Sprint's first quarter was solid relative to expectations as the company activated 1.5 million iPhones and said its Network Vision plan is off to a good start. However, the execution risks over the next year are huge.
The first quarter results showed Sprint has benefited from Apple's iPhone, a device that comes at a high cost for the carrier. Sprint reported a net loss of $863 million, or 29 cents a share, on revenue of $8.73 billion, up 5 percent from a year ago. Wall Street was looking for a loss of 41 cents a share. Sprint's adjusted EBITDA (earnings minus all the bad stuff) was 40 percent better than forecast.
The catch for Sprint is that it has to bolster its network and move from iDEN (Nextel's network) and WiMax (Clearwire) to 4G LTE.
This network overhaul is much needed, but comes at a steep price. Sprint has cash in the coffers, but has $1.8 billion in debt maturing in 2013 ($300 million in May 2013 and $1.5 billion in October).
You see where this is headed. The moving parts for Sprint look like this:
- Sprint bet heavily on the iPhone, a device that puts the carrier into the game against AT&T and Verizon.
- A network overhaul comes at a time when Sprint won't garner any LTE first mover advantage. Verizon and AT&T will have 4G networks built out before Sprint gets there.
- And Sprint has to execute near flawlessly over the next year to make these moving parts work.
Add it up and Sprint will either be a strong No. 3 carrier or toast. There's not much in between. Compare and contrast Sprint's two primary bullets form its earnings statement:
Sprint’s Network Vision initiative remains on track. To date, the company has approximately 600 sites on air, which are meeting speed and coverage enhancement targets. Zoning requirements are completed for approximately 9,700 sites and leasing agreements have been completed for close to 7,700 sites. More than 3,200 sites are in notice to proceed status and work has started on approximately 3,000. Sprint expects to bring approximately 12,000 sites on air by the end of 2012 and to complete the majority of its Network Vision roll-out in 2013. The company has also taken approximately 1,300 iDEN sites off air to date and expects to shut down a total of 9,600 before the end of the third quarter. In addition, as part of Network Vision, Sprint continues to expect to launch 4G LTE in six major cities by mid-year 2012 including Houston, Dallas, San Antonio, Atlanta, Kansas City and Baltimore.
Sprint CEO Dan Hesse noted that Sprint hit its internal milestones for Network Vision.
And the potentially bad:
During the first quarter, Sprint raised additional financing of $2 billion to help fund the Network Vision deployment, debt maturities and working capital requirements over the next few years. This followed financing of $4 billion raised in the fourth quarter of 2011. Sprint’s next scheduled debt maturities include $300 million due in May 2013 and $1.5 billion due in October 2013. As of March 31, 2012, the company’s total liquidity was approximately $8.8 billion, consisting of $7.6 billion in cash, cash equivalents and short-term investments and $1.2 billion of undrawn borrowing capacity available under its revolving bank credit facility.
Sprint can handle the debt load, but only if it keeps customers happy, engaged and add new subscribers.
On the happy customers front, Sprint has improved service nearly every quarter The company has 56 million customers and 32.8 million postpaid. Sprint added 263,000 postpaid customers, but churn in the first quarter hit 2 percent, up from 1.78 percent a year ago.
Even if you cut Sprint a break on the Nextel customer losses, it's unclear whether the carrier can continue to add customers going forward. If LTE isn't a differentiator and the iPhone represents table stakes, what does Sprint have exactly?