First Quarter Recap
Sprint Nextel (S) reported tepid first quarter results with its net loss increasing 46% year-over-year on account of a one-time tax related non-cash charge of $365 million. Adjusted net loss per share of 17 cents was a penny below the Zacks Consensus Estimate. Revenues fell 2% year-over-year to $8.09 billion due to lower contributions from its wireline and postpaid wireless businesses.
Wireless revenues were flat year-over-year, attributable to stable service revenues. Declines in both total and retail postpaid customer bases were lower compared to the year-ago quarter. Losses in postpaid were partly offset by the sustained gains in the carrier’s Boost Mobile prepaid subscriber base, driven by the carrier’s popular $50 unlimited price plan. Wireline revenues dipped 11% year-over-year due to erosion in voice and data revenues.
Sprint’s shares were under pressure following the earnings release as the Street discounted the improving subscriber results and focused instead on the wider financial losses.
We have discussed the quarterly results at length here: Sprint Loss Widens on Lofty Charge
Agreement – Estimate Revisions
The overall trend in annual estimate revisions for Sprint has been sporadic over the last month. Out of a total of 29 analysts covering the stock, 19 have lowered their estimates for 2010 while 5 have moved in the opposite direction.
Conversely, 15 analysts (out of a total of 28) have raised their estimates for 2011 while 7 made negative revisions. The quarterly estimates have been inclined more towards the positive side over the last 30 days.
Improvements in wireless contract customer losses and churn in the first quarter represent the key impetus for upward estimate revisions. Other drivers represent the continued expansion of the 4G network footprint coupled with the forthcoming launch of the 4G handset, which should provide a leeway to stabilize wireless service revenues and boost postpaid subscriber metrics this year.
On the other hand, negative estimate revisions are attributable to the wider net loss, sustained decline in revenues and the wireless subscriber base as well as margin pressure due to higher smartphone subsidies and cost associated with the recently revamped prepaid price plans. Moreover, there is the risk of lower customer additions in the Boost Mobile prepaid unit as competition intensifies in 2010 due to the aggressive roll-out of competitive price plans.
Magnitude – Consensus Estimate Trend
Given the high number of negative revisions, the estimated loss per share for 2010 has gone up by 2 cents and 9 cents over the past week and month, respectively. In contrast, a plethora of positive revisions have led to a reduction in the estimated loss per share for 2011 by 5 cents over the past 30 days. The current Zacks Consensus Estimates of loss per share for 2010 and 2011 are 76 cents and 50 cents, respectively.
Neutral on Sprint
Sprint is well positioned to leverage the growing wireless smartphone market in the US, leveraging a rich portfolio of popular smartphones. Moreover, to improve subscriber retention, its Boost Mobile subsidiary is offering the popular $50 unlimited prepaid plan across all wireless network platforms. Moreover, to compete more effectively in the prepaid space, Sprint recently rolled out a new price plan dubbed “Beyond Talk,” which offers a base price point of $25 and targets the lucrative youth demographic.
Sprint continues to lead the 4G hoopla in the US as it is aggressively deploying its 4G WiMax mobile broadband service, which has already launched in 27 US markets. The WiMax footprint currently addresses more than 30 million people and targets serving 120 million people in 2010. Sprint’s 4G services are expected to play a critical role for its survival in the domestic wireless market.
Sprint has jettisoned the postpaid wireless service (“Helio”) of its wholly-owned subsidiary Virgin Mobile USA to delve deeper into the prepaid market. Moreover, the forthcoming launch of the world’s first 4G smartphone HTC EVO 4G (expected on June 4, 2010) will provide Sprint a head start over its Tier-1 peers.
However, Sprint is losing market share to its larger peers Verizon (VZ) and AT&T (T) as they continue expanding their respective customer bases at a brisk rate. The carrier is struggling to integrate Nextel’s iDEN wireless network with its own CDMA platform, resulting in subscriber defection.
Nevertheless, the management has reaffirmed its 2010 outlook expecting year-over-year improvement in both postpaid and total subscriber losses. Sprint expects to continue generating positive free cash flow driven by its aggressive cost-cutting measures.
We believe a lower margin-revenue mix, expenditures related to wide-scale 4G service deployments and weak wireless business may impact financials over the near-term. Moreover, Sprint may continue to experience the exodus of its contract customers (albeit at a slower pace) to larger competitors, and there exist heightening concerns of an aggressive price war in the prepaid segment as rivals react to the “Beyond Talk” plan.
Consequently, we remain on the sidelines and maintain our Neutral recommendation, which is supported by a Zacks #3 Rank (Hold).
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “S”
Read the full analyst report on “VZ”
Read the full analyst report on “T”
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