Sprint Nextel Corp. today reported third quarter 2008 financial results, which included consolidated net operating revenues of $8.8 billion and a diluted loss per share of 11 cents. Adjusted EPS before Amortization*, which removes the effects of special items and non-cash amortization expense, was zero cents. The company reported Free Cash Flow* for the quarter of $1.1 billion.
During the quarter, the company retired approximately $1 billion in principal of debt and incurred a $694 million financing obligation related to the close of its tower transaction. As of Sept. 30, 2008, the company had $4.1 billion of cash and cash equivalents. In November 2008, the company renegotiated the terms of its revolving credit facility, providing greater flexibility regarding its financial covenants.
“During tough economic times, we tightly managed our business to generate and retain cash and maintain substantial liquidity while continuing to reduce debt. At the same time, we made advancements in improving operations and delivering on the promise of the Now Network,” said Dan Hesse, Sprint Nextel CEO. “Customer care metrics have improved steadily throughout the year, and external surveys are confirming we’re providing a better customer experience.”
Hesse added, “Our Ready Now program revolutionizes the wireless data customer experience by personalizing and teaching customers how to take advantage of the capabilities of our Now Network; our One Click handsets allow customers easy access to applications, and we launched our fourth generation WiMAX service in Baltimore, which generated excellent reviews for a new era of high-speed mobile Internet access. All of this positions us to invite new customers to join us as we begin to focus on stabilizing gross adds in the fourth quarter.”
* Consolidated net operating revenues of $8.8 billion for the quarter were 3% lower than in the second quarter, primarily due to a lower contribution from Wireless.
* Adjusted OIBDA* of $1.8 billion reflects a sequential decline in net operating revenues due to subscriber losses and higher cost of service, partially offset by continued improvement in SG&A expenses. Third quarter Adjusted OIBDA* includes $65 million in non-cash compensation expense, as well as $75 million in operating expenses associated with the company’s WiMAX efforts.
* The company made capital investments of $485 million in the quarter, down from $646 million in the second quarter. The decline reflects lower spending in both Wireless and Wireline segments. The company recorded $134 million in capital expenditures in the quarter related to the deployment of WiMAX.
* For the quarter, Free Cash Flow* was $1.1 billion, compared to $1.3 billion in the third quarter of 2007 and $11 million in the second quarter of 2008. The sequential improvement reflects working capital benefit and reduced capital expenditures.
* Net Debt* at the end of the period was $18.4 billion, consisting of total debt of $22.6 billion, offset by cash and marketable securities of $4.2 billion. The company used cash in the third quarter to extinguish $485 million in principal of affiliate debt due 2012. The company also repaid $500 million of its revolving credit facility in August 2008. In addition, the company incurred a $694 million financing obligation related to the close of its tower transaction, which includes net cash proceeds of $645 million with an additional $20 million to be received 90 days after the closing of the transaction, subject to adjustments.
* In November 2008, the company renegotiated the terms of its revolving credit facility and increased the ratio of total indebtedness to trailing four quarters earnings before interest, taxes, depreciation and amortization and certain other non-recurring charges from no more than 3.5 to 1.0 to no more than 4.25 to 1.0. The company also paid down $1 billion of outstanding debt and decreased the current borrowing capacity of the credit facility from $6 billion to $4.5 billion, of which $1.3 billion is available.
* In the quarter, the company recorded cash expenditures of $187 million related to intangible asset investments, including $178 million associated with re-banding efforts and $9 million for the purchases of FCC licenses.
* On Nov. 4, the Federal Communications Commission approved plans to combine Sprint’s WiMAX business and assets with Clearwire Corp.
* The company served 50.5 million customers at the end of the period, compared to 54.0 million at the end of the third quarter of 2007. The credit mix of acquisitions has improved for four consecutive quarters, and prime customers represent almost 83% of the post-paid base.
* For the quarter, total wireless customers declined by a net 1.3 million including losses of 1.1 million post-paid customers and 329,000 prepaid users, which was slightly offset by a 130,000 increase in the number of wholesale and affiliate subscribers.
* At the end of the third quarter, the company served 37.8 million post-paid subscribers, 3.9 million prepaid subscribers and 8.8 million wholesale and affiliate subscribers.
* Subscribers by network platform include 35.4 million on CDMA, 13.5 million on iDEN and 1.6 million Power Source users who utilize both networks.
* More than 9% of post-paid customers upgraded their handsets during the third quarter, resulting in increased contract renewals.
