Sprint Nextel Corp. (S) today reported a net loss of $1.4 billion and a diluted net loss of $.46 per share for the second quarter of 2012 as compared to a net loss of $847 million and a diluted net loss of $.28 per share in the second quarter of 2011. Sprint’s second quarter 2012 results include accelerated depreciation of $782 million, or negative $.26 per share (pre-tax), primarily related to Network Vision, including the expected shutdown of the Nextel platform; $184 million, or negative $.06 per share (pre-tax), for the recognition of lease exit costs for the remaining lease obligations associated with certain Nextel sites shut down; and an impairment of $204 million, or negative $.07 per share (pre-tax), related to Sprint’s investment in Clearwire.
The company reported wireless service revenues of $7.3 billion during the quarter, an increase of more than 8 percent year-over-year, driven primarily by Sprint platform postpaid ARPU growth of $4.31 – the largest quarterly year-over-year increase on record for the U.S. wireless industry.
Sprint platform postpaid net additions of 442,000 improved by 68 percent sequentially driven by best ever quarterly churn performance of 1.69 percent, a Nextel postpaid recapture rate of 60 percent and the continued strength of iPhone® sales. Sprint recorded nearly 1.5 million iPhone sales in the second quarter with 40 percent going to new postpaid customers.
“The Sprint platform achieved best ever postpaid ARPU and customer churn that, combined with disciplined customer acquisition and cost management, contributed to our Adjusted OIBDA* of $1.45 billion,” said Dan Hesse, Sprint CEO. “Based on this performance, we are raising the 2012 Adjusted OIBDA* forecast to between $4.5 billion and $4.6 billion.”
NETWORK VISION HIGHLIGHTS
Sprint’s Network Vision initiative remains on track. The company has taken 9,600 Nextel sites off air to date – earlier than previous guidance. To date, the company has completed leasing agreements for more than 12,700 Network Vision sites and zoning requirements are completed for nearly 13,900 sites. In addition, nearly 6,300 sites are either ready for construction or already underway and more than 2,000 sites are on air and meeting speed and coverage enhancement targets. Sprint expects to bring 12,000 sites on air by the end of 2012 and to complete the majority of its Network Vision roll-out by the end of 2013.
As part of Network Vision, Sprint launched 4G LTE in five major markets and 15 cities on July 15 including Houston, Dallas, San Antonio, Atlanta and Kansas City. Sprint launched its first four 4G LTE smartphones during the second quarter – Galaxy Nexus™, LG Viper™ 4G LTE, HTC EVO 4G LTE™ and Samsung Galaxy S® III. Sprint also significantly expanded the coverage area of its Sprint Direct Connect push-to-talk service with the addition of roaming and Sprint 1xRTT coverage areas.
During the second quarter, Sprint entered into a new $1 billion secured credit facility contingent on equipment-related purchases from Ericsson for Network Vision with a cost of funding of approximately 6 percent based on expected drawdowns. This followed debt offerings of $2 billion raised in the first quarter of 2012 and $4 billion raised in the fourth quarter of 2011 to help fund the Network Vision deployment, debt maturities and working capital requirements. The company also retired $1 billion of 2013 debt maturities during the quarter. Sprint’s next scheduled debt maturities include $300 million due in May 2013 and $473 million due in October 2013. As of June 30, 2012, the company’s liquidity was approximately $8 billion consisting of $6.8 billion in cash, cash equivalents and short-term investments and $1.2 billion of undrawn borrowing capacity available under its revolving bank credit facility. Additionally, the company had $1 billion of undrawn availability under the equipment financing credit facility. Sprint generated $1.2 billion of net cash provided by operating activities and $209 million of Free Cash Flow* in the quarter.
