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Sprint Corporation (S - Analyst Report) reported second-quarter 2014 earnings per share of a penny beating the Zacks Consensus Estimate of a loss of 4 cents. The company also recovered from the loss of 4 cents per share reported in the year-ago quarter. Significant improvement in operating profits enabled the company to register earnings growth despite customer losses due to network conversions.

 

Quarterly operating revenues remained flat year over year at $ 8,789 million and surpassed the Zacks Consensus Estimate of $8,770 million.

Adjusted EBITDA grew 30% year over year to $1.83 billion representing adjusted EBITDA margin of 23.8%, up 40 basis points year over year.

Segment Results

Wireless operating revenues grossed $8,193 million in the quarter, up from $8,178 million a year ago. The company recorded service revenues of $6,937 million, down from $7,242 million in the year-ago quarter. Equipment revenue grossed $1,106 million as against $820 million a year ago.     

Sprint lost approximately 334,000 million subscribers in the reported quarter, representing a net loss of 245,000 in retail post-paid and 619,000 in retail pre-paid subscribers. However, the company gained 530,000 in wholesale and affiliate subscribers.

The Sprint platform lost 181,000 post-paid customers. With regard to prepaid subscription, Sprint lost 542,000 users.

At the end of the second quarter, Sprint had approximately 54.6 million customers (including 30.3 million post-paid, 15.2 million prepaid and 9.1 million wholesale and affiliate) compared with 53.6 million in the year-ago quarter.

Wireless post-paid average revenue per unit (ARPU) decreased to $39.16 from $59.87 in the year-ago quarter. Prepaid ARPU increased to $45.15 from $19.17 in the year-ago quarter. 

Sprint platform post-paid churn (customer switch) rate was 2.05% in the reported quarter, compared to 1.83% in the year-ago period. On the other hand, Sprint platform prepaid churn improved to 4.44% in the quarter from 5.22% a year ago.

During the second quarter, Sprint sold 5 million smartphones.

Wireline revenues dropped to $746 million from $910 million in the year-ago quarter owing to poor performances by the voice, Internet and cable units.

Liquidity

At the end of the second quarter, Sprint had approximately $4,171 million in cash and cash equivalents compared with $4,970 million in 2013. Net debt increased to $27 billion from $26.6 billion at the end of the first quarter of 2014. The company incurred capital expenditure of $1,416 million at the end of the second quarter.

Guidance

For 2014, Sprint continues to expect adjusted EBITDA in the range of $6.7–$6.9 billion.

Our Take

Sprint currently has a Zacks Rank #3 (Hold). We believe Sprint’s near future remains challenged by the dilutive impact of the Network Vision program and subscriber headwinds due to re-certification of the Lifeline service. However, Sprint’s efforts to taper its losses supported by a strong wireless business with reducing churn, improving ARPU, increasing penetration of handsets, service offerings and spectrum acquisitions from Clearwire and United States Cellular Corporation (USM - Analyst Report) transactions are encouraging. Nevertheless, increased competition from carriers like Verizon Communications Inc. (VZ - Analyst Report) and AT&T Inc. (T - Analyst Report), heavy investments, and continued wireline margin erosion keep us cautious regarding the stock.

Sprint currently has a Zacks Rank #3 (Hold).

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