Sprint Nextel Corp. (S) today reported wireless service revenues of nearly $7.3 billion during the quarter, an increase of nearly 6 percent year-over-year. Wireless service revenues for the Sprint platform grew 14 percent year-over-year driven by postpaid ARPU growth of $3.01 and continued subscriber growth.
The company reported a net loss of $767 million and a diluted net loss of $.26 per share for the third quarter of 2012 as compared to a net loss of $301 million and a diluted net loss of $.10 per share in the third quarter of 2011. Sprint’s third quarter 2012 results include accelerated depreciation of $397 million, or negative $.13 per share (pre-tax), primarily related to Network Vision, including the expected shutdown of the Nextel platform.
The Sprint platform postpaid subscriber base grew for the tenth consecutive quarter, with net additions of 410,000 driven by a postpaid Nextel recapture rate of 59 percent and best ever third quarter churn. Sprint recorded approximately 1.5 million iPhone® sales in the third quarter with 40 percent representing new customers. The company also surpassed 1 million LTE smartphones sold prior to the launch of iPhone 5.
“The Sprint platform performed well, with strong net subscriber additions, record third quarter postpaid and prepaid churn and robust revenue growth, contributing to Adjusted OIBDA* of $1.28 billion even as we continue to invest in Network Vision and position the company for future growth,” said Dan Hesse, Sprint CEO. “As a result, we believe we will slightly exceed the top of the range of our recently increased Adjusted OIBDA* forecast.”
NETWORK VISION HIGHLIGHTS
Sprint’s Network Vision initiative continues to gain momentum. The number of sites that are either ready for construction or already underway has more than doubled in the last three months to more than 13,500. Leasing and zoning have been completed on more than 20,000 sites. To date nearly 4,300 sites are on-air and meeting speed and coverage enhancement targets. Recent weekly construction starts are up over 250 percent from the second quarter. Sprint now expects to bring 12,000 sites on air approximately one quarter later than originally planned.
As part of Network Vision, Sprint has launched 4G LTE in 32 cities and expects that 4G LTE will be available in more than 115 additional cities in the coming months. Sprint has launched or announced 13 4G LTE devices to date. Sprint launched Motorola PHOTON™ Q 4G LTE and Samsung Galaxy Victory™ 4G LTE in addition to iPhone 5 in the third quarter. Earlier this month Sprint announced the upcoming availability of LG Optimus G™, LG Mach™, Samsung Galaxy Note® II and Samsung Galaxy Tab® 2 10.1.
In the third quarter, Sprint nearly surpassed 1.2 million Sprint® Direct Connect® push-to-talk devices sold, which contributed to the strong recapture rate of Nextel subscribers on the Sprint platform. The company has shut down power and disconnected backhaul to most of the 9,600 Nextel sites taken off air and is realizing the related savings. The Nextel platform shutdown remains on pace for the middle of 2013.
During the third quarter, Sprint raised additional financing of $1.5 billion and retired $1.5 billion of debt maturities including $473 million of 2013 maturities and $1 billion of 2015 maturities. Sprint’s next scheduled debt maturities include $317 million due in 2013 and approximately $1.4 billion of total maturities in 2014. As of September 30, 2012, the company’s liquidity was approximately $7.5 billion consisting of $6.3 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 borrowed $77 million of available funding under the equipment financing credit facility, reducing the remaining undrawn availability to $923 million. Sprint generated $628 million of net cash provided by operating activities and negative Free Cash Flow* of $487 million in the quarter.
CUSTOMER EXPERIENCE AND BRAND HIGHLIGHTS
Third-party studies continue to confirm Sprint offers the industry’s best customer experience. Sprint earned J.D. Power and Associates’ top ranking – for the third straight time – for purchase experience among full-service wireless carriers. Sprint also received the Nemertes 2012 PilotHouse award for MPLS Services, beating all rivals in customer service. Sprint’s Virgin Mobile USA brand ranked highest in satisfaction for customer care with non-contract wireless service by J.D. Power and Associates. Sprint was also recognized for its innovative machine-to-machine (M2M) solutions in the transportation and home health care industries by Connected World Magazine and earlier this month was named to the magazine’s annual list of the 100 most important and influential providers of M2M services. For the fourth straight year, Newsweek’s annual Green Rankings has recognized Sprint as one of the greenest companies in the U.S., ranking the company third among the 500 largest publicly traded corporations. Sprint was also named the top U.S. wireless carrier on the 2012 Carbon Disclosure Project S&P 500 Climate Change Report for its leading carbon disclosure score and for the second consecutive year, the Dow Jones Sustainability Index named Sprint as a leader in sustainability.
Sprint launched a number of innovative products and services during the third quarter including Single Source Enablement, a turnkey set of wireless solutions and support enabling any business to become a wireless Mobile Virtual Network Operator (MVNO). Sprint also began offering Microsoft Office 365 to small and mid-sized businesses to bring organizations new ways to enhance productivity, reduce costs and collaborate with customers and partners while also extending the cloud-based communication tools to mobile workforces. In October, Sprint launched Pinsight Media+™, a new advertising service that gives advertisers the power to reach consumers on their mobile device in a more personalized way. Finally, the Samsung Galaxy family of devices was introduced to Sprint’s prepaid brand Virgin Mobile with Samsung Galaxy Reverb™ and Boost Mobile also launched the award-winning Samsung Galaxy S® II 4G.
