Sprint Nextel (S) reported first-quarter 2010 results with an adjusted net loss per share of 17 cents, a penny below the Zacks Consensus Estimate. Adjusted earnings exclude a one-time tax related non-cash charge of $365 million.

The third-largest U.S. wireless carrier posted a net loss of $865 million (29 cents a share), 46% more than the net loss of $594 million (21 cents per share) reported a year ago, as a result of the lofty one-time charge.

Consolidated operating revenue fell 2% year-over-year to $8.09 billion due to lower contributions from its wireline and postpaid wireless businesses. However, the revenues were modestly higher than the Zacks Consensus Estimate of $8.04 billion.

Adjusted OIBDA (operating income/loss before depreciation, amortization, asset impairments and abandonments) dipped 14% year-over-year to $1.5 billion, due to decreased wireless service revenues and a higher handset subsidy.
 
Results by Segment

Wireless

Consolidated revenues from the wireless segment were $7 billion, flat year-over-year, as a result of stable wireless service revenues which came in at $6.4 billion. Sprint lost a net of 75,000 subscribers in the quarter, representing an improvement from 182,000 customers lost in the prior-year quarter due to the significant annualized improvement in contract subscriber losses and respectable growth in prepaid. 

A net loss of 578,000 customers in the retail postpaid business reflects a considerable year-over-year decline from a net loss of 1.25 million subscribers in the year-ago quarter. Sprint gained 348,000 customers in the “Boost Mobile” prepaid business, partly offsetting the losses in the postpaid business. The carrier’s popular $50 unlimited price plan continues to support its prepaid business.

Sprint’s core postpaid business remains in a shambles as the carrier is losing valuable contract customers to competition due to intense pricing pressure, the maturing US wireless market and the problems associated with the integration of its CDMA and iDEN wireless network platforms. Sprint’s bigger rivals Verizon (VZ) and AT&T (T) recently reported lower postpaid net additions in the first quarter.

At the end of the quarter, Sprint had 48.06 million customers (including 33.4 million post-paid and 11 million prepaid) compared with 48.1 million and 49.1 million customers reported in the previous and year-ago quarters, respectively.

Postpaid ARPU (average revenue per user) of $55 represents a decline from $56 reported both in the year-ago quarters due to declines in usage. Prepaid ARPU dipped to $27 from $31 a year-ago with the decline is attributable to the acquisition of Virgin Mobile USA in November 2009 as Virgin Mobile customers have lower ARPU compared to Boost prepaid customers.

Postpaid churn decreased year-over-year to 2.15%, primarily due to improved customer retention. Prepaid (Boost) churn of 5.74% also represents a decline from the year-ago quarter, assisted by the Virgin Mobile acquisition.

Wireline

Revenues from the wireline segment declined 11% year-over-year to $1.3 billion due to erosion in voice and data revenues, which declined by 11% and 31%, respectively. Internet revenues also declined 4.2% year-over-year.

Financial Condition

Sprint spent $419 million in capital expenditure in the quarter and generated a free cash flow of $506 million. The company exited the quarter with $4.4 billion in cash and cash equivalents and roughly $21 billion in total debt.

Outlook

Although Sprint has not released its second quarter outlook, the carrier expects year-over-year improvement in both postpaid and total subscriber losses for full year 2010. 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 aggressive cost-cutting measures. The carrier generated $2.8 million in free cash flow in 2009, the highest ever.

Sprint is aggressively deploying its 4G WiMax mobile broadband service having already launched the service in 28 US markets. The WiMax footprint currently addresses nearly 40 million people and targets serving 120 million people in 2010.

Sprint will jettison the postpaid wireless service (marketed under the “Helio” moniker) of its wholly-owned subsidiary Virgin Mobile USA effective May 25, 2010. This represents a part of the carrier’s initiatives to delve deeper into the prepaid market. Moreover, the forthcoming launch of the world’s first 4G smartphone (“HTC EVO 4G”) will not only provide Sprint a head start over its Tier-1 peers but will also offer a leeway to stabilize wireless revenues.

However, 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. Sprint may continue to experience exodus of its contract customers (albeit at a slower pace) to larger competitors.

Moreover, the carrier’s prepaid business is expected to face fresh challenges as competition intensifies in 2010 due to the aggressive roll-out of competitive price plans by the rivals. We currently have a Neutral recommendation on Sprint which is supported by a Zacks #3 Rank (Hold).
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