The third-largest U.S. wireless carrier Sprint Nextel (S) has reported second quarter 2011 adjusted net loss per share of 6 cents, surpassing the Zacks Consensus Estimate of a loss of 12 cents.
Adjusted net loss excludes the one-time charge of 22 cents. Including the charge, net loss widened to 28 cents from the year-ago loss of 25 cents.
Consolidated operating revenue grew 4% year over year to $8.31 billion but fell short of the Zacks Consensus Estimate of $8.32 billion. The revenue improvement was driven by strong post-paid average revenue per user (ARPU), healthy prepaid subscriber additions and higher wireless equipment revenues, partially offset by lower contributions from its wireline business and post-paid wireless subscribers.
Adjusted OIBDA (operating income/loss before depreciation, amortization, asset impairments and abandonments) dropped 12% year over year to $1.3 billion. Higher wireless expenses, equipment subsidies and lower wireline revenues partially offset strong wireless post-paid and prepaid revenues and wireline cost reductions.
Segment Results
Wireless revenue increased 6% year over year to $7.4 billion. Sprint gained approximately 1.1 million subscribers in the reported quarter, representing a net addition of 573,000 in retail subscribers and 519,000 in wholesale and affiliate subscribers.
Sprint lost 101,000 net post-paid customers during the quarter, which reflects a considerable improvement from a net loss of 127,000 customers in the year-ago quarter and 114,000 subscribers in the previous quarter. The company added 226,000 post-paid subscribers from the CDMA network while lost 327,000 customers from the iDEN network.
With regard to prepaid subscription, Sprint added 674,000 customers, which represents a net addition of 1.1 million CDMA customers, partially offset by a net loss of 475,000 iDEN customers.
At the end of the second quarter, Sprint had 52.1 million customers (including 32.9 million post-paid, 13.8 million prepaid and 5.4 million wholesale and affiliate) compared with 48.2 million in the year-ago quarter.
Post-paid ARPU increased to $57 from $55 in the year-ago quarter as higher monthly recurring revenue counterbalanced lower overage, casual data and text revenues. This is the largest year-over-year post-paid ARPU growth in seven years. Prepaid ARPU remained flat year over year at $28 in the second quarter.
Sprint posted the best-ever post-paid churn of 1.75% in the reported quarter, compared with 1.85% in the previous-year quarter and 1.81% in the previous quarter. The lower churn was driven by improved customer retention, handset upgrades and new handset offerings.
Prepaid churn improved to 4.14% from 5.61% in the previous-year quarter and 4.36% in the previous quarter. This is the lowest prepaid churn in the last six years. The improvement was attributable to the lower churn of Boost Monthly Unlimited subscribers and Assurance Wireless customers.
Wireline revenues dropped 14% year over year to $1.1 billion, as erosion in voice and data revenues declined 15.5% and 12%, respectively. Internet revenues also fell 13.9% year over year.
Liquidity
Sprint enjoys a strong balance sheet, with approximately $4.3 billion in cash and short-term investments at the end of second quarter compared with $5.5 billion at the end of 2010. Long-term debt declined to $16.3 billion from $18.5 billion at the end of 2010.
The company spent $640 million in the reported quarter compared with $437 million in the year-ago quarter. Sprint generated free cash flow of $267 million, down 62% from $709 million in the year-ago quarter.
Guidance
For fiscal 2011, Sprint Nextel expects post-paid and total net subscriber additions to continue improving annually. Capital expenditure is expected to be approximately $3 billion. The company is also likely to generate positive free cash flow for the remainder of the year.
Sprint-LightSquared Deal
Concurrent with its earnings release, Sprint inked a 15-year deal with LightSquared for spectrum hosting and network services as well as 4G wholesale and 3G roaming services.
Under the deal, Sprint will receive $9 billion from LightSquared over 11 years for deploying a high-speed 4G Long-Term Evolution (LTE) wireless network to customers. In addition, Sprint also has the opportunity to buy 50% of LightSquared's expected L-Band 4G capacity. Under the agreement, Sprint would become a major customer of LightSquared.
The deal seems to be positive for both companies. It would provide a new source of revenue for Sprint and improve its competitive position among its largest rivals AT&T Inc. (T) and Verizon Communications (VZ) in gaining market share. The agreement with LightSquared is a step forward in Sprint’s Network Vision venture. The company could use LightSquared’s network to lessen the load on its own network as the demand for wireless data is growing rapidly.
Coming to LightSquared, the privately held LTE provider is also facing intense competition from AT&T, Verizon and Clearwire Corp. (CLWR). AT&T and Verizon use their own 4G technologies while Sprint resells the Clearwire network.
Hence, we believe the partnership with Sprint will provide LightSquared opportunities for future growth and improve its competitive position. Further, the deal will lower construction and operating costs by $13 billion over the next eight years.
Moreover, the agreement allows LightSquared to deploy LTE network to 260 million Americans by 2014, a year before the Federal Communications Commission (FCC) authorization.
Our Analysis
We believe Sprint’s business has been depressed since the proposed merger of AT&T and Deutsche Telekom’s unit T-Mobile USA was announced in late March. The merged AT&T would be almost three times the size of Sprint. It might further hurt Sprint’s profitability and shrink its subscriber base.
However, Sprint is turning its business around and gaining ground following various contracts wins, the appointment of the new CFO, and resolution of the wholesale pricing dispute with Clearwire.
We are currently maintaining our long-term Neutral recommendation on Sprint. For the short term, the stock retains a Zacks #3 Rank (Hold).
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