The company served nearly 56 million customers at the end of the third quarter of 2012. This includes 32.1 million postpaid subscribers (29.8 million on the Sprint platform and 2.3 million on the Nextel platform), 15.4 million prepaid subscribers (14.6 million on the Sprint platform and 800,000 on the Nextel platform) and 8.4 million wholesale and affiliate subscribers, all of whom utilize the Sprint platform.
The Sprint platform added 410,000 net postpaid customers during the quarter. The Nextel platform lost 866,000 net postpaid customers in the quarter. Sprint platform postpaid net additions and Nextel platform postpaid net subscriber losses include 516,000 net subscribers from the Nextel platform acquired on the Sprint platform.
The company added 19,000 net prepaid subscribers during the quarter, which includes net additions of 459,000 prepaid Sprint platform customers, offset by net losses of 440,000 prepaid Nextel platform customers. Sprint platform prepaid net additions and Nextel platform prepaid net losses include 152,000 net subscribers from the Nextel platform acquired on the Sprint platform.
For the quarter, the company reported net additions of 14,000 wholesale and affiliate subscribers (all of whom are on the Sprint platform) as a result of 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 second quarter of 2012.
Sprint Platform Churn and Nextel Recapture
For the quarter, the company reported Sprint platform postpaid churn of 1.88 percent, compared to 1.91 percent for the year-ago period and 1.69 percent for the second quarter of 2012. The sequential increase in Sprint platform postpaid churn was driven primarily by higher voluntary churn in the third quarter.
59 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 third quarter of 2011 and 60 percent in the second quarter of 2012.
Approximately 10 percent of Sprint platform postpaid customers upgraded their handsets during the third quarter of 2012 compared to 8 percent for the year-ago period and 9 percent for the second quarter of 2012 (includes Nextel recaptures). The quarterly year-over-year increase in the Sprint platform postpaid device upgrade rate was impacted by upgrade eligibility changes introduced in 2011. The quarterly year-over-year and sequential increases were also impacted by new device launches and subscribers who left the Nextel platform and were acquired on the Sprint platform.
Sprint platform prepaid churn for the third quarter was 2.93 percent, compared to 3.43 percent for the year-ago period and 3.16 percent for the second quarter of 2012. The quarterly year-over-year improvement in Sprint platform prepaid churn was a result of improvements in the Virgin Mobile, Boost and Assurance Wireless® brands, including a larger percent of the subscriber base on Assurance Wireless. The sequential decrease in churn was primarily related to lower Assurance Wireless churn, partially offset by higher churn for the Boost brand. The year-over-year and sequential improvement in Assurance Wireless churn was primarily driven by a change in the recertification practices of subscribers due to new regulatory requirements that went into effect in the second quarter of 2012.
Wireless Service Revenues
Wireless retail service revenues of $7.2 billion for the quarter represent an increase of nearly 5 percent compared to the third quarter of 2011 and flat compared to the second 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 Sprint platform subscribers, partially offset by lower Nextel postpaid and prepaid subscribers.
Wireless postpaid ARPU increased quarterly year-over-year from $57.65 to $61.18, while sequentially ARPU increased from $60.88 to $61.18. 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 since the first quarter of 2011.
Prepaid ARPU of $26.77 for the quarter declined from $27.19 in the third quarter of 2011 and increased from $26.59 in the second 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. The sequential increase was primarily driven by higher Virgin Mobile ARPU.
Quarterly wholesale, affiliate and other revenues of $121 million increased by $57 million, compared to the year-ago period and decreased by $3 million sequentially. The increase in the year-over-year period is primarily related to growth in MVNOs reselling prepaid services.
Wireless Operating Expenses
Total wireless net operating expenses were $8.3 billion in the third quarter, compared to $7.4 billion in the year-ago period and $8.7 billion in the second quarter of 2012.
Wireless equipment net subsidy in the third quarter was approximately $1.6 billion (equipment revenue of $750 million, less cost of products of $2.4 billion), compared to approximately $1.2 billion in the year-ago period and approximately $1.5 billion in the second quarter of 2012. The quarterly year-over-year increase in net subsidy is primarily due to the launch of iPhone and 4G LTE devices, which on average carry a higher subsidy rate per handset as compared to other handsets. The sequential increase in net subsidy is primarily due to higher postpaid and prepaid handset sales and the launch of 4G devices on the prepaid Sprint platform, which on average carry a higher subsidy rate per handset as compared to other handsets.
Wireless cost of service decreased approximately 3 percent year-over-year primarily due to lower service and repair and license and fees, partially offset by higher costs associated with increased data volume and Network Vision related expenses. Wireless cost of service decreased 1 percent sequentially due to savings related to Nextel platform sites taken off air, partially offset by seasonally higher service and repair and roaming expenses.
Wireless SG&A expenses increased approximately 4 percent year-over-year and were flat sequentially. Quarterly year-over-year increases in sales and marketing expenses were partially offset by reductions in customer care 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. Customer care expense declined year-over-year due primarily to lower call volumes.
Wireless depreciation and amortization expense increased $294 million year-over-year and decreased $419 million sequentially. The year-over-year increase was primarily related to accelerated depreciation expense associated with the expected shutdown of the Nextel platform. The sequential decrease was primarily related to a decrease in accelerated depreciation expense as a result of Nextel platform assets that were fully depreciated in the second quarter of 2012.