Sprint Nextel Corp. (S), the third-largest U.S. wireless carrier, reported first quarter 2011 results on April 28. Adjusted loss bettered the Zacks Consensus Estimate by 7 cents and was 14 cents narrower from the year-ago loss. Total revenue also improved from the year-ago quarter and surpassed the Zacks Consensus Estimate.
First Quarter Review
Sprint delivered improved results despite competitive pressure from its chief rivals AT&T Inc. (T) and Verizon Communications Inc. (VZ). Revenues from the wireless segment increased on strong subscriber growth and lower churn. Wireline revenue, however, remained the dampener.
Sprint added 1.1 million wireless subscribers in the first quarter to reach 51 million. The company’s multi-brand prepaid strategy like Assurance Wireless and Virgin Mobile and innovative offers like Boost Mobile’s Monthly Unlimited is contributing significantly to the company’s subscriber growth.
Prepaid subscribers generated strong growth while the post-paid subscriber fell following the launch of the Verizon iPhone and aggressive pricing by T-Mobile and AT&T. The recently concluded quarter remained depressed by the higher subsidy costs resulting from increased smartphone sales.
Further, the company recorded year-over-year growth in adjusted OIBDA (operating income/loss before depreciation, amortization, asset impairments and abandonments) for the first time in the last four years.
(Read our full coverage on this earnings report: Sprint Ahead, Loss Narrows)
Agreement of Analysts
The trend noticed over the last 30 days shows the analysts’ positive bias in estimate revisions for the upcoming quarter and two fiscal years. The analysts’ estimates remained unchanged over the last 7 days.
For the second quarter, 15 out of 23 analysts revised their estimates upward while 3 moved downward. Similarly, for fiscal 2011, 15 out of 26 analysts made positive revisions while 6 moved in the opposite direction.
For fiscal 2012, out of 27 analysts, 13 made upward revisions while 8 moved downward.
Sprint has started gaining solid ground this year following contracts wins, the appointment of the new CFO and the resolved wholesale pricing dispute with Clearwire Corp. (CLWR) that was plaguing Sprint’s revenue since last year. After several years of focussing on cost containment and business stabilization, Sprint is turning around its post-paid wireless business. In December 2010, Sprint announced Network Vision, a multiyear network infrastructure initiative, which could be a significant long-term margin driver. The initiative is expected to generate $10 billion to $11 billion in savings over the next seven years.
Sprint is continuously expanding its 4G services that are vital for its survival in the matured U.S. wireless market given its continued market share erosion to larger rivals. The company’s 4G network is expected to cover 130 million people by the end of 2011 and its entire coverage by year-end 2013.
Further, Sprint is expected to benefit from increased penetration of smartphones, rising average revenue per user (ARPU) and lower churn. The company maintains a strong and adequate liquidity to pay off debts, invest in capital expenditures as well as for future growth.
All these efforts made by Sprint increased confidence among investors, urging the analysts to raise their estimates. The efforts also overshadowed the company’s major risk stemming from the completion of proposed AT&T/T-Mobile merger, which will likely hurt Sprint’s profitabilty and shrink its subscriber base.
Magnitude –– Consensus Estimate Trend
The Zacks Consensus Estimate for the second quarter remained stable at a loss of 14 cents over the last 7 days and decline by a nickel over the last 30 days. The estimate represents a 9.86% increase year over year.
For fiscal 2011, the Zacks Consensus Estimate remained static at a loss of 68 cents over the last 7 days and declined 11 cents over the last 30 days, representing a substantial growth of 41.65% year over year.
The Zacks Consensus Estimate for fiscal 2012 is a loss of 48 cents, unchanged over the last 7 days and 6 cents below the last 30 days. This represents a growth of 29.09% annually.
Following the magnitude of estimate revisions, the loss will continue to decline going forward. We believe an attractive wireless product and service mix, wider 4G network footprint, prepaid brands, new wholesale agreement as well as the Network Vision initiative will continue to boost earnings.
With respect to earnings surprises, the company’s healthy track record is expected to continue in the coming quarters. Sprint produced a positive average earnings surprise of 15.24% over the last four quarters, which suggests that it outpaced the Zacks Consensus Estimate by that amount over the last year.
We believe Sprint will generate higher revenue due to increased penetration of handsets, lower churn and better ARPU. Sprint’s network modernization project is expected to generate substantial synergies over the next few years with reduced costs and more efficient network.
However, we remain cautious due to lower margins in wireless and wireline, higher payments made to Clearwire, higher subsidies and increased competitive threats due to the proposed AT&T/T-Mobile merger. Further, the Network Vision initiative will also dilute margins and free cash flow in the initial years of implementation.
Hence, we are maintaining our long-term Neutral recommendation with the Zacks #3 (Hold) Rank.