Sprint Nextel reported Q3 2006 financial results. In the quarter, the company improved profitability and launched several initiatives to enhance operating performance. (NYSE: S)
Third Quarter Highlights:
Wireless (pro forma)
- Revenues of $9.1 billion increased 12% from third quarter 2005
- Adjusted Operating Income* of $743 million compares to $689 million in the year-ago period. This measure was partially impacted by increased amortization expense arising from acquisitions
- Adjusted OIBDA* of $3.16 billion increased 20% from the year-ago period
- Revenues were $1.6 billion, a 6% decrease year-over-year
- Adjusted Operating Income* of $82 million decreased 48% from the year- ago period
- Adjusted OIBDA* of $206 million was 27% lower than the third quarter 2005
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RESTON, Va. — 10/26/2006
Sprint Nextel Corp. (NYSE: S) today reported third quarter 2006 financial results. In the quarter, the company improved profitability and launched several initiatives to enhance operating performance.
For the quarter, diluted earnings per share (EPS) from continuing operations were 8 cents, compared to 12 cents per share for the third quarter 2005. The reported earnings include charges of 2 cents for special items and 22 cents for merger and acquisition-related amortization cost. For the quarter, Adjusted EPS before Amortization*, which removes these effects, increased 7% to 32 cents per share, versus pro forma Adjusted EPS before Amortization* of 30 cents in the year-ago period. Third quarter results reflect growth in operating income from the Wireless segment, offset by a lower contribution from Long Distance.
In the current quarter, the company reported consolidated revenue of $10.5 billion, an increase of 8% compared to pro forma revenues in the 2005 third quarter. Consolidated Adjusted OIBDA* of $3.4 billion increased 14 percent compared to the third quarter of 2005 pro forma results. In the quarter, the company reported a 38.4% Adjusted OIBDA margin* in the Wireless segment and a Consolidated Adjusted OIBDA margin of 34.8%, a 150-basis point improvement from the year-ago period. Third-quarter Consolidated Free Cash Flow* was $769 million.
Total wireless net subscriber additions were 233,000 for the quarter due to growth in CDMA post-paid subscribers, a gain in Boost pre-paid service subscribers and renewed growth in wholesale subscribers, offset by a decline in iDEN post-paid subscribers. At the end of the quarter, Sprint Nextel’s total base was 51.9 million subscribers.
In the third quarter, Wireless data revenues increased 74% compared to the year-ago period. Long Distance IP services increased 26% and Cable Voice over Internet Protocol (VoIP) users served by Sprint Nextel more than doubled from the third quarter a year-ago.
In August, the company initiated its common stock buy-back program which is expected to total up to $6 billion over an 18-month period. In the third quarter, the company acquired 91 million common shares at an aggregate cost of approximately $1.5 billion. The company will vary the amount and timing of its common stock purchases from time to time as the program proceeds.
“In the third quarter, our margins benefited from merger synergies and the scale provided by acquisitions,” said Sprint Nextel President and Chief Executive Officer Gary Forsee. “Our profitability in the quarter is encouraging and demonstrates the potential of an asset mix that now is predominantly wireless. In the third quarter we took some actions to improve the quality of the customers coming into our business, and this is constraining our near-term growth. At the same time, we have taken a number of actions we believe will improve our top-line growth performance over time. Activities in the quarter included:
- Launching a new “Power Up” branding and marketing campaign that emphasizes the power of our network and the power we bring customers to enhance their lifestyles and productivity. The campaign focuses on both the Nextel and Sprint brands, and utilizes traditional national channels, local network advertising, new media and innovative placement approaches;
- Restructuring our sales, service and distribution organization and simplifying the business to enhance operating effectiveness while lowering our cost structure;
- Augmenting our product portfolio to include fourth quarter introductions of hybrid phones that will offer the benefits of Nextel and Sprint features, and a popular suite of Motorola handsets; and
- Investing in our networks, including initiatives to improve performance on the iDEN platform, expansion of our CDMA EV-DO broadband network to areas where 168 million people live or work, planning for the fourth quarter implementation of the EV-DO Rev. A network, and the announcement of the selection of WIMAX as our 4G Network technology.
“We have established an intense focus on execution across the company, and I am confident this will produce stronger customer growth and loyalty, improved margins and increased shareholder value over time,” Forsee said.
In accordance with purchase accounting rules, Sprint Nextel’s 2005 reported results are comprised of Sprint’s stand-alone results prior to the Aug. 12, 2005, merger with Nextel Communications Inc., plus combined Sprint and Nextel results for the remainder of the year. Results from acquired Sprint PCS affiliates and Nextel Partners are included as of the date the applicable acquisition was completed.
