Sprint announces Q3 earnings: net subs reach five year high, net losses at $300 million

Sprint has just unveiled its Q3 earnings report, and it's looking pretty bittersweet. According to the company, net operating revenues reached $8.3 billion during the quarter (about two percent higher than Q3 2010), while additions of new wireless net subscribers reached a five year high, with 1.3 million customers hopping onboard. Of those 1.3 million, 304,000 were of the postpaid variety, 485,000 were prepaid and about 835,000 were wholesale. Sprint lost about 44,000 net postpaid customers this quarter, but that's a major improvement over last quarter, when a little over 100,000 jumped ship, and marks a 59 percent improvement over last year's report. At the same time, however, the carrier reported net losses of $301 million -- lower than Q2's figures, but not exactly encouraging, either. As far as the future goes, the folks at Overland Park expect to end the year with even more new subscribers, though it remains to be seen whether that long-awaited LTE rollout can make much of a dent in its bottom line. Check out the press release in full, after the break.

Update: Listening in on the earnings call it's clear Sprint is really counting on the iPhone to help it run with the big dogs. According to some convoluted metaphor, the carrier is the Oakland A's in Moneyball and Apple's handset is A-Rod (who never spent a day with the Athletics... but we digress). Still, Sprint expects more loyalty and bigger profits from customers who choose the iPhone -- at least for the next four years, after which it'll have to negotiate a new deal with the Cupertino crew.

Update 2: Sprint also clarified that, in addition to its deal with LightSquared, it will be working with Clearwire to deliver LTE network coverage. The carrier has reached a preliminary agreement with its WiMAX partner, but expects to announce a wholesale deal soon.

Update 3: We already knew that the iPhone 4S launch was the company's best launch ever for a family, but now the company's confirming that it was its best launch ever for any device.

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Sprint Nextel Reports Third Quarter 2011 Results

Year-over-year and sequential Adjusted OIBDA* growth driven by ARPU strength and continued wireless subscriber growth

Postpaid ARPU growth of $1 sequentially; $3 year-over-year improvement best in almost 12 years
Nearly 1.3 million total net new wireless subscriber additions – best in more than five years
Eight consecutive quarters of net postpaid subscriber growth for the Sprint brand and also for year-over-year improvement in postpaid churn
The company's third quarter 2011 earnings conference call will be held at 8 a.m. EDT today. Participants may dial 800-938-1120 in the U.S. or Canada (706-634-7849 internationally) and provide the following ID: 15483737 or may listen via the Internet at www.sprint.com/investor.

OVERLAND PARK, Kan.--(BUSINESS WIRE)--Sprint Nextel Corp. (NYSE: S) today reported that during the third quarter of 2011, the company generated net operating revenues of $8.3 billion and Adjusted OIBDA* of $1.4 billion. Adjusted OIBDA* grew sequentially and year-over-year driven primarily by strength in postpaid ARPU and continued growth in the prepaid wireless customer base. Postpaid wireless ARPU increased $3 from the year-ago period and the prepaid subscriber base has grown 23 percent since the third quarter of 2010.

The company achieved its best total company wireless net subscriber additions in more than five years. The company added nearly 1.3 million total net wireless subscribers, primarily driven by 304,000 net postpaid additions for the Sprint brand, net prepaid additions of 485,000 and net wholesale and affiliate additions of 835,000.

Growth in Sprint brand net additions was achieved without the benefit of Apple's iPhone 4S and iPhone 4, which launched Oct. 14. The launch of this iconic device resulted in Sprint's best ever day of sales in retail, web and telesales for a device family in Sprint history. The response to this device by current and new customers has surpassed initial expectations. The iPhone is expected to be accretive for Sprint, and iPhone users are expected to be among Sprint's most profitable customers.

Additionally, the company reported operating income of $208 million, a net loss of $301 million and a diluted loss of $.10 per share for the quarter, which includes $261 million in equity losses of unconsolidated investments and other. This compares to an operating loss of $213 million, a net loss of $911 million and a diluted loss of $.30 per share, which included $284 million in equity losses of unconsolidated investments and other in the third quarter of 2010.

