Sprint shares fell 7 percent after the company said it plans to refinance $4 billion of its debt and seek $1 billion to $3 billion in financing from suppliers. Sprint first said it has to raise funds on Oct. 7. Its third-quarter loss narrowed, beating analysts' estimates.
“The risk is extremely high, both for execution and liquidity,” said Michael Nelson, an analyst at Mizuho Securities USA Inc. in New York, who has a “neutral” rating on Sprint shares. The cost of the iPhone and the network expansion were cited by Moody's Investors Service this month as it slashed Sprint's credit rating to B1, four steps below investment grade.
Sprint, based in Overland Park, Kansas, fell to $2.51 at the close in New York. IPhone Impact
Sprint began selling the iPhone this month and said today customer response has exceeded its expectations. Last quarter, Sprint lost 44,000 net monthly contract subscribers, more than the loss of 4,300 estimated by seven analysts surveyed by Bloomberg on average. A year ago, Sprint lost 107,000 such users, who spend more than others. The iPhone has upfront expenses because Sprint subsidizes the cost to consumers in exchange for service revenue. Sprint said it has to pay a minimum of $15.5 billion to Apple over their four-year agreement. Sprint now sells about 15 million smartphones a year, he said.
Shrinking Loss
Sprint said free cash flow for the full year will be between negative $200 million and positive $100 million. Analysts predicted a loss of 22 cents for the quarter ended Sept. 30, the average of estimates compiled by Bloomberg.
Analysts projected $8.38 billion. Operating costs fell 2.9 percent to $8.13 billion.
Raising Funds
Chief Financial Officer Joe Euteneuer told analysts at an Oct. 7 investor meeting that Sprint would need to raise money before 2013. Sprint had initially declined loan offers from suppliers, he said.
“This effectively enables the company to incur significant subsidy costs for the iPhone without tripping its debt leverage covenants,” Piecyk said.
Clearwire Deal
Sprint's financial picture may also depend on the company's possible decision on whether to help finance its 4G wireless venture partner Clearwire Corp. During the analysts' day presentation, Hesse said the company would upgrade its network with LightSquared Inc., a startup wireless broadband operator.
Sprint said today it is negotiating with Clearwire about a new network-sharing agreement, sending the partner's shares up 20 percent. Hesse said he would like Clearwire to be successful, declining to comment on whether Sprint will help the partner with financing.
Sprint also provided important updates on the iPhone, its financing needs and planned network upgrades, undoing some of the damage caused by an investor day presentation three weeks ago that had investors fuming and sent its stock plunging.
Sprint continued to lose subscribers from its lucrative contract-based plans, but at a relatively low rate: 44,000 in the quarter.
Unfortunately for the company, most of the new customers are low-paying ones. They buy service from Sprint's low-cost Virgin Mobile, Boost Mobile or Assurance Wireless brands, or from non-Sprint brands that use the company's network.
The latest subscriber results don't include the effect of the iPhone, which Sprint started selling Oct. 14. Apple charges about $600 for a phone that Sprint sells for $200.
Chief Financial Officer Joe Euteneuer said each iPhone will cost the company about $200 more than another smartphone. CEO Dan Hesse compared getting the iPhone to signing a star baseball player to the "Sprint team."
The problem for Sprint is that the cost of selling the iPhone comes up front, while the benefits, like higher service fees and lower service costs, accrue over time. Sprint doesn't expect the iPhone to be a moneymaker until 2014.
The added cost of the iPhone comes as Sprint is also starting to revamp its network for higher speeds. Sprint hopes to cover the gap by refinancing $4 billion debt coming due, Hesse said. The remaining $1 billion to $3 billion could be raised in the form of financing from the companies Sprint buying its new network equipment from: Samsung Electronics Co., Alcatel-Lucent and LM Ericsson AB.
Figures on the effect of the iPhone on Sprint's finances were missing from the presentation on Oct. 7, contributing to investor consternation. Sprint's net loss was $301 million, or 10 cents per share, for the third quarter. Revenue rose 2.2 percent to $8.3 billion.
Analysts polled by FactSet expected a loss of 22 cents per share on $8.4 billion in revenue.
Sprint shares slipped 19 cents, or 7 percent, to close at $2.51 Wednesday. Hesse also said the company has started discussions with Clearwire Corp. on how to make Sprint phones compatible with Clearwire's planned new wireless data network, and a discussions on commercial arrangements are ongoing. That sent Clearwire shares up 32 cents, or 20 percent, to close at $1.96.
Sprint owns 54 percent of Clearwire and uses its current data network for "Sprint 4G" service. That sent Clearwire shares into a dive.
Sanford Bernstein analyst Craig Moffett said Sprint third-quarter results were "fairly good." Sprint said it does not expect the benefits from iPhone to exceed its costs until 2015. Clearwire shares closed up 19.5 percent.
Sprint was sharply criticized for refusing to disclose iPhone costs and its intentions for Clearwire at an October 7 conference.
"We need to see it's a priority for the company," said Fitch analyst Bill Densmore, who added that his current B+ rating of the company has "limited flexibility" for any missteps by Sprint in executing its strategy.
IPHONE WORTH EVERY PENNY?
Sprint, which started taking iPhone orders on October 7, said it would pay Apple a subsidy that is 40 percent higher, or $200 more per device, than what it pays for other phones.
Chief Executive Officer Dan Hesse told analysts on a conference call the iPhone would be worth the extra cost as it has already lured record numbers of new customers to Sprint.
Sprint promised that, over time, the iPhone would bring 50 percent more value to the company than any other handset.
Sprint gave a 2011 free cash flow forecast ranging from a loss of $200 million to a gain of $100 million. The outlook overshadowed Sprint's smaller-than-expected third-quarter loss.
Sprint Credit Default Swaps, or the cost of insuring its debt, rose after the report. It now costs $1.475 million paid upfront to insure $10 million of Sprint debt, on top of $500,000 in annual payments.
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