To provide comparability with previously reported periods, Sprint Nextel also is providing pro forma Consolidated and Wireless results and certain other financial measures* for 2005 reporting periods. The pro forma results assume the merger of Sprint and Nextel occurred at the beginning of each 2005 reporting period and include the impact of conforming the accounting policies and both financial and non-financial measures of the two companies. The pro forma Consolidated and Wireless information excludes results of acquired affiliates prior to their respective acquisition close dates.
The following is a discussion of Consolidated pro forma results.
- Revenue growth in the quarter was due to revenue growth in Wireless, offset by lower Long Distance revenues. Long Distance revenues were partially impacted by sales of businesses.
- The decline in Adjusted Operating Income* was due to higher amortization and depreciation expense and a lower contribution from Long Distance which offset growth in Wireless Adjusted OIBDA*.
- Free cash flow* in the quarter was $769 million.
- In the quarter, a lower average cash balance due to the Nextel Partners and UbiquiTel acquisitions, debt retirements and purchases of common stock produced a $43 million sequential decline in interest income, while interest expense declined $18 million.
- The effective tax rate for the quarter was 30.8% compared to 38.1% a year ago. The lower tax rate is due to a favorable tax audit settlement covering 1995 to 1999. It includes a tax benefit of $26 million, plus interest income, net of tax, of $16 million. The $42 million total is netted in special items for the quarter.
- At the end of the quarter, Net Debt* was $19.9 billion.
Discussion of the following Wireless results is on a pro forma basis.
- Total operating revenues increased 12% compared to the year-ago period. Service revenues increased 14% due to a larger subscriber base, offset by lower average revenue per user (ARPU). After adjusting for Nextel Partners and all affiliate acquisitions, pro forma year-over-year net operating revenue growth would have been approximately 4%.
- Adjusted OIBDA Margin* improved to 38.4% compared to 37.6% in the second quarter and 36.5% a year ago. The margin gain is due to a growing customer base and operating cost efficiencies which offset lower average customer revenues.
- In the quarter, the company reported a total net subscriber gain of 233,000. Total net additions include a loss of 188,000 post-paid subscribers, a gain of 216,000 Boost subscribers, a gain of 177,000 Wholesale subscribers, and a gain of 28,000 net subscribers from affiliates. The company also acquired 458,000 post-paid customers though the purchase of UbiquiTel.
- Total retail gross additions were approximately 3.8 million compared to 3.5 million a year ago on a pro forma basis and 3.8 million in the second quarter.
- Post-paid churn in the quarter was 2.4%. Churn increased from 2.1% in the second quarter, mainly due to seasonally higher CDMA network involuntary churn, higher iDEN network voluntary churn, and higher-than-expected Nextel Partners churn. Boost churn was 6.8% in the quarter versus 6.0% in the second quarter. The increase is due to increased competition.
- Direct post-paid ARPU was approximately $61, a decline of 5.5% year-over-year and 1% sequentially. After adjusting for the effects of affiliate acquisitions, the decline was 4% from a year ago and 1% sequentially. Strong growth in data services partially mitigated lower contributions from voice revenues. Data revenues contributed approximately $7.75 to direct post-paid ARPU, up from $7.25 in the second quarter. CDMA post-paid data ARPU exceeded $10 in the quarter. Boost ARPU was approximately $32.50 in the quarter.
- Net equipment subsidies increased 18% from the year-ago period due to higher gross additions. Subsidies declined 9% sequentially due to higher-priced handset sales. Cost of services increased 10% year-over-year and 6% sequentially due to a larger subscriber base, significant network expansion and deployment of broadband services. At the end of the quarter, Sprint Nextel was providing services through 59,000 cell sites. Selling, general and administrative expense increased 6% year-over-year and 6% sequentially. The year-over-year increase is due to increases in sales and marketing and customer care costs, while the sequential increase is due to higher sales costs and seasonally higher bad debt expense.
- Year-to-date, Adjusted OIBDA* exceeded capital expenditures by $5.2 billion compared to $3.6 billion in the year-ago period.
The following is a discussion of Long Distance results.
- Total revenues declined 6% versus the third quarter of 2005, and 1% sequentially. Adjusting for the sale of a conferencing business and a UNE-P business in prior periods, revenues declined 3% on a year-over-year basis and were up modestly on a sequential basis.
