Any Hope of a Better Future?
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is no longer news that the third-largest wireless telecom carrier Sprint Nextel (NYSE: S) is facing a series of problems. But what may be difficult to determine is whether this company that is currently making every effort to weather the storm will be able to survive its challenges. So will there be a Sprint still in existence by the year 2015, or will it even be able to survive the period before then?
It may be hard to say, but one should have a better picture of this company after assessing the following details about its woes and attempts at changing its fortunes. But first, the company recently released its 2012 second quarter result with a greater loss being reported. Regarding this, an operating loss of $629 million was made in the quarter as against the $79 million operating income that was earned in the same quarter last year, reflecting charges attributable to the shutdown of the Nextel network, as well as subscriber losses.
Other highlights of the results include: the growth of the company’s cash reserves, which has increased by more than 100% to $267 million from what was obtained in the first quarter of 2012; a lower net cash provided by operating activities of $1.2 billion in the quarter as compared with a sum of $1.1 billion in the same period last year, as well as a $1.37 billion net loss or $0.46 per share net loss as against that of 2011’s second quarter, which was a $847 million net loss or $0.28 per share net loss.
Also, Sprint Nextel’s net operating revenues increased by 6%, exceeding the $8.73 billion expected by analysts. This was comparable with a $0.40 per share loss that analysts expected, but which the company equally failed to meet, even though this was a negative development. And, the company attributes improvement in net operating revenue primarily due to increase in wireless service revenue, which was partly offset by revenue reduction in wireline service. It is equally important to inform you that the best-ever churn and postpaid ARPU was achieved on the Sprint platform in this quarter.
So what is Sprint Nextel doing right at this point in time?
Some good news from Sprint Nextel
One of the good things happening to Sprint Nextel right now is its iPhone sales, which are roughly 1.5 million every quarter. Although this may not be considered much when compared with the numbers that both Verizon (NYSE: VZ) as well as AT&T (NYSE: T) are pushing out, it is a good development that may increase due to the company’s heavy subsidization.
Also, from the recent second quarter results for 2012, it was discovered that the company now has 442,000 postpaid subscribers in addition to new prepaid subscribers of 141,000 that was added to the Sprint network. This increases the company’s client base to 56 million in the country, with 60% of previous users of Nextel opting to stay with the Sprint brand. The best news yet from the report may be the improvement in churn levels as well as in postpaid ARPU.
But on the flip-side here is some bad news to be considered.
It’s a risky bet
Okay, although 1.5 million iPhone sales were made, this came at a risky cost. You see, sometime last year in October, 2011, Sprint agreed to buy more than 30 million iPhones at the rate of $600 apiece in the next 4 years. This was a risky long-term bet on iPhones from Apple (NASDAQ: AAPL) that they were willing to take, which will cost them more than $15.5 billion. And, these phones were then sold for $199 with recent development even indicating that they will now be sold for lower at $149.99 as a $36 activation fee is also waived. This means that the company has taken a massive loss upfront so as to carry the iPhone, the cost of which, it must earn back.
Its debt profile
One thing that Sprint Nextel will certainly be grappling with, both in the near future as well as for some time afterwards, is debt and a lot of it. Total debt (mrq) as it stands is now $21.26 billion, with total debt/equity (mrq) at 230.45.
Spring Nextel needs to carefully consider any other loan it will be taking in the future before doing so. Benchmarking itself against bigger players like Verizon or AT&T may not be the best option for it in its present condition. In other words, the company should focus more and more on its competitive strengths or reinventing itself as opposed to fighting at the same pace on the telecommunications turf with these two. At best the company seems to be a mixed bag of contradictions and only time will tell which will gain the upper hand. Therefore, investors should consider not taking any position in the stock at all, for now.
muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.