* In the third quarter, the company launched Ready Now as part of an ongoing plan to familiarize customers with their handsets and service while encouraging data adoption. The company added to its device and service capabilities with the launch of the Palm® Treo™ 800w, Katana Eclipse by Sanyo, Motorola Renegade™ V950, M320 and M220 by Samsung, the nationwide introduction of Sprint AIRAVE™ by Samsung, and Touch Diamond™ by HTC.
* In the fourth quarter, the device lineup is expanding further to include the award-winning Samsung Rant, Samsung Highnote and LG Lotus™ featuring the easy-to-use One Click interactive user interface, HTC Touch Pro, and Motorola i576. Additionally, the company will launch the BlackBerry® Curve™ 8350i - the newest Nextel Direct Connect-capable BlackBerry smartphone. In 2009, Sprint plans to launch a total of eight new Nextel Direct Connect handsets as part of its new device portfolio, with five launching during the first half of the year.
* Wireless post-paid churn was just under 2.15%, compared to 2.0% in the second quarter and 2.3% in the year-ago period.
* Boost churn in the third quarter was 8.2%, compared to 7.4% in the second quarter of 2008, reflecting higher churn for both traditional Boost Pay-as-you-go subscribers and for Boost Unlimited.
Wireless Service Revenues
* Wireless service revenues for the quarter of $6.8 billion declined 13% year-over-year and 3% sequentially. The year-over-year decline was due to fewer subscribers and lower ARPU, while the sequential decline was due primarily to fewer wireless subscribers. Wholesale, affiliate, and other revenues were down sequentially and compared to the year-ago period due to pricing pressures.
* Wireless post-paid ARPU in the quarter was stable at $56 compared to the first and second quarters of 2008, as growth in data substantially offset voice declines. Wireless post-paid ARPU declined by nearly 6% compared to the year-ago period, reflecting continued pressure on voice MRC and overage revenues, partially offset by data revenue growth.
* Data revenues contributed approximately $13.50 to overall post-paid ARPU in the third quarter, led by growth in CDMA data ARPU. CDMA data ARPU increased more than $1 from second quarter, to about $16.50, now representing almost 29% of total CDMA ARPU. The increase was driven by strong take rates on bundled data services, such as those included with Simply Everything™, as well as continued growth in data cards.
* Prepaid ARPU in the quarter was approximately $31 compared to $30 in the year-ago period and in the second quarter of 2008. The sequential and year-over-year increase reflects a growing contribution from Boost Unlimited subscribers, offset by lower ARPU of traditional prepaid users.
Wireless Operating Expenses and Adjusted OIBDA*
* Total operating expenses, after normalizing for special items, were $7.8 billion in the third quarter, compared to $8.2 billion in the year-ago period and $7.9 billion in the second quarter of 2008.
* Adjusted OIBDA* of $1.6 billion in the quarter compares to $2.6 billion in the third quarter of 2007 and $1.9 billion in the second quarter. The sequential and year-over-year decline in Adjusted OIBDA* is due to fewer wireless subscribers and lower ARPU, partially offset by lower SG&A expense.
* Cost of services increased 5% year-over-year and 3% sequentially. The increases are due mainly to higher roaming and premium services costs.
* Equipment subsidy of nearly $700 million (equipment revenue of approximately $500 million less cost of products of nearly $1.2 billion) was down 1% from the second quarter and up 29% from the third quarter of 2007. The year-over-year increase in subsidy is primarily due to the increase in the average cost per handset sold as the company continued to sell a greater number of higher-priced units, partially offset by a decrease in the number of handsets sold.
* SG&A expenses declined 11% from the third quarter of 2007 and 2% from the second quarter of 2008. The year-over-year improvement is due to lower selling, bad debt and labor expenses. On a sequential basis, higher marketing spending was offset by lower customer care, labor and bad debt expenses.
* Bad debt expense was at its lowest level since the second quarter of 2006 due to the continued increase in the credit quality of our subscribers and improved collection efforts.
Wireless Capital Spending
Wireless capital investments were $217 million in the third quarter, compared to $393 million spent in the second quarter of 2008 and $813 million spent in the third quarter of 2007. Lower spending levels reflect reduced capacity needs and the conclusion of several network investment initiatives. At the end of the quarter, Sprint continues to lead the competition in 3G data network reliability, and CDMA and iDEN network performance continues at best-ever levels.
Sprint Nextel expects continued pressure on post-paid subscribers in the fourth quarter; however, we expect that gross adds will stabilize and that churn rate will be consistent with the third quarter. We also expect slight downward pressure on post-paid ARPU in the fourth quarter. Consistent with recent periods, the company expects revenue pressures leading to lower Adjusted OIBDA*. The company now expects full-year capital expenditures to be in the range of $3 billion to $3.3 billion. The company expects to continue to generate positive Free Cash Flow*.