Sprint Posts Bigger Loss

Sprint Nextel (S - Analyst Report) reported third-quarter 2009 results with net loss per share of 17 cents, exceeding the Zacks Consensus Estimate of 15 cents and the year-ago loss per share of 11 cents.

The third-largest US wireless carrier posted a net loss of $478 million, 47% more than the net loss of $326 million reported a year ago. Sprint remains significantly challenged by the volatile economic backdrop, which has contributed to the sustained decline in the wireless subscriber base and associated revenues.

Operating revenue fell 9% year over year to $8 billion due to lower contributions from its wireline and post-paid wireless businesses. The company reported adjusted OIBDA of $1.5 billion for the quarter, down 17% year over year, due to decreased operating revenue partly offset by lower SG&A expenses.

Wireless

Consolidated revenue from the wireless segment was $6.9 billion, down 8% year over year, as a result of lower wireless service revenue which declined 8% to $6.3 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 545,000 subscribers in the second quarter compared to 257,000 in the previous quarter. A net loss of 801,000 customers in the retail postpaid segment reflects a sequential decline, which was partially offset by a net gain of 666,000 customers in the retail prepaid segment.

At the end of the quarter, Sprint had 48.3 million customers (including 33.6 million post-paid and 5.7 million prepaid) compared to 48.8 million and 50.5 million customers reported in the previous and year-ago quarters, respectively.

Post-paid ARPU (average revenue per user) of $56 remained stable both sequentially and year-over-year basis, as growth in fixed-rate bundled plans was offset by declines in usage. Prepaid ARPU increased to $35 from $34 and $31 in the previous and year-ago quarter respectively, largely favored by the $50 Boost Monthly unlimited plan.

Post-paid churn increased sequentially and year over year to 2.17%, partly due to competition. Prepaid (Boost) churn of 6.65% represents a decline from year-ago quarter, assisted by subscriber growth.

Wireline

Revenues from the wireline segment declined 10% year over year to $1.4 billion due to declines in voice and data revenue. On a positive note, revenue for the Internet Protocol services increased 5% year over year driven by strong demand from enterprise customers. This was, however, offset by declines in voice (down 14%) and legacy data (down 35%) services.

Outlook

Sprint has reaffirmed its 2009 outlook as it continues to expect improvement in both postpaid and total subscriber losses for the year compared to 2008. Capital expenditure for the year is expected to be less than $1.7 billion. Sprint expects to continue generating positive free cash flow in 2009 (including fourth-quarter) driven by its ongoing cost-cutting measures.

Opportunities and Challenges

Sprint is well positioned to leverage the growing wireless smartphone market in the US leveraging a rich portfolio of popular smartphone offerings. In response to the increased competition from iPhones, the company launched Palm Inc’s (PALM - Snapshot Report) Pre touchscreen smartphone in June 2009. Sprint further broadened its next-generation handset portfolio by launching smartphones based on the Android platform. The company is set to launch Palm’s Pixi (cheaper version of Pre) this November.

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 US carrier network any time using any handset for free.

Sprint is acquiring Virgin Mobile USA (VM - Snapshot Report) to strengthen its presence in the fast-growing prepaid market. The company recently announced plans to buy its wireless affiliate iPCS Inc (IPCS - Snapshot Report), which will expand Sprint’s service territories and offer cost synergies.

Sprint is aggressively deploying 4G WiMax mobile broadband service having already launched its service in 17 US cities including 10 markets launched in October. The company targets to launch 4G services in additional US cities during the fourth-quarter 2009. 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 company continues to lose market share to its larger peers Verizon (VZ - Analyst Report) and AT&T (T - Analyst Report) as they continue expanding their respective customer bases at a brisk rate. Sprint is struggling to integrate Nextel’s iDEN wireless network, resulting in subscribers losses to other carriers. However, to improve network performance, the company is outsourcing its networks to Ericsson AB (ERIC - Analyst Report).

We believe a lower margin-revenue mix, expenditures related to the wide deployment of the 4G services and weak wireless business will have an adverse impact on financials in the near-term. Additionally, the company may continue to experience steep declines in its post-paid subscriber base, resulting from customer migration to competition.