"Sprint's focus on creating the best customer experience with simple, unlimited plans and innovative products and services continues to strengthen our brand and drive positive results," said Dan Hesse, Sprint CEO. "We are adding to our customer base, our ARPU is increasing, and as a result our wireless revenues are growing."

As of Sept. 30, 2011, the company's total liquidity was approximately $5 billion, consisting of $4 billion in cash, cash equivalents and short-term investments and $1 billion of undrawn borrowing capacity available under its revolving bank credit facility. The company's next scheduled debt maturities of $2.3 billion are due in March 2012.

During the third quarter, third parties continued to validate Sprint's progress. Sprint was ranked highest by J.D. Power and Associates among full-service providers in a tie in its 2011 Wireless Purchase Experience Study, Volume 2. The study also found Sprint led the industry in its website buying experience. Boost Mobile was ranked by J.D. Power and Associates as highest in the Wireless Purchase Experience Study, Volume 2 as well as highest in 2011 Wireless Customer Care Performance, Volume 2 with Non-Contract Service. Additionally, Sprint earned the No. 3 spot among the largest U.S. companies on Newsweek's 2011 Green Rankings. This is the second straight year that Sprint has ranked in the top 10, up from No. 6 last year.

Sprint also added to its innovative portfolio of products and services. It launched three additional 4G phones – Samsung Conquer™ 4G, Motorola PHOTON™ 4G and the first Samsung Galaxy S™ II product available in the U.S., Samsung Galaxy S™ II, Epic™ 4G Touch. This week Sprint launched its 25th 4G device – HTC EVO Design 4G™. Sprint also added the BlackBerry® Torch™ 9850, the first all-touch BlackBerry® smartphone from Sprint, BlackBerry® Bold™ 9930, the thinnest BlackBerry® smartphone ever and the BlackBerry® Curve™ 9350. Boost Mobile grew its smartphone lineup of Android™ devices with the launch of the Samsung Transform™ Ultra, and Virgin Mobile USA launched the Android-powered Motorola TRIUMPH™ and announced the coming availability of the LG® Optimus™ Slider.

Consolidated net operating revenues of $8.3 billion for the quarter were 2 percent higher than in the third quarter of 2010 and remained relatively flat as compared to the second quarter of 2011. The quarterly year-over-year improvement was primarily due to higher postpaid ARPU and growth in the number of net prepaid subscribers, partially offset by lower wireline revenues and lower wireless equipment revenues.

Adjusted OIBDA* was $1.4 billion for the quarter, compared to $1.3 billion for the third quarter of 2010 and the second quarter of 2011. The quarterly year-over-year improvement in Adjusted OIBDA* was primarily due to higher postpaid and prepaid wireless service revenues, partially offset by an increase in wireless cost of service, higher equipment net subsidy, and lower wireline revenues. Sequentially, quarterly Adjusted OIBDA* improved primarily as a result of higher postpaid and prepaid wireless service revenues, reduced marketing expenses, and partially offset by higher wireless cost of service.

Capital expenditures(1), excluding capitalized interest of $103 million, were $760 million in the quarter, compared to $462 million in the third quarter of 2010 and $640 million in the second quarter of 2011. Wireless capital expenditures were $647 million in the third quarter of 2011, compared to $341 million in the third quarter of 2010 and $546 million in the second quarter of 2011. During the quarter, the company invested in data capacity as a result of increased data usage, as well as approximately $115 million for our Network Vision plan. Wireline capital expenditures were $36 million in the third quarter of 2011, compared to $59 million in the third quarter of 2010 and $35 million in the second quarter of 2011. Corporate capital expenditures were $77 million in the third quarter of 2011, compared to $62 million in the third quarter of 2010 and $59 million in the second quarter of 2011, primarily related to infrastructure to support our Wireless and Wireline businesses.

Free Cash Flow* was negative $273 million for the quarter, compared to $384 million for the third quarter of 2010 and $267 million for the second quarter of 2011. While Adjusted OIBDA* was relatively stable for the quarterly year-over-year and sequential periods, Free Cash Flow* was reduced by quarterly year-over-year increases in capital expenditures of $328 million as well as year-over-year and sequential increases in working capital of $483 million and $697 million, respectively, partially offset by spectrum hosting prepayments.

