The third-largest U.S. wireless carrier Sprint Nextel (S) reported first quarter 2011 adjusted net loss per share of 15 cents, which surpassed the Zacks Consensus Estimate of a loss of 22 cents. Adjusted net loss narrowed from the year-ago loss of 29 cents.
Despite competitive pressure from its chief rivals AT&T Inc. (T) and Verizon Communications Inc. (VZ), Sprint generated solid results, thanks to its cheap service plans, fourth generation (4G) leadership, healthy service and a successful multi-brand strategy.
Consolidated operating revenue grew 3% year over year to $8.3 billion in the reported quarter and was ahead of the Zacks Consensus Estimate of $8.12 billion. Higher revenues were driven by strong post-paid and prepaid 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) rose 2% year over year to $1.5 billion. Higher handset subsidy was offset by strong wireless post-paid and prepaid ARPU.
Segment Results
Wireless revenue increased 5% year over year to $7.4 billion. Sprint gained approximately 1.1 million subscribers in the reported quarter, representing a net addition of 732,000 in retail subscribers and 389,000 in wholesale and affiliate subscribers. This represents the best wireless subscriber growth in five years.
Sprint lost 114,000 net post-paid customers during the quarter, which reflects a considerable improvement from a net loss of 578,000 customers in the year-ago quarter but a massive deterioration from a net gain of 58,000 subscribers in the previous quarter. The company added 253,000 post-paid subscribers from the CDMA network while lost 367,000 customers from the iDEN network.
With regard to prepaid subscription, Sprint added a total of 846,000 customers, which represents a net addition of 1.4 million CDMA customers, partially offset by a net loss of 560,000 iDEN customers.
At the end of the first quarter, Sprint had 51 million customers (including 33 million post-paid, 13.1 million prepaid and 4.9 million Wholesale and Affiliate) compared with 49.9 million in the year-ago quarter.
Post-paid ARPU increased to $56 from $55 in the year-ago quarter as higher monthly recurring revenue counterbalanced lower overage, casual data and text revenues. Prepaid ARPU rose to $28 from $27 in the year-ago quarter, owing to increased ARPU from Boost Mobile customers.
Sprint posted a churn of 1.81%, the best-ever in five years compared with 2.15% in the previous-year quarter and 1.86% in the previous quarter. The lower churn was driven by improved customer retention, handsets upgrades and new handset offerings. Prepaid churn improved to 4.36% from 5.74% in the previous-year quarter and 4.93% in the previous quarter. The year-over-year improvement was attributable to the lower churn of Boost Monthly Unlimited subscribers and Assurance Wireless customers.
Wireline revenues dropped 14% year over year to $1.12 billion, as erosion in voice and data revenues declining 16.9% and 15.9%, respectively. Internet revenues also fell 10.1% year over year.
Liquidity
Sprint enjoys a strong balance sheet with approximately $4 billion in cash and short-term investments at the end of first quarter 2011 compared with $5.5 billion at the end of 2010. Long-term debt declined to $16.3 billion from $18.5 billion in the previous quarter.
The company spent $644 million in the reported quarter compared with $505 million in the year-ago quarter. Sprint generated free cash flow of $178 million, down from $506 million in the year-ago quarter.
Guidance
For fiscal 2011, Sprint Nextel expects post-paid and total net subscriber additions to improve 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.
Our Analysis
The company’s 4G WiMax is a major opportunity in the wireless market, which may drive its future revenue. Sprint will continue its prime focus on 4G network that currently covers 71 U.S.markets in 28 states via the Clearwire Corp. (CLWR) network. However, Sprint is now no longer the only major carrier offering the 4G network and its market advantage has eroded as other carriers started offering competitive services.
Further, we believe Sprint’s business has been depressed since the proposed merger of AT&Tand Deutsche Telekom’s unit T-Mobile USA was announced in late March. The merged AT&T would be almost three times the size of Sprintand might further hurt Sprint’s profitabilty and shrink its subscriber base.
On the other hand, Sprint has started gaining ground from this month following new contracts wins, the appointment of the new CFO and resolved wholesale pricing dispute with Clearwire, which was plaguing Sprint’s revenue since last year. Last year, Sprint announced a multiyear network initiative, Network Vision, which could be a significant long-term margin driver and is expected to generate $10 billion to $11 billion in savings over the next seven years.
We believe all these factors will serve as a major catalyst to Sprint’s growth plan going forward. Hence, we are currently maintaining our long-term Neutral recommendation on Sprint, supported by the Zacks #3 (Hold) Rank.
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