With iPhone Sprint Has No More Excuses, Fourth Quarter is Critical

Sprint (NYSE:S) reported mixed third quarter results on Wednesday as solid earnings were overshadowed by disappointing postpaid subscriber additions and further details about the costly iPhone contract with Apple (NASDAQ:AAPL). The stock dropped by nearly 7% on the day after the company reported a net loss of 44,000 net postpaid subscribers and postpaid churn came in at 1.91%, up from 1.75% in Q2. ^[1] This came on the heels of sluggish growth reported by AT&T (NYSE:T) last week. Fourth quarter subscriber numbers will be very important for Sprint as it is the first quarter in which the iPhone was available to the company’s subscribers.

See our full analysis of Sprint’s stock here

Earnings Solid Financially but Operating Metrics Disappoint

Sprint’s Q3 earnings were generally good from a financial standpoint as revenue and EBITDA grew 2% and 5% year-over-year, respectively, while the reported net loss improved from ($911 million) in Q3 2010 to ($301 million) this quarter. The company’s capital expenditures have continued to escalate as it focuses on its network modernization project and improving data capacity in advance of the iPhone launch.

Most disappointing to investors, however, was the continued loss of postpaid subscribers, the customers who are on long-term contracts and therefore most highly valued. Management still expects a net gain for 2011, but given that the company has lost 259k net postpaid subscribers so far this year, management must be counting on the iPhone to reduce churn as well as bring in a significant number of new customers. ^[1] We will be looking closely at the company’s Q4 results as a barometer of just how much of an impact the iPhone could have on its customer base and believe it will need to have a significant immediate effect in order to justify the massive upfront commitment that Sprint has made.

Clearwire Relationship Clarified

One key issue about which Sprint’s management has been reticent was the company’s LTE plan and, more specifically, its relationship with 4G partner Clearwire. Sprint had previously announced plans to roll out its own 4G network, which sent Clearwire’s stock plummeting. That issue was clarified on Wednesday’s earnings call as CEO Dan Hesse announced that the company has come to an agreement with Clearwire in order to help roll out Clearwire’s own LTE network that Sprint’s subscribers will be able to use. ^[1] This led to a significant rally in Clearwire’s stock, but still leaves open the question of why Sprint has multiple LTE plans given its projected liquidity situation.

We have a $4.73 price estimate for Sprint’s stock, which is almost 80% higher than the market price. We are in the process of updating our numbers for earnings.

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1. Sprint Nextel Reports Third Quarter 2011 Results, Sprint Press Release, Oct 2011 [↩] [↩] [↩]