CUSTOMER EXPERIENCE AND BRAND HIGHLIGHTS
Sprint’s leading customer experience continued to garner third-party accolades. In particular, the American Customer Satisfaction Index ranked Sprint number one among all national carriers in customer satisfaction and most improved, across all 47 industries, over the last four years. Sprint is the only U.S. company to go from last place to first place in its industry during this time. Sprint was the only telecom provider ranked in the top 50 by the Environmental Protection Agency Green Power Partners Fortune 500 list and for the third consecutive year Sprint won the International Electronics Recycling Conference and Expo Sustainability Leadership Award.
In addition to the new 4G LTE device launches, Sprint continued to strengthen its portfolio of products and services during the second quarter. Sprint’s Virgin Mobile USA brand began offering the iPhone to prepaid customers. Virgin Mobile also launched HTC EVO™ V 4G and Boost Mobile launched HTC EVO Design 4G™ bringing the combination of 4G WiMax and the award-winning EVO family of devices to prepaid customers. Sprint also announced Sprint Wholesale Cloud Services, a unique combination of platform services, a full suite of enablement applications and one-on-one support for wireless resellers. Additionally, earlier this month Sprint announced an exclusive relationship with CSC to deliver cloud computing, cloud-based email, managed hosting and co-location services in the U.S. to commercial customers. The company also introduced Sprint Guardian, a collection of mobile safety and device security bundles that provide families relevant tools to help stay safe and secure.
* The company served more than 56 million customers at the end of the second quarter of 2012. This includes nearly 32.6 million postpaid subscribers (29.4 million on the Sprint platform and 3.1 million on the Nextel platform), 15.4 million prepaid subscribers (14.1 million on the Sprint platform and 1.3 million on the Nextel platform) and approximately 8.4 million wholesale and affiliate subscribers, all of whom utilize the Sprint platform.
* The Sprint platform added 442,000 net postpaid customers during the quarter. The Nextel platform lost 688,000 net postpaid customers in the quarter. Sprint platform postpaid net additions and Nextel platform postpaid net subscriber losses include 431,000 net subscribers from the Nextel platform acquired on the Sprint platform.
* The company added 141,000 net prepaid subscribers during the quarter, which includes net additions of 451,000 prepaid Sprint platform customers, offset by net losses of 310,000 prepaid Nextel platform customers. Sprint platform prepaid net additions and Nextel platform prepaid net losses include 143,000 net subscribers from the Nextel platform acquired on the Sprint platform.
* For the quarter, the company reported net additions of 388,000 wholesale and affiliate subscribers (all of whom are on the Sprint platform) as a result of growth in MVNOs reselling prepaid services.
* The credit quality of Sprint’s end-of-period postpaid customers was 82 percent prime compared to approximately 83 percent for the year-ago period and flat as compared to the first quarter of 2012.
Sprint Platform Churn and Nextel Recapture
* For the quarter, the company reported Sprint platform postpaid churn of 1.69 percent, compared to 1.72 percent for the year-ago period and 2.00 percent for the first quarter of 2012. Sprint platform quarterly postpaid churn decreased year-over-year primarily due to a reduction in voluntary churn. The sequential decrease in Sprint platform postpaid churn was driven primarily by seasonality as well as a reduction in both voluntary and involuntary deactivation rates. Involuntary deactivations occur when Sprint disconnects a customer due to lack of payment or violations of terms and conditions. Higher levels of involuntary deactivations were realized during the first quarter of 2012 largely due to pricing actions taken in the second and third quarters of 2011, primarily through indirect channels. Sprint tightened its credit standards during the third and fourth quarters of 2011 to stem further impacts of these types of promotional activities by our indirect dealers.
* 60 percent of total subscribers who left the postpaid Nextel platform during the period were recaptured on the postpaid Sprint platform as compared to 27 percent in the second quarter of 2011 and 46 percent in the first quarter of 2012.
* Approximately 9 percent of Sprint platform postpaid customers upgraded their handsets during the second quarters of 2012 and 2011 and 8 percent in the first quarter of 2012. The sequential increase was primarily driven by new device launches and subscribers who left the Nextel platform and were acquired on the Sprint platform. The year-over-year period was relatively flat due to changes in our upgrade eligibility policies offset by an increase in subscribers leaving the Nextel platform and being acquired on the Sprint platform.
