Long Term Evolution
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The nation’s third largest cell phone carrier, Sprint (NYSE: S), has made numerous strategic errors over the last decade. The largest of these was their acquisition of Nextel. Announced in 2004 and approved in 2005 the $36 billion merger of Sprint and Nextel into Sprint Nextel was ultimately a complete disaster. In 2008 Sprint wrote down $29.7 billion of the merger, wiping out 80% of the value of Nextel at its acquisition price.
Not only was the Nextel merger financially painful but it left Sprint with a nationwide iDen cell phone network that is incompatible with their CDMA network. Then in an attempt to get ahead of their competitors 4G deployment, Sprint deployed a ‘4G’ technology called WiMax and Sprint purchased a 50.1% stake in the WiMax operator Clearwire. WiMax has now been essentially killed off by Sprint and they are jumping to LTE 4G, which is what AT&T and Verizon are using. However MVNO’s that run on Sprint’s network will continue to use WiMax through 2015. Additionally, Sprint did not have the iPhone for years until in 2011 Sprint began carrying the iPhone 4 and iPhone 4S. Sprint made a $15-20 billion bet on the iPhone, a Hail Mary pass for a company of Sprint's size, selling millions of iPhones per quarter is essential for Sprint if they are going to pay for their large initial iPhone order.
With all of these technologies, subsidiaries, and potentially bankrupting deals, Sprint's earnings are always closely watched. Sprint posted a $1.37 billion loss for the second quarter, or $.46 per share. This was lower than the already low expectations which estimated a loss of $.40 per share. It was also up from the $847 million loss Sprint reported this time last year. However, Sprint's stock went up on the seemingly dismal second quarter performance.
When you dig deeper into what caused this loss the reason for the optimism becomes a little more apparent. More than 50% of that loss, $.26 per share came from the cost of shutting down the Nextel iDen network. Sprint has hastened the iDen shut down to make room for their LTE 4G network. An additional $.06 per share loss came from Sprint shutting down 8,300 Nextel cell sites; Sprint will be shuttering another 1,300 sites this year so additional costs will be incurred. An additional $.07 per share loss came from Clearwire, Sprint's WiMax provider. Thus $.39 of the $.46 per share loss resulted from ventures that are hopefully on their last legs. iDen certainly is and though Clearwire will be around for the next few years, the WiMax technology has taken its place in the rear view mirror.
Sprint did have higher than expected revenue for the second quarter of $8.84 billion. This 6.4% increase was higher than the $8.73 billion that had been expected. This unexpected increase in revenue was largely due to Sprint increasing their average revenue per user. ARPU jumped $4.31 from last year to $61; Sprint's CEO claimed that was "the highest year-over-year postpaid ARPU increase on record for any major U.S. wireless company." Sprint’s higher priced smartphone plans no doubt helped get that additional revenue. Sprint sold 1.5 million iPhones this quarter which is the same amount they sold during the first quarter of 2012. Sprint also managed to add a net of 442,000 customers to their core Sprint network, which will help them deal with the $26 billion in debt they have on their balance sheet. $15.5 billion of that debt comes from their hefty 4 year agreement with Apple to have the iPhone, and Sprint's market valuation sits at less than half of that $26 billion in debt.
Sprint’s LTE network is still in its infancy; they have spent just under $2 billion of the $6 billion they plan on spending to roll out LTE. Currently they are only operating LTE in 15 markets. AT&T (NYSE: T) has 47 and Verizon (NYSE: VZ) has 337 LTE markets. Additionally this fall we expect a 4G LTE iPhone and customers who want the best LTE experience may choose Verizon, or even AT&T over Sprint as it will take Sprint years to catch up to Verizon’s LTE coverage. For the rest of the year it remains to be seen how fast Sprint can roll out their LTE as not only Apple’s (NASDAQ: AAPL) upcoming iPhone but Samsung’s Galaxy SIII and virtually every other flagship Android smartphone will be LTE equipped.
AT&T announced 332,000 postpaid customers and Verizon added 888,000 postpaid customers. AT&T sold 3.7 million iPhones and Verizon sold 2.7 million in this latest quarter. AT&T sold 5.1 million smartphones total this quarter and Verizon sold 5.9 million, the vast majority of the non-iPhones sold were Google Android smartphones. Now that Sprint has not only the iPhone but also flagship Android devices like the Samsung galaxy SIII and their own line of branded Android devices under the ‘EVO’ brand, Sprint should begin to show better quarterly results. Barring any other unfortunately expensive mergers, proper management of their heavy debt load and Sprint should be able to emerge as a credible and profitable competitor to Verizon and AT&T.
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