- Compared to a year ago, voice revenues declined 9%. Voice revenues continue to be impacted by declining consumer market share and lower yields. Adjusting for the sale of businesses, voice revenues declined 4% year-over-year and were flat sequentially. Legacy data revenues were 14% below the year-ago period. These services continue to be impacted by product substitution. The company reported strong growth in IP revenues, which were up 26%, driven by strong demand for Multi-Protocol Label Switching services.
- At the end of the quarter, Sprint Nextel was providing services to more than 1.3 million cable telephony customers. Market penetration now exceeds 10% in more than a quarter of the cable footprint served by Sprint Nextel.
- The Adjusted OIBDA Margin* of 12.7% was down both sequentially and year-over-year. Margins were impacted by a lower product margin mix and increased access costs.
- Year-to-date Adjusted OIBDA* exceeded capital expenditures by $170 million compared to $583 million in year to date 2005. The decline is mainly due to increased investment to support wireless volume growth and demand for IP services.
The company is reiterating prior guidance which calls for full-year revenues of $41.0 billion to $41.5 billion, Adjusted OIBDA* of $12.6 billion to $12.9 billion and capital expenditures, inclusive of re-banding requirements, of $7 billion to $7.1 billion. This guidance includes results for Nextel Partners and UbiquiTel operations from July 1, 2006.
Sprint Nextel provides financial measures generated using generally accepted accounting principles (GAAP) and using adjustments to GAAP (non-GAAP). The non-GAAP financial measures reflect industry conventions, or standard measures of liquidity, profitability or performance commonly used by the investment community for comparability purposes. These non-GAAP measures are not measurements under accounting principles generally accepted in the United States. These measurements should be considered in addition to, but not as a substitute for, the information contained in our financial statements prepared in accordance with GAAP. We have defined below each of the non-GAAP measures we use, but these measures may not be synonymous to similar measurement terms used by other companies.
Sprint Nextel provides reconciliations of these non-GAAP measures in its financial reporting. Because Sprint Nextel does not predict special items that might occur in the future, and our forecasts are developed at a level of detail different than that used to prepare GAAP-based financial measures, Sprint Nextel does not provide reconciliations to GAAP of its forward-looking financial measures.
The measures used in this release include the following:
Adjusted Earnings per Share (EPS) is defined as income from continuing operations, before special items, net of tax and the diluted EPS calculated thereon. Adjusted EPS before Amortization is defined as income from continuing operations, before special items and amortization, net of tax, and the diluted EPS calculated thereon. These non-GAAP measures should be used in addition to, but not as a substitute for, the analysis provided in the statement of operations. We believe that these measures are useful because they allow investors to evaluate our performance for different periods on a more comparable basis by excluding items that relate to acquired amortizable intangible assets and not to the ongoing operations of our businesses.
Adjusted Net Income is defined as income (loss) from continuing operations before special items. Adjusted Net Income before Amortization is defined as income (loss) from continuing operations before special items and amortization, net of tax. These non-GAAP measures should be used in addition to, but not as a substitute for, the analysis provided in the statement of operations. We believe that these measures are useful because they allow investors to evaluate our performance for different periods on a more comparable basis by excluding items that do not relate to the ongoing operations of our businesses.
Adjusted Operating Income is defined as operating income before special items. This non- GAAP measure should be used in addition to, but not as a substitute for, the analysis provided in the statement of operations. We believe this measure is useful because it allows investors to evaluate our operating results for different periods on a more comparable basis by excluding special items.
Adjusted OIBDA is defined as operating income before depreciation, amortization, restructuring and asset impairments, and special items. Adjusted OIBDA Margin represents Adjusted OIBDA divided by non-equipment net operating revenues for Wireless and Adjusted OIBDA divided by net operating revenues for Long Distance. Although we have used substantially similar measures in the past, which we called “Adjusted EBITDA,” we now use the term Adjusted OIBDA and Adjusted OIBDA Margin to describe the measure we use as it more clearly reflects the elements of the measure. These non-GAAP measures should be used in addition to, but not as a substitute for, the analysis provided in the statement of operations. We believe that Adjusted OIBDA and Adjusted OIBDA Margin provide useful information to investors because they are an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, spectrum acquisitions and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Adjusted OIBDA and Adjusted OIBDA Margin are calculations commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the telecommunications industry.
Free Cash Flow is defined as the change in cash and cash equivalents less the change in debt, investment in certain securities, proceeds from common stock, repurchase of the company’s common stock and other financing activities, net, from continuing operations. This non-GAAP measure should be used in addition to, but not as a substitute for, the analysis provided in the statement of cash flows. We believe that Free Cash Flow provides useful information to investors, analysts and our management about the cash generated by our core operations after interest and dividends and our ability to fund scheduled debt maturities and other financing activities, including discretionary refinancing and retirement of debt and purchase or sale of investments.
