The third-largest U.S. wireless carrier Sprint Nextel Corp. (S) reported better-than-expected second quarter 2012 results, before the opening bell. Adjusted loss per share of 7 cents strongly outpaced the Zacks Consensus Estimate of a loss of 41 cents. Sprint outperformed our expectations on strong revenue growth and continued focus on the core Sprint platform.
Adjusted net loss per share excludes accelerated depreciation of 26 cents and lease cost of 6 cents related to the shutdown of the Nextel platform as well as impairments of 7 cents related to the Clearwire Corporation (CLWR) investment. Including these special items, the company reported net loss per share of 46 cents, plummeting 64% from the year-ago loss.
Revenue grew 6% year over year to $8.84 billion, outpacing the Zacks Consensus Estimate of $8.72 billion. The year-over-year growth was driven by higher wireless service revenue that compensated for lower wireline revenues.
Adjusted OIBDA (operating income/loss before depreciation, amortization, asset impairments and abandonments) improved 10% year over year to $1.4 billion in the reported quarter. This is the highest year-over-year increase in more than 5 years, primarily attributable to higher post-paid and prepaid wireless service revenues that offset higher subsidies and wireless service cost.
Segment Results
Wireless operating revenue increased 8% year over year to $8.1 billion.
Sprint gained approximately 283,000 subscribers in the reported quarter, representing a net loss of 105,000 in retail subscribers and net addition of 388,000 in wholesale and affiliate subscribers.
Sprint lost 246,000 net post-paid customers during the quarter, more than the loss of 101,000 customers in the year-ago quarter. The Sprint platform added 442,000 post-paid customers while the Nextel platform lost 688,000. With regard to prepaid subscription, Sprint added 141,000 users, which represents a net addition of 451,000 CDMA customers, partially offset by a net loss of 310,000 iDEN customers.
At the end of the second quarter, Sprint had 56.4 million customers (including 32.6 million post-paid, 15.4 million prepaid and 8.4 million wholesale and affiliate) compared with 52.1 million in the year-ago quarter.
Sprint sold nearly 1.5 million Apple Inc. (AAPL) iPhones and about 40% of the iPhone customers were new to Sprint.
Wireless post-paid ARPU increased to $60.88 from $56.67 in the year-ago quarter, boosted by higher monthly recurring revenue. This is the largest year-over-year post-paid ARPU growth in the company’s record. Prepaid ARPU declined to $26.59 from $27.53 in the year-ago quarter due to the growth in Assurance Wireless customers, who have lower ARPU on average.
Sprint platform post-paid churn (customer switch) rate improved to 1.69% in the reported quarter from 1.72% in the year-ago quarter and 2.00% in the prior quarter. This is the best churn rate in the company’s history, driven mainly by a reduction in voluntary churn.
Sprint platform prepaid churn also improved to 3.16% from 3.25% in the prior-year quarter but deteriorated from 2.92% in the last quarter. The year-over-year improvement was attributable to continued improvements in the Virgin Mobile and Boost brands.
On July 15, Sprint launched its 4G LTE networks initially in five major markets namely Atlanta, Dallas, Houston, Kansas City and San Antonio, covering 15 cities. In addition, the company introduced four LTE smartphones – Galaxy Nexus, LG Viper 4G LTE, HTC EVO 4G LTE and Samsung Galaxy S III.
Wireline revenues dropped 9% year over year to $995 million owing to reduced interconnection charges and continued declines in voice and cable IP customers.
Liquidity
Sprint has strengthened its balance sheet with approximately $5.9 billion in cash and cash equivalents as of June 2012 compared with $4.0 billion in the same month last year. Net debt reduced slightly to $14.5 billion from $14.7 billion at the end of 2011.
The company spent $1.2 billion in the second quarter compared with $640 million in the year-ago quarter. Sprint generated free cash flow of $209 million versus $267 million in the year-ago quarter.
Guidance
For fiscal 2012, Sprint expects net service revenue to grow 4–6% and adjusted OIBDA of $4.5–$4.6 billion. Capital expenditures are estimated to be approximately $6 billion.
Sprint is advancing on its Network Vision plan as expected. The company expects to add about 12,000 sites by the end of this year and complete the majority of its deployment in 2013.
Our Take
Sprint is showing signs of turning around its business and is focusing entirely on the growth of its core Sprint platform business. Increasing smartphone sales, attractive product and service offerings, shutting down of iDEN networks and the roll out of 4G LTE networks would boost Sprint’s wireless growth prospects going forward. Further, the improving liquidity position makes the stock attractive for the long term.
However, lofty iPhone subsidies, higher spending on Network Vision plan and aggravated competitive threats from the major rivals — Verizon Communications Inc. (VZ) and AT&T Inc. (T) — could be dilutive to future margins and free cash flow.
We currently maintain our long-term Neutral recommendation on Sprint. For the short term (1–3 months), the stock retains a Zacks #2 (Buy) Rank.
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