October 26, 2011
On this morning’s Q3 earnings call, Sprint executives responded to investor and analyst demands that it disclose more details about the critical issues facing the company, including the impact of the huge iPhone subsidies that it will be required to absorb, the cost and timing of its Network Vision roll-out, the status of its strained relationship with Clearwire and, most importantly, how much new debt it is going to have to raise over the next year or two. During the call, Sprint execs attempted to respond to these demands.
There seems to be no question that Sprint’s execs stepped up their game over their dismal Network Vision presentation. However, the big question remains – was it enough?
In our view, the major news coming from this morning will probably be the fact that, in order to fund its Network Vision build-out, the massive iPhone subsidies, and other cash requirements, Sprint projects that it needs to raise between $5 billion and $7 billion through 2013. As illustrated from the slide Sprint displayed during its earnings call, it looks like it needs to start raising those funds very quickly:
Meeting those needs will be a whole lot more expensive for Sprint. The Wall Street Journal reminded us this morning that “all three major credit-ratings firms have either cut or put the company [Sprint] on watch for a downgrade this month, saying plans to sell the iPhone and accelerate its network upgrade could hurt profits and key credit measures.”
CNET.com wrote that: “Sprint will lose money on the iPhone through fiscal 2015. OIBDA will be hit by $900 million in 2012 and $1.2 billion in 2013. Then, iPhone customer margin will turn the Apple deal profitable.”
While they improved a bit, Sprint’s margins are still the lowest in the industry — 16.8% for the quarter (a bit better than 16.4% for last year’s quarter) and 16.9% year-to-date (lower than last year’s 17.8%). Also, while improved, Sprint’s “capital intensity” (capital expenditures as a percent of revenues) is still well below its competitors: For the quarter it was 9.1% (vs 5.7% for Q3 in 2010) and 7.8% year-to-date (vs. 5.4% last year). This is still hugely below the 13% to 16/17% average among its competitors.
In a clear departure from the position Sprint espoused during its Network Vision presentation that it would rely on LightSquared for additional capacity before turning to Clearwire, Sprint announced a “non-binding” “technical” agreement with Clearwire. Sprint’s CEO Dan Hesse said this tentative accord will provide the basis for commercial negotiation over Sprint’s potential use of Clearwire’s 4G LTE capacity.
“[I]t was necessary to reach this agreement in order to clear the way to begin the negotiations of commercial terms under which Sprint may utilize and pay for access to the Clearwire LTE network,” he told the analysts. While cautioning that the firms had yet to reach a definitive agreement, Hesse said that such a deal would help Sprint meet its objective to offload “some 4G usage from its own LTE network onto the Clearwire LTE network.” It looks like the three-way poker match among Sprint, Clearwire and LightSquared will continue to create uncertainty for Sprint and Clearwire investors as Sprint grapples with the major technological challenges involved with integrating different spectrum on its networks moving into the future.
Over the next day or two, analysts, reporters, bloggers and investors will weigh in with their own reviews of Sprint management’s performance. Stay tuned.
Posted by EyeOnSprint in: Finances