Net Debt is consolidated debt, including current maturities, less cash and cash equivalents, current marketable securities and restricted cash. This non-GAAP measure should be used in addition to, but not as a substitute for, the analysis provided in the balance sheet and statement of cash flows. We believe that Net Debt provides useful information to investors, analysts and credit rating agencies about the capacity of the company to reduce the debt load and improve its capital structure.
This press release includes “forward-looking statements” within the meaning of the securities laws. The statements in this presentation regarding the business outlook and expected performance, as well as other statements that are not historical facts, are forward-looking statements. The words “estimate,” “project,” “forecast,” “intend,” “expect,” “believe,” “target,” “providing guidance” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are estimates and projections reflecting management’s judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. With respect to these forward-looking statements, management has made assumptions regarding, among other things, customer and network usage, customer growth and retention, pricing, operating costs, the timing of various events and the economic environment. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include:
- the effects of vigorous competition, including the impact of competition on the price we are able to charge customers for the services we provide and on Sprint Nextel’s ability to attract new customers and retain existing customers; the overall demand for Sprint Nextel’s service offerings, including the impact of decisions of new subscribers between Sprint Nextel’s post-paid and prepaid services offerings and between Sprint Nextel’s two network platforms; and the impact of new, emerging and competing technologies on Sprint Nextel’s business;
- the impact of overall wireless market penetration on Sprint Nextel’s ability to attract and retain customers with good credit standing and the intensified competition among wireless carriers for those customers;
- the uncertainties related to the benefits of the Sprint-Nextel merger, including anticipated synergies and cost savings and the timing thereof;
- the potential impact of difficulties we may encounter in connection with the integration of the pre-merger Sprint and Nextel businesses, and the integration of the businesses and assets of certain of the third party affiliates, or PCS Affiliates, that provide wireless personal communications services, or PCS, under the Sprint® brand that we have acquired, and Nextel Partners, Inc., including the risk that these difficulties could prevent or delay Sprint Nextel’s realization of the cost savings and other benefits we expect to achieve as a result of these integration efforts and the risk that Sprint Nextel will be unable to continue to retain key employees;
- the uncertainties related to the implementation of Sprint Nextel’s business strategies and Sprint Nextel’s investments in networks, systems, and other businesses, including investments required in connection with Sprint Nextel’s planned deployment of a next generation broadband wireless network;
- the costs and business risks associated with providing new services and entering new geographic markets, including with respect to Sprint Nextel’s development of new services expected to be provided using the next generation broadband wireless network that we plan to deploy;
- the impact of potential adverse changes in the ratings afforded Sprint Nextel’s debt securities by ratings agencies;
- the ability of Wireless to continue to grow and improve profitability;
- the ability of Long Distance to achieve expected revenues;
- the effects of mergers and consolidations in the communications industry and unexpected announcements or developments from others in the communications industry;
- unexpected results of litigation filed against Sprint Nextel;
- the inability of third parties to perform to Sprint Nextel’s requirements under agreements related to Sprint Nextel’s business operations;
- no significant adverse change in Motorola, Inc.’s ability or willingness to provide handsets and related equipment and software applications or to develop new technologies or features for the iDEN network;
- the impact of adverse network performance, including, but not limited to, any performance issues resulting from reduced network capacity and other adverse impacts resulting from the reconfiguration of the 800 Megahertz band used to operate the iDEN network, as contemplated by the Federal Communications Commission’s, or FCC’s, Report and Order, released in August 2004 and supplemented thereafter;
- the costs of compliance with regulatory mandates, particularly requirements related to the FCC’s Report and Order, deployment of enhanced 911, or E911, services on the iDEN network and privacy-related matters;
- equipment failure, natural disasters, terrorist acts, or other breaches of network or information technology security;
- one or more of the markets in which Sprint Nextel competes being impacted by changes in political or other factors such as monetary policy, legal and regulatory changes or other external factors over which Sprint Nextel has no control; and
- other risks referenced from time to time in Sprint Nextel’s filings with the Securities and Exchange Commission, including its Form 10-K for the year ended December 31, 2005, as amended, in Part I, Item 1A, “Risk Factors.”
Sprint Nextel believes these forward-looking statements are reasonable; however, you should not place undue reliance on forward-looking statements, which are based on current expectations and speak only as of the date of this presentation. Sprint Nextel is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this release.