(S) Sprint-Nextel Second Quarter 2010 Earnings Beat – Grows Subscribers

July 28th, 2010

Sprint Nextel (S), the third-largest U.S. wireless carrier, reported second-quarter 2010 adjusted net loss per share of 15 cents, which surpassed the Zacks Consensus Estimate of a net loss of 19 cents. Adjusted earnings excluded a one-time tax related to non-cash charge of $302 million (10 cents per share). Sprint reported its second-quarter results before the market open on July 28.

On a GAAP basis, Sprint posted a net loss of $760 million (25 cents per share), 98% beyond the net loss of $384 million (13 cents) in the year-ago quarter.

Consolidated operating revenue dipped 1% year over year to $8.025 billion due to lower contributions from its wireline and post-paid wireless businesses, which were partially offset by higher revenues from prepaid service and equipment. However, the revenues were modestly higher than the Zacks Consensus Estimate of $8.018 billion.

Adjusted OIBDA (operating income/loss before depreciation, amortization, asset impairments and abandonments) fell 15% year over year to $1.5 billion. Lower post-paid wireless and wireline revenues, as well as higher handset subsidies, put a drag on adjusted OBIDA in the second quarter.

Segment Results

Wireless: Consolidated revenue from the wireless segment was $7 billion, flat year over year. Sprint gained approximately 111,000 subscribers in the quarter, which represents 55,000 net declines in retail subscribers and 166,000 net additions in wholesale and affiliate subscribers. This represents the first wireless subscriber growth in three years.

Sprint achieved the best year-over-year quarterly improvement in post-paid subscriber additions in more than five years. A net loss of 228,000 customers in the retail post-paid business reflects a considerable improvement from a net loss of 991,000 subscribers in the year-ago quarter and 578,000 subscriber loss in the sequential quarter.

Demand for handsets such as “HTC EVO 4G” as well as “BlackBerry Curve” led to the increase in the retail post-paid subscriber. The company added 136,000 post-paid subscribers from the CDMA network while lost 364,000 customers from iDEN network.

With regard to prepaid subscription, Sprint added a net of 173,000 customers, which represents net additions of 683,000 CDMA customers partially offset by net loss of 465,000 iDEN customers.

At the end of the quarter, Sprint had 48.2 million customers (including 33.2 million post-paid and 11.2 million prepaid) compared with 48.8 million in the year-ago quarter.

Post-paid ARPU (average revenue per user) declined to $55 from $56 in the year-ago quarter due to lower usage, partially offset by lower credits issued to customers. Prepaid ARPU plunged to $28 from $34 in the year-ago quarter, attributable to the acquisition of Virgin Mobile USA in November 2009, as Virgin Mobile customers have lower ARPU compared with Boost Mobile customers.

Sprint posted post-paid churn of 1.85% in the second quarter compared with 2.05% in the year-ago quarter and 21.5% in the sequential quarter, due to improved customer retention. Prepaid churn improved to 5.6% compared with 6.38% in the year-ago quarter and 5.74% in the sequential quarter. The year-over-year improvement is attributable to the lower churn of Virgin Mobile customers.

Wireline: Revenues from the wireline segment declined 11% year over year to $1.3 billion, owing to erosion in voice and data revenues, which decreased by 12% and 22%, respectively. Internet revenues also dropped 5.3% year over year.

Liquidity

Sprint enjoys a strong balance sheet with approximately $4.3 billion in cash and cash equivalents and $18.5 billion in long-term debt.

The company spent $437 million in capital expenditures in the second quarter, compared with $321 million in the year-ago quarter. The company generated free cash flow of $709 million, up $33 million from the year-ago quarter.

Outlook

Sprint Nextel believes net additions to the total subscriber will improve and net losses to the post-paid customers will fall in the second half of 2010. Capital expenditures are expected to reach approximately $2 billion. Further, the company expects to generate positive free cash flow going forward.

Our Analysis

Sprint is well positioned to leverage the growing wireless smartphone market in the U.S. with a rich portfolio of popular smartphone offerings and more advanced devices in the pipeline. We believe an attractive wireless product/service mix, expanding 4G network footprint and the Boost Mobile prepaid business will continue to add opportunities in the wireless business. The company’s deployment of 4G WiMax is a major prospect in the wireless market, which may boost the company’s revenues.

However, Sprint Nextel may continue to experience declines in its post-paid subscriber base (albeit at a slower pace), resulting from customer migration to competition. Moreover, the company’s prepaid business is expected to face fresh challenges with intensified competition in the balance of 2010 from the aggressive roll-out of competitive price plans by its rivals.

We are currently maintaining our Neutral recommendation on Sprint, supported by a Zacks #3 Rank (Hold).

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(S) Sprint-Nextel Second Quarter 2010 Earnings Beat – Grows Subscribers

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