Sprint’s Earnings Dip and Stock Goes Up

Sprint Nextel’s (NYSE: S  ) second quarter net loss of $1.37 billion, or $0.46 a share, was worse than analysts’ not-so-great expectations of a $0.40 a share loss. Yet, in spite of Sprint’s second quarter bottom line dipping even lower than forecast, some watchers saw it as a harbinger of a brighter future for the beleaguered carrier.

Why? Because some of that loss -- $0.26 a share -- can be attributed to hastened costs incurred from the dismantling of the Nextel iDEN network, that millstone of a platform that Sprint has been wearing around its neck since it acquired Nextel in 2005, for the regrettable sum of around $36 billion.

Another $0.06 a share loss is attributable to the removal of some 8,300 Nextel cell sites during the quarter. More shutdown expenses will be reported for the current quarter, according to the company, as they remove an additional 1,300 Nextel cell sites, ending the Nextel "thinning" for 2012.

And $0.07 of that EPS loss can be blamed on Sprint’s investment in Clearwire (Nasdaq: CLWR  ) , its 4G WiMAX network provider.

Sprint’s squeeze play
A bright spot for Sprint was its revenue increase. Sales went up 6.4% to $8.84 billion; estimates were for $8.73. Much of that revenue came from the record increase in revenue that Sprint was able to eke out of each subscriber. Average revenue per Sprint platform postpaid user, or ARPU, jumped $4.31 from the year-ago quarter. Sprint CEO Dan Hesse touted that as "the highest year-over-year postpaid ARPU increase on record for any major U.S. wireless company."

Sprint didn’t have to put those users in a vise to squeeze out that much extra revenue; higher spending on data plans did that trick. The iPhone probably helped that along, which may help Sprint justify the $15.5 billion four-year deal it cut with Apple (Nasdaq: AAPL  ) last year. Sprint felt compelled to agree to those terms to get the iPhone, as it saw that not having it made the carrier much less attractive to subscribers.

Three cheers
Jennifer Fritzsche, an analyst with Wells Fargo, said the earnings results "… illustrate that the fruits of Sprint’s labor are finally being seen." Credit Suisse analyst Jonathan Chaplin said, "It turned out extremely well," for Sprint.  And Macquarie Securities USA analyst Kevin Smithen told Bloomberg, "… with this report, I think you’ll see some bounce in the stock."

And bounce it did, up 20% by earnings report day’s end.

But after the party
Sprint still has to deal with its increasing postpaid subscriber losses, which included 246,000 during the quarter, more than double those that hung up on Sprint a year ago. It has now suffered 19 straight quarterly postpaid subscriber losses. Sprint was able to keep 431,000 of the 688,000 departing Nextel postpaid subscribers, but not enough to make up for the 442,000 postpaids that ran off -- quite possibly to AT&T (NYSE: T  ) , which gained 320,000 during the quarter, and to Verizon (NYSE: VZ  ) , which gained 888,000.

Sprint will still have to play a mighty game of catch up with its newly-launched LTE network. It has 15 markets now with LTE coverage, including in five major cities: Atlanta, Dallas, Houston, San Antonio, and Kansas City. But, again, it’s up against AT&T, with 47 LTE markets, and Verizon, with a whopping 337.

Cost of doing business
Building an LTE network is expensive. So far this year, Sprint has spent $1.7 billion in capital expenditures and expects to spend another $4.3 billion by the end of the year. Good thing, then, ,that it managed to produce $209 million in free cash flow during the quarter, helping it retire $1 billion in debt ahead of its maturity date. The company ended the quarter with $6.8 billion in cash, cash equivalents, and short-term investments.

And that cash will be needed. The big question for Sprint in the upcoming months is how quickly can it provide enough LTE coverage so that it won’t be overlooked by data-hungry customers when the next iteration of the iPhone -- one expected to be LTE-capable -- is released, it's assumed, in the second half of the year.

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Fool contributor Dan Radovsky owns shares of AT&T. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.
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