The quarterly year-over-year change in working capital is primarily associated with increased inventory balances and reductions in accounts payable. The quarterly sequential change in working capital is primarily associated with the reduction in accounts payable associated with the second quarter build-up of inventory partially offset by reduced inventory purchases during the third quarter of 2011.

Wireless Customers

The company served more than 53 million customers at the end of the third quarter of 2011. This includes 32.9 million postpaid subscribers (28 million via the Sprint brand on CDMA, 4.7 million on iDEN, and 229,000 Nextel PowerSource users who utilize both networks), 14.3 million prepaid subscribers (11.9 million on CDMA and 2.4 million on iDEN) and approximately 6.3 million wholesale and affiliate subscribers, all of whom utilize our CDMA network.

For the quarter, Sprint added nearly 1.3 million net wireless customers, including net additions of 441,000 retail subscribers and net additions of 835,000 wholesale and affiliate subscribers as a result of growth in MVNOs reselling prepaid services.

Sprint lost approximately 44,000 net postpaid subscribers during the quarter compared to a loss of 107,000 in the third quarter of 2010, representing a 59 percent improvement year-over-year.

The CDMA network added approximately 265,000 net postpaid customers during the quarter, which includes net losses of 39,000 Nextel PowerSource customers. Excluding Nextel PowerSource customer losses, the Sprint brand added 304,000 net postpaid wireless subscribers. The iDEN network lost 309,000 net postpaid customers in the quarter.

The company added 485,000 net prepaid subscribers during the quarter, which includes net additions of 839,000 prepaid CDMA customers, offset by losses of 354,000 net prepaid iDEN customers.

The credit quality of Sprint's end-of-period postpaid customers was approximately 83 percent prime.
Wireless Churn

For the quarter, Sprint reported postpaid churn of 1.91 percent, compared to 1.93 percent for the year-ago period and 1.75 percent for the second quarter of 2011. Quarterly postpaid churn improved year-over-year primarily as a result of a larger base of customers on fixed rate bundled plans or 4G handsets, which typically have a lower deactivation rate. Sequentially, postpaid churn was impacted by historical third quarter seasonality.

Approximately 8 percent of postpaid customers upgraded their handsets during the third quarter. Upgrades as a percentage of our subscriber base declined slightly, likely due to customer expectations of a fourth quarter iPhone launch.

Prepaid churn for the third quarter of 2011 was 4.07 percent, compared to 5.32 percent for the year-ago period and 4.14 percent for the second quarter of 2011. The quarterly year-over-year and sequential improvements in prepaid churn were primarily a result of the predominance of Assurance WirelessSM customers, who on average have lower churn than that of the remainder of our prepaid subscriber base. Year-over-year, prepaid churn also benefited from improvement in churn for both the Virgin Mobile and Boost Mobile brands.

Wireless Service Revenues

Wireless retail service revenues of $6.8 billion for the quarter represent an increase of more than 7 percent compared to the third quarter of 2010 and almost 2 percent compared to the second quarter of 2011. The quarterly year-over-year improvement is primarily due to higher postpaid ARPU as well as an increased number of net prepaid subscribers as a result of the Boost Monthly Unlimited offering, additional market launches of Assurance WirelessSM and the re-launch of the Virgin Mobile brand, partially offset by net losses of postpaid subscribers since the third quarter of 2010. Sequentially, wireless retail service revenues increased, primarily as a result of higher postpaid ARPU and growth in net prepaid subscribers.

Wireless postpaid ARPU increased year-over-year from $55 to $58, the largest year-over-year postpaid ARPU growth in almost 12 years, while sequentially ARPU increased from $57 to $58. Quarterly year-over-year and sequential ARPU benefited from higher monthly recurring revenues as a result of the premium data add-on charges for smartphones and higher device insurance revenue.

Prepaid ARPU of $27 for the quarter declined from $28 in the third quarter of 2010 and the second quarter of 2011 as a result of a greater mix of Assurance WirelessSM customers who on average have lower ARPU than the remainder of our prepaid subscriber base.

