After several quarters of disappointments, Sprint Nextel (NYSE: S ) finally offered investors good news this morning. Third-quarter earnings came in better than expected.
The numbers aren't pretty, per se. Revenue rose 2% to $8.33 billion while Sprint's net loss shrank from $0.30 in last year's Q3 to just $0.10 this time around. Sprint also lost 44,000 retail post-paid subscribers, down from 101,000 lost last quarter. Yet beating expectations is what matters to Wall Street and Sprint's $0.10 loss is better than the $0.22 loss analysts had been expecting.
So why is the stock off more than 10% as of this writing? Debt, I think. Along with earnings, Sprint announced a plan to increase its borrowing capacity by $150 million. Some of those proceeds could be earmarked for wireless broadband partner Clearwire (Nasdaq: CLWR ) .
According to Forbes, CEO Dan Hesse told investors in a call this morning that the two companies had signed a "nonbinding cooperation" agreement in which Sprint will help Clearwire roll out a national LTE network to compete with AT&T (NYSE: T ) and Verizon (NYSE: VZ ) , as well as space-based provider LightSquared.
Unable to afford a losing proposition
Investors should be skeptical of the Clearwire arrangement. Though the agreement itself isn't binding, Hesse talked of cooperating on a whole network build-out that would ensure the sort of "seamless hand-off and service-layer control" that customers should expect. It's a pricey proposition given the billions Clearwire has already spent to create a WiMAX network that's been blown away by Verizon's LTE network in speed tests.
And what does Sprint get in return? The right to buy access on Clearwire's network, which, again, could be problematic given the history between these two companies. Back in March, Clearwire and Sprint were publicly battling over wholesale rates for WiMAX usage. The dispute is what led Sprint to consider LightSquared in the first place. You'll forgive me for refusing to believe this time is different.
Sprint doesn't have the capital to risk. Sure, the company claims more than $5 billion in liquidity in the way of cash and available borrowing. None of that accounts for cash flow. In the third quarter, Sprint burned through $273 million on an adjusted basis. Year to date, the carrier has produced just $172 million in free cash flow, down from $1.6 billion last year at this time.
The cost of biting into Apple
Cash flow should continue lower from there. Sprint told analysts it would end 2011 with as much as $100 million in free cash flow, but could also burn as much as $200 million as costs to carry Apple's (Nasdaq: AAPL ) iPhone kick in.
Overall, Sprint is committing to pay 40% more to Apple than it does to other handset makers, Reuters reports. The result? Carrying iCandy will cost $15 billion over the next four years while producing $7 billion to $8 billion in value over the same period. Another mathematically losing proposition -- unless Sprint takes share from AT&T, T-Mobile, and Verizon and then locks these new customers in for the long haul.
That may prove to be difficult. A rising tide of complaints has flooded Sprint's support forums this week. New Sprint iPhone users are apparently experiencing unexpectedly slow speeds -- in some cases about as slow as a 1980s 2400 baud modem. The 72-page thread began on Oct. 14 and continues through this morning. As this story was being written a customer named "dujuanr26" posted about switching to Verizon because a single app still hadn't downloaded after three hours.
Sprint can't afford this kind of trouble. At the very least, it calls into question the wisdom of investing in Clearwire when its own network may be in need of an even more basic upgrade. Be careful here, investors. Just because the iPhone has been a powerful catalyst for AT&T and Verizon doesn't mean it will also lift Sprint to new highs.
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