Sprint Nextel (S) reported fourth-quarter 2009 results with a net loss per share of 34 cents, wider than the Zacks Consensus Estimate of a loss of 18 cents. The third-largest U.S. wireless carrier posted a net loss of $980 million, 40% lower than the net loss of $1,621 million (57 cents per share) reported a year ago.
Net loss for full-year 2009 was $2.44 billion or 84 cents per share, also worse than the Zacks Consensus Estimate of a loss of 66 cents.
Sprint’s shares were down 34 cents (or 9.32%) to $3.31 in morning trading Wednesday. The market appears to be discounting the lower subscriber losses in the quarter and focusing instead on the lower-than-expected sales number.
Estimate Revisions Trend
The overall trend in estimate revisions for Sprint has been sporadic. Out of total 28 analysts covering the stock, 1 analyst has lifted an earnings estimate for full-year 2010 over the last 7 days while 1 analyst moved in the opposite direction.
For the last 30 days, 6 analysts have raised their estimates for 2010 while 4 have truncated their forecasts. We feel that near-term visibility for improvement in contract customer losses represents the key impetus for upward estimate revisions moving forward.
With respect to earnings surprises, Sprint has a mixed track record in the preceding four quarters with two positive and two negative earnings surprises. The struggling top-tier carrier produced an average negative earnings surprise of -80.4% over the last four quarters, meaning that it missed the Zacks Consensus Estimate by that measure over the trailing 12 months.
This can be largely attributed to the sustained decline in the wireless subscriber base and associated revenues, which were exacerbated by the volatile economic backdrop in 2009.
The current Zacks Consensus Estimate of a loss per share for first-quarter 2010 is 15 cents. The upside potential (essentially a proxy for future earnings surprises) of this estimate is roughly 6.7%. The Zacks Consensus Estimate of loss per share for 2010 is 54 cents, representing a roughly 35.7% improvement from 2009 loss per share of 84 cents. Upside potential to this annualized forecast is 3.7%.
The Quarter in Detail
Consolidated operating revenue fell 7% year-over-year to $7.9 billion, below the Zacks Consensus Estimate of $8 billion, due to lower contributions from its wireline and post-paid wireless businesses. Revenue for 2009 declined 9.5% year-over-year to $32.3 billion, also below the Zacks Consensus Estimate of $32.4 billion. Sprint reported adjusted OIBDA of $1.4 billion for the quarter, down 19% year-over-year, due to decreased operating revenue, partly offset by lower operating expenses.
Following is a snapshot of segment-wise performance:
Wireless
Consolidated revenue from the wireless segment was $6.8 billion, down 5% year-over-year, as a result of lower wireless service revenue which declined 5% to $6.2 billion. This year-over-year decrease is attributable to declines in the post-paid segment, which more than offset gains in the Boost Monthly prepaid subscriber base.
Sprint lost a net of 148,000 subscribers in the quarter, representing significant improvement from 545,000 customers lost in the previous quarter. A net loss of 504,000 customers in the retail postpaid segment also reflects a sequential decline from a net loss of 801,000 subscribers in the previous quarter. Sprint gained 435,000 customers in the retail prepaid segment, partly offsetting the losses in the postpaid business.
At the end of the quarter, Sprint had 48.1 million customers (including 34 million post-paid and 10.7 million prepaid) compared to 48.3 million and 49.3 million customers reported in the previous and year-ago quarters, respectively.
Post-paid ARPU (average revenue per user) of $55 represents a decline from $56 reported both in the previous and year-ago quarters due to declines in usage and roaming. Prepaid ARPU declined to $31 from $35 in the previous quarter while increasing from $30 registered in the year-ago quarter. The sequential decline is attributable to the acquisition of Virgin Mobile in November 2009 as Virgin Mobile customers have lower ARPU compared to Boost customers.
Post-paid churn decreased sequentially and year-over-year to 2.11%, primarily due to seasonality. Prepaid (Boost) churn of 5.56% represents a decline from the year-ago quarter, assisted by subscriber growth (driven by Boost monthly plan) and the Virgin Mobile acquisition.
Wireline
Revenues from the wireline segment declined 13% year-over-year to $1.3 billion due to erosion in voice and data revenue which declined by 14% and 32%, respectively. Internet revenue also declined 3.5% year-over-year.
Outlook
Sprint has released its 2010 outlook and expects improvement in both postpaid and total subscriber losses for the year vis-à-vis 2009. Capital expenditure for the year is expected to be up to $2 billion. Sprint expects to continue generating positive free cash flow in 2010 driven by its ongoing cost-cutting measures. The company generated $2.8 million in free cash flow in 2009 (including $666 million in the fourth quarter), the highest ever in the company’s history.
Opportunities and Challenges
Sprint is well positioned to leverage the growing wireless smartphone market in the U.S., leveraging a rich portfolio of popular smartphone offerings. In response to the increased competition from iPhones, the company launched Palm’s (PALM) Pre and Pixi smartphones in 2009. Sprint further broadened its next-generation handset portfolio by launching smartphones based on the Android platform.
In order to improve subscriber retention, the company’s Boost Mobile prepaid subsidiary is offering the $50 unlimited rate plan across all wireless network platforms. Sprint also launched an unlimited calling plan (“Any Mobile Anytime”), which enables cell phone users to make or receive unlimited calls from the company’s network to any other U.S. carrier network any time using any handset for free.
To strengthen its presence in the fast-growing prepaid market, Sprint acquired Virgin Mobile USA. Moreover, the company acquired its wireless affiliate iPCS Inc in late 2009, which has expanded its service territories while offering meaningful cost synergies.
Sprint is aggressively deploying 4G WiMax mobile broadband service having already launched its service in 27 US markets, addressing more than 30 million people with a target to serve roughly 120 million people in 2010. The 4G WiMax service is expected to play a critical role for Sprint’s survival in the domestic wireless market given the continued market share losses to larger rivals.
The carrier launched a new dual-mode (operates on 3G and 4G networks) wireless router called “Overdrive” in January 2010, which is expected to boost its 4G business by enticing more customers through expanded network accessibility and coverage.
However, Sprint continues to lose market share to its larger peers Verizon (VZ) and AT&T (T) as they continue expanding their respective customer bases at a brisk rate. AT&T and Verizon posted robust subscriber growth of 2.7 million and 2.2 million in the fourth quarter, respectively. Sprint is struggling to integrate Nextel’s iDEN wireless network, resulting in subscribers losses to other carriers.
We believe a lower margin-revenue mix, expenditures related to wide-scale 4G service deployments and weak wireless business may impact financials in the near-term. Additionally, the company may continue to experience declines in its postpaid subscriber base (albeit at a slower pace), resulting from customer migration to competition. This is reflected in our Neutral recommendation on Sprint, which is supported by a Zacks #3 Rank (Hold).
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