* Sprint platform prepaid churn for the second quarter was 3.16 percent, compared to 3.25 percent for the year-ago period and 2.92 percent for the first quarter of 2012. The quarterly year-over-year improvement in Sprint platform prepaid churn was primarily a result of improvements in the Virgin Mobile and Boost brands, partially offset by higher churn for Assurance Wireless®. The sequential increase in churn was also primarily related to higher Assurance Wireless churn.
Wireless Service Revenues
* Wireless retail service revenues of $7.2 billion for the quarter represent an increase of 7 percent compared to the second quarter of 2011 and an increase of 1 percent compared to the first quarter of 2012. The quarterly year-over-year improvement was primarily due to higher postpaid ARPU as well as an increased number of net prepaid subscribers due to continued growth of Assurance Wireless customers, partially offset by lower Nextel postpaid subscribers. Sequentially, wireless retail service revenues increased, primarily as a result of higher postpaid ARPU, partially offset by a decreased number of Nextel postpaid subscribers.
* Wireless postpaid ARPU increased year-over-year from $56.67 to $60.88, the largest quarterly year-over-year postpaid ARPU growth in the company’s history, while sequentially ARPU increased from $59.88 to $60.88. Quarterly year-over-year and sequential ARPU benefited from higher monthly recurring revenues primarily as a result of the premium data add-on charges for smartphones introduced in the first quarter of 2011 and a reduction in the mix of customers eligible for certain plan discounts due to policy changes.
* Prepaid ARPU of $26.59 for the quarter declined from $27.53 in the second quarter of 2011 and declined slightly from $26.82 in the first quarter of 2012. The decline in the year-over-year period is a result of a greater mix of Assurance Wireless customers who on average have lower ARPU than the remainder of our prepaid subscriber base, partially offset by improvements in Boost and Virgin Mobile ARPU.
* Quarterly wholesale, affiliate and other revenues of $124 million increased by $70 million, compared to the year-ago period and increased by $21 million sequentially, resulting primarily from growth in MVNOs reselling prepaid services.
Wireless Operating Expenses
* Total wireless net operating expenses were $8.7 billion in the second quarter, compared to $7.5 billion in the year-ago period and $8.3 billion in the first quarter of 2012.
* Wireless equipment net subsidy in the second quarter was approximately $1.5 billion (equipment revenue of $753 million, less cost of products of $2.2 billion), compared to approximately $1.1 billion in the year-ago period and approximately $1.6 billion in the first quarter of 2012. The quarterly year-over-year increase in net subsidy is primarily due to the launch of the iPhone, which on average carries a higher subsidy rate per handset as compared to other handsets. The sequential decline in net subsidy is primarily due to lower postpaid and prepaid gross additions.
* Wireless cost of service increased approximately 2 percent year-over-year primarily due to higher costs associated with increased data volume and Network Vision related expenses, partially offset by lower service and repair expenses. Wireless cost of service was flat sequentially, primarily due to lower service and repair expenses, offset by seasonally higher roaming expenses.
* Wireless SG&A expenses were flat year-over-year and decreased by approximately 2 percent sequentially. Quarterly year-over-year increases in sales expenses were offset by reductions in customer care and marketing expenses. Sales expenses increased year-over-year primarily due to iPhone point-of-sale discounts (subsidy) for devices directly sold by the manufacturer to indirect dealers in which Sprint does not take device title. Sequentially, SG&A expenses decreased primarily as a result of lower customer care expenses. Customer care expense declined year-over-year and sequentially due primarily to lower call volumes.
* Wireless depreciation and amortization expense increased $667 million year-over-year and $232 million sequentially, primarily related to accelerated depreciation expense associated with the expected shutdown of the Nextel platform.