Sprint-Nextel: Hit Or Miss In 2012?
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As the number three cellular service provider in the U.S., Sprint-Nextel (NYSE: S) falls far behind AT&T (NYSE: T) and Verizon (NYSE: VZ) in profitability and market value. The struggles of Sprint-Nextel cause an investor to consider whether a third major wireless service provider can survive against the Big Two. Sprint-Nextel has struggled for several years and the company management believes they are on the verge of turning around the results. The market is still skeptical whether Sprint's ambition plans will, in the end, allow the company to be competitive with the larger wireless companies.
With a current market cap of $8.4 billion, Sprint-Nextel has fallen far since the $36 billion merger between Sprint and Nextel in 2005. What was supposed to be a synergistic merger ended up as a company with two different wireless systems and a steady erosion of customers and revenue, especially from the Nextel side. In December 2007, the company brought in a new CEO: Dan Hesse – formerly of AT&T – to attempt to turn around the flagging fortunes of the company.
If you listen to the 2011 fourth quarter earnings conference call, it is apparent that Hesse believes Sprint-Nextel has nearly recovered from the post merger problems and the company is set to consolidate financially and technically over the next couple of years then start earning profits through margin expansion starting in about 2014. The conference call speakers threw out a very large amount of data with plenty of included acronyms. Without trying to digest the fine points of the presented data, here are some of the major take-aways from the earnings conference call.
- 2011 was the first time in seven years that pro forma operating income – OIBDA – increased compared to the prior year.
- With the new contract to sell Apple (AAPL) iPhones, They reported 1.8 million iPhone activations with 40% of those new Sprint-Nextel customers.
- Revenue from the company's Sprint network increased by 17% in 2011. This growth was greater than the revenue declines from the Nextel network and wireline services, allowing Sprint-Nextel to record revenue growth for the first time since 2007.
- Customer satisfaction surveys ranked Sprint-Nextel as one of the top companies in any industry.
- The company is on the verge of shutting down the Nextel network, allowing Sprint-Nextel to reduce the number of cell towers by half and use the Nextel push-to-talk bandwidth to support the 4G wireless expansion efforts.
- Sprint's 4G LTE service, called Sprint Network Vision, will be launched in six U.S. cities by mid-year 2012.
According to the Sprint-Nextel management team, all is good and everything is on schedule for an outstanding future for the company. On the flip side here are some of the problems Sprint-Nextel faces:
- The company is way behind the Big Two in rolling out 4G LTE service. Sprint-Nextel will not have the coverage area for high-speed wireless offered by AT&T and Verizon. As more and more users demand the fast wireless data, Sprint may not be able to retain customers.
- Sprint committed to spend a lot of money – $15 billion total – for the right to buy and sell iPhones.
- Sprint-Nextel is heavily in debt, of which it must pay off or refinance a large portion over the next few years. If the company does not meet its revenue goals, refinancing debt may become problematical.
The company does have an agreement with Clearwire (NASDAQ: CLWR) to use that company's 4G wi-fi and soon to roll out LTE networks as part of the Sprint 4G system. Clearwire offers its services in 40 cities, but it will be mid-2013 before true LTE wireless broadband becomes available over the Clearwire system.
For 2012 Sprint-Nextel is forecasting adjusted OIBDA in a range of $3.7 to $3.9 billion and capital expenditures of around $6 billion. That means the company will spend $2 billion more than it earns. Sprint currently has a $5 billion cash hoard, but results need to be very positive in 2012 for the market to stay positive on the company and the stock. In comparison, last year AT&T generated cash from operations of $34 billion and spend $20 billion on capital expenditures, leaving $14 billion of free cash flow. Verizon produced $13.5 billion of free cash flow after spending $16 billion on capital expenditures. Sprint-Nextel must get everything pretty close to right and offer a superior product to its customers to compete with the large amounts of money the Big Two can throw at their networks to upgrade and expand services.
For investors, Sprint-Nextel will either be a home-run a few years down the road – you probably need to give management until 2014 to see if the plans work out – or the company will fall on its face in which the stock will crater to near zero and the company will head for bankruptcy court.
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