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Sprint borrows nearly as much as its worth

Sprint Nextel Corp. (S) recently posted positive net revenue and new suscriber numbers, helping to offset the company's latest quarterly loss and send stock cautiously upward. But late in the day shares plunged back downwards after the company revealed how much debt it plans to take on.

I. Sprint Needs to Borrow Nearly as Much as It's Currently Worth

The company's financial sheet looks very troubled.  Its stock is currently is only worth $7.7B USD (market capitalization).  Yet Sprint says it must somehow obtain $7B USD in new financing over the next few years in order to pay off its expensive iPhone contract and complete network upgrades.  If it can't get that financing, it will likely go into bankruptcy and that could be the end of the network.

Sprint has commited a massive $15.5B USD over the next four years to Apple, Inc. (AAPL), in order to get the popular iPhone on its network.  It's easy to see why Sprint would want the iPhone so badly -- the iPhone remains the best-selling single handset in the U.S. and in the world.  However, in signing away a massive amount of money to Apple, Sprint may have signed its own death warrant.

Industry analysts say Sprint was crazy to give Apple so much cash, potentially a fatal error.  Bernstein analyst Craig Moffett offers, "To meet their target, they'd effectively have to turn their entire company into an Apple shop."

Sprint iPhone
Sprint would have to turn into an iPhone store to make its huge gamble pay off, say analysts [Source: TechBuffalo]

II. Network Upgrade Also Hits Sprint Hard

Adding to the company's financial woes, its shortfall comes at a time when the industry is looking to make the transition to 4G.  Sprint was first to the 4G game, but the technology it picked -- WiMAX -- has been cast aside almost unilaterally, globally, in favor of LTE.  As a result, Sprint has been forced to shift gears and prepare itself for a costly LTE deployment, essentially losing all its hard WiMAX work.  Between that LTE deployment and financing for improved 3G coverage, Sprint expects to pay $7B USD.

This double trouble for America's third largest carrier greatly raises the risk level, according to analysts.  Michael Nelson, an analyst with Mizuho, comments, "They're betting the house on two things at the same time.  If they pull it off, great. If they don't, their financial performance would get materially worse, and they could have significant liquidity risks."

Cell tower construction
Sprint is also being hit hard with network upgrade costs as it tries to transition to LTE 4G [Source: Sun Journal]

Sprint says in the best case it may generate a $100M USD free cash flow for 2011 (worst case it would have a negative cash flow of $200M USD), and that it would have a positive cash flow for 2012.  However, those numbers don't tell the full picture as they don't include the interest payments on the big loans Sprint hopes to draw from vendor financiers.  With interest factored in, Sprint will likely be continuing to post big losses.

The network added 1.3 million subscribers in Q3 2011, but lost just a bit more than that, yielding a net decline of 44,000 customers.  Sprint may face more defections as it cuts its unlimited data plans and begins slapping customers with fines.  Sprint's tethering plans are currently the most expensive in the industry, while its 4G coverage is worse than its rivals.

III. Sprint's 4G Service Provider is in Trouble as Well

Sprint is also in the process of negotiating its contract with ClearWire Corp. (CLWR), who provides its WiMAX service.  The move is broadly seen as a good thing for Clearwire, as investors had previously feared that Sprint might bail on its partner.  

The pair have an interesting relationship; Sprint is a majority owner of ClearWire.  ClearWire paid Sprint to build its 4G network.  Then Sprint and other carriers paid Clearwire to use that network.  

However, investors have grown concerned recently that bankruptcy risk from ClearWire could lead to Sprint bailing on the relationship.  ClearWire, like Sprint is looking to take on debt.  The company -- which has a market cap. of $1.85B USD -- needs $900M USD in financing.

Ultimately it's far from game over for Sprint and ClearWire.  But both companies seem to be digging deep into the money hole and look to be headed to big losses, when you factor in interest.  

Sprint, in particular, made a huge gamble with the iPhone -- at a time when the iPhone seemed to be waning in popularity versus Google Inc.'s (GOOG) Android juggernaut.  Sprint CEO Dan Hesse promises the deal will pay off.  But Sprint admits it won't see profit from the deal until at least 2015 and that it doesn't know how many iPhones in it will sell.  Sprint better hope that number turns out to be "a lot."

Source: Reuters



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RE: Ballzy move
By TheRequiem on 10/27/2011 1:34:24 PM , Rating: 0
This is another obscured article by daily tech that doesn't get the facts right. They lost 45,000 customers to churn not over a million!! They had over a million "net" adds... Seriously dailytech? Also, I highly doubt they will go bankrupt and that will be the end of them.

They are making huge, yes, but very necessary risks. If they didn't get the phone now and launch 4g Lte or network vision, they would be significantly out performed by the other carriers. What's not mentioned here is how well off Sprint will be and a good position it will beown 5 years to adapt to new technology with network vision or the fact that they will most likely have the most affordable Lte advanced nationwide network yet. Also, they would have not bought that many iPhones unless they they could sell them. Not only that, it will bring higher customer satisfaction and retention as they continue to grow and add subs. Plus, the iPhone is recognized worldwide as being a very tofu table device for carriers, we already saw this when sprint broke sales records by mid day on launch.

I honestly think Sprint is finally making the right choices that will set them up to be extremely competitive in the future and I think these risks will be beneficial. It's just a bad economic climate right now and these are made to look like a bigger deal by the media then they really are.


RE: Ballzy move
By bruce24 on 10/27/2011 2:46:29 PM , Rating: 2
quote:
This is another obscured article by daily tech that doesn't get the facts right.


You mean like the fact that the money Sprint said it would need to borrow has nothing to do with Apple, but has to do with their building out their network?


RE: Ballzy move
By TheRequiem on 10/27/2011 3:52:48 PM , Rating: 2
lol, exactly.

What I understand is all of a sudden Sprint is being brought forth to a negative light on this particular website. In order to have an effective article showing negative points, there needs to be more clarity by showing what can happen if thing's go wrong and what can happen if they go right, so in other words, the risks need to be weighed properly. This is a purely negative article, when really, it's not really going to have that much of a negative impact on Sprint.

They are making huge risks, but they are absolutely necessary. Inaction for Sprint is worse then action at this point. If they really do have 277 million people covered by the end of 2013 with LTE-Advanced, that will be extremely competitive with Verizon, who themselves should have about the same amount of coverage and Sprint will likely offer it for a cheaper price. This is also 2 years ahead of AT&T's planned nationwide coverage. At this point, Sprint will have a massive amount of coverage and will offer a very competitive product, positioning themselves as one of the beter carriers. That, coupled with their customer service improvements will be huge and could offer significant gains for the company. They also have very large partnerships being created with Lightsquared and Clearwire that will ensure multiple different products for good prices. WE NEED THIS. If it doesn't happen, we will have a massive duopoly and everyone will lose. Sprint can't fail or we are going to be screwed. Root for them, even if yo don't own one of their devices, because it's healthier to have good competition like this.

They are already 2 years ahead of schedule on their new network, see below.

http://www.fiercewireless.com/story/sprint-will-de...



"It looks like the iPhone 4 might be their Vista, and I'm okay with that." -- Microsoft COO Kevin Turner














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