Quarterly wholesale, affiliate and other revenues were up $9 million, compared to the year-ago period, and up $10 million sequentially, resulting primarily from growth in MVNOs reselling prepaid services.
Wireless Operating Expenses and Adjusted OIBDA*

Total wireless net operating expenses were $7.4 billion in the third quarter, compared to $7.5 billion in the year-ago period and in the second quarter of 2011.

Wireless equipment net subsidy in the third quarter was almost $1.2 billion (equipment revenue of $616 million, less cost of products of $1.8 billion), compared to almost $1.1 billion in the year-ago period and approximately $1.1 billion in the second quarter of 2011. The quarterly year-over-year increase in net subsidy is associated with postpaid customers due to an increased mix of 4G smartphone sales, which on average carry a higher subsidy rate per handset, partially offset by decreased handset sales volume.

Sequentially, total net subsidy increased as a result of higher average subsidy rate per postpaid handset due to a greater mix of 4G smartphones, partially offset by lower volume of postpaid and prepaid handset sales.

Wireless cost of service increased approximately 9 percent and 4 percent for the quarterly year-over-year and sequential periods, respectively. The quarterly year-over-year and sequential increases primarily resulted from higher customer data usage, higher roaming expenses, and higher service and repair costs as a growing percentage of our customer base is on smartphones.

Wireless SG&A expenses increased approximately 1 percent year-over-year but decreased approximately 4 percent sequentially. Quarterly year-over-year SG&A expenses increased, primarily due to higher selling and bad debt expenses, partially offset by lower marketing and customer care costs. Sequentially, SG&A decreased primarily as a result of lower marketing expenses, partially offset by higher bad debt expenses. Bad debt expenses were higher year-over-year and sequentially due to an increase in the agings of accounts receivable outstanding combined with higher average write-off per account.

Wireless depreciation and amortization expense decreased $327 million year-over-year, primarily due to the absence of amortization for customer relationship intangible assets related to previous acquisitions, which have become fully amortized, as well as the company's annual depreciable life study reflecting a reduction in the replacement rate of capital additions.

Wireless Adjusted OIBDA* of $1.2 billion in the third quarter of 2011 compares to $1.1 billion in the third quarter of 2010 and in the second quarter of 2011. The year-over-year improvement in quarterly Adjusted OIBDA* was primarily due to higher postpaid and prepaid service revenues, partially offset by increases in cost of service and equipment net subsidy. Quarterly Adjusted OIBDA* improved sequentially primarily as a result of higher postpaid and prepaid service revenues, lower SG&A expenses, partially offset by higher cost of service.

Wireline revenues of $1.1 billion for the quarter declined 15 percent year-over-year primarily as a result of an annual intercompany rate reduction based on market prices for voice and IP and the scheduled migration of wholesale cable VoIP customers off of Sprint's IP platform. Sequentially, third quarter wireline revenues declined almost 3 percent, primarily as a result of continued migration of wholesale cable VoIP customers off of Sprint's IP platform.
Total wireline net operating expenses were almost $1 billion in the third quarter of 2011. Total operating expenses declined approximately 11 percent year-over-year due to lower cost of service from continued declines in voice and cable IP volumes, improvement in SG&A expenses and lower depreciation expenses. Sequentially, third quarter total net operating expenses remained relatively flat.
Wireline Adjusted OIBDA* was $184 million for the quarter, compared to $271 million in the third quarter of 2010 and $210 million reported for the second quarter of 2011. Quarterly wireline Adjusted OIBDA* declined year-over-year as a result of lower revenues, partially offset by cost reductions. Sequentially, quarterly wireline Adjusted OIBDA* declined as a result of lower revenues.
Forecast

Sprint Nextel expects net postpaid subscriber additions for the full year 2011 and to improve total net wireless subscriber additions in 2011, as compared to 2010. The company expects full year capital expenditures in 2011, excluding capitalized interest, to be approximately $3 billion. In addition, the company expects Free Cash Flow* between negative $200 million and positive $100 million for 2011.