Shaky Margins Worry Sprint Investors After Profitable Q1
Soft margins were the biggest hitch in an overall solid Q1 for Sprint Nextel, which announced its quarterly results Wed. The company cited a higher growth rate than other wireless carriers and strong affiliate merger management as the foundations of its solid quarter and said it has made solid progress on central merger matters the past several months. Sprint was evasive, however, about its plans for the upcoming spectrum auction.
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Sprint reported $419 million in profit, down from $472 million in Q1 2005 but a 55% decrease in per-share earnings year-over-year. Though the news wasn’t what investors wanted to hear -- shares dropped 68 cents for the day -- the carrier said profit was up on a pro-forma basis after one-time expenses related to the Nextel merger and PCS affiliate buy- outs. CFO Paul Saleh said earnings fell short of most Wall Street estimates because investors and analysts didn’t allow enough time for savings from the Nextel merger to take effect. Saleh said the company had $64 million in after-tax merger expenses and another $14 million in employee benefit payments related to the merger this quarter, but projected wireless service margins would be “up in the double digits” by next quarter. COO Len Lauer said synergies hadn’t kicked in yet but would be a “big driver” at the margins, especially with the company’s strong equipment revenue and “pole position” on data revenue, with over $7 of revenue per user coming from data transmission.
While Bank of America (BofA) agreed that wireless margins were too soft, driven by general and administrative rather than equipment or installation costs, it found Sprint’s overall revenue model to be in line with its projections and maintained Sprint’s “Top Picks” ranking. While churn was 0.1 point higher than BofA projected, it said total additions were a favorable sign, especially for prepaid Boost mobile. Merrill Lynch, admitting to being “overly optimistic” in its expectations for Sprint in Q1, called Sprint “light” on wireless subscriber growth and margin. It said the unexpectedly high revenue was a “bright spot” for the carrier, and that the company’s value is supported by a strong corporate balance sheet. Sprint’s local-line spinoff Embarq is on track for a May completion, and benefited greatly from favorable credit ratings from Moody’s and Fitch, said Merrill Lynch.
Sprint executives were hesitant to discuss spectrum issues besides costs during a question session after the results were announced Wed. Saleh said total rebanding costs are expected to be about $1.4 billion and include $600 million in capital investment that will be recorded as spectrum assets, but wouldn’t talk about the company’s plans for the AWS auction. Janco analyst Donna Jaegers said the carrier didn’t want to play its hand, but said with all the MMDS spectrum and EVDO capability it has, the company would probably be well situated, except in particular areas.
Jaegers said another round of job cuts is expected soon at Sprint, according to rumors from within the company. Sprint had no projections on job cuts and focused on synergies generally. CEO Gary Forsee said Sprint has recently made key decisions on its postmerger billing vendor and will soon announce a decision on its postmerger customer care outsourcing vendor. Those choices were holding up the integration. Lauer said he thinks customers’ perception of the new network is “different from reality,” and one of the final steps in the integration process will be to set that right.