Post-Paid Still an Issue at Sprint

For Thomas's preview heading into the Sprint Nextel conference call, please click here.

Sprint Nextel (S - commentary - Trade Now) posted a quarter that was largely in line with the most forecast. For the quarter just ended, the company posted a loss of -17 cents per share on total revenue of $8 billion. Free cash flow came in at $664 million. Wireless revenue came in at $6.3 billion (down 8% year over year) while the traditional wireline / long distance business came in at $1.4 billion (down 10% year over year). The company lost a total of 135,000 net subscribers.

Guidance (if that's what you want to call it) calls for the company to improve its full-year post-paid subscriber loss in 2009 compared to 2008 and to improve sequentially during the fourth quarter. The company expects capex to come in less than $1.7 billion. Honestly, in my opinion, this outlook does not mean very much by itself.

Wireless (and other highlights):

• ended with 48.3 million subs (33.6 post-paid, 5.7 million pre-paid and 8.9 wholesale);
• lost 801,000 post-paid subscribers (about in line with expectations and came largely from iDen);
• company also lost 410,000 wholesale subscribers (perhaps this was a lot of those kindles that are no longer on the Sprint network);
• post-paid churn was 2.17% (in line with expectations but higher than competitors);
• average revenue per unit was $56;
• 4G is now available in 17 markets (expect to be in 80 markets by year-end 2010);
• management thinks there would probably be some benefit from industry consolidation but doesn't think it is required to be successful; and
• churn early in the year was driven more by weak economy, and that is stabilizing.

Overall, the earnings report and call was about as expected. The company continues to lose more post-paid subs while seeing the pre-paid side hold up fairly well. Now how much of this pre-paid growth is counter-cyclical with the economy and how much is just consumer preference for wireless without contracts is up for debate. I tend to think these are low-quality subs and not nearly as valuable as the post-paid side. Hopefully, Sprint can continue to improve the product lineup and see the subs stabilize. Until then, I will probably avoid the stock except for quick trading opportunities.

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At the time of publication, Thomas had no positions in the stocks mentioned, although holdings can change at any time without notice.

Ben Thomas, CFA, is the founder and managing principal of Waycross Partners. Waycross Partners is a long/short hedge fund that focuses on the technology and health care sectors. Before Waycross, Ben was a portfolio manager and senior equity analyst at INVESCO, where he was part of a team that managed over $20 billion in assets. While at INVESCO, he was the lead manager for the INVESCO Midcap Growth fund as well as the firm's senior equity analyst covering technology stocks.

Prior to INVESCO, Ben worked for Banc One Securities and Prudential Securities. He graduated from the University of Kentucky with a bachelor's degree in finance and went on to earn his MBA from Indiana University. Ben is a member of the CFA Institute and serves on the board of directors for the CFA Society of Louisville.