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Sprint Nextel Corp. Series 1 Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 3, 2011 03:43PM

Sprint Nextel Corp. Series 1 (S) filed Quarterly Report for the period ended 2011-09-30. Sprint Nextel has a market cap of $8.14 billion; its shares were traded at around $2.72 with and P/S ratio of 0.2.



Highlight of Business Operations:

We recognize equipment revenue and corresponding costs of devices when title of the device passes to the dealer or end-user subscriber. Our marketing plans assume that devices typically will be sold at prices below cost, which is consistent with industry practice, as subscriber retention efforts often include providing incentives to subscribers such as offering new devices at discounted prices. We reduce equipment revenue for these discounts offered directly to the subscriber, or for certain payments to third-party dealers to reimburse the dealer for point of sale discounts that are offered to the end-user subscriber, primarily associated with obtaining a service plan in excess of 12 months. Additionally, the cost of devices is reduced by any rebates that are earned from the supplier. Cost of products (primarily devices and accessories) also include order fulfillment related expenses and write-downs of device and related accessory inventory for shrinkage and obsolescence. Equipment cost in excess of the revenue generated from equipment sales is referred to in the industry as equipment net subsidy. Equipment revenue decreased $124 million, or 17%, for the three-month period ended September 30, 2011 and increased $128 million, or 7%, for the nine-month period ended September 30, 2011 as compared to the same periods in 2010. Cost of products decreased $32 million, or 2%, for the three-month period ended September 30, 2011 and increased $472 million, or 10%, for the nine-month period ended September 30, 2011 as compared to the same periods in 2010. The increase in both equipment revenue and cost of products for the year-to-date period is primarily due to an overall increase in the number of prepaid devices sold in addition to a higher average sales price and cost per device sold for both postpaid and prepaid devices. However, a decrease in the number of postpaid devices sold in addition to a lower average sales price per postpaid device resulted in a decrease in both equipment revenue and cost of products for the three-month period ended September 30, 2011 as compared to the same prior year period.

Voice revenues decreased $80 million, or 14%, and $267 million, or 16%, for the three and nine-month periods ended September 30, 2011 as compared to the same periods in 2010 primarily driven by overall price declines of which $25 million and $78 million are related to decline in prices for the sale of services to our Wireless segment in the three and nine-month periods ended September 30, 2011, respectively, as well as volume declines due to customer churn. Voice revenues generated from the sale of services to our Wireless segment represented 35% and 33% of total voice revenues for the three and nine-month periods ended September 30, 2011 as compared to 33% and 31% for the three and nine-month periods ended September 30, 2010.

Internet revenues reflect sales of IP-based data services, including MPLS, VoIP and SIP. Internet revenues decreased $88 million, or 16%, and $221 million, or 13%, for the three and nine-month periods ended September 30, 2011 as compared to the same periods in 2010. Certain MSO's have decided to in-source their digital voice products resulting in a $60 million and $128 million decrease in the three and nine-month periods ended September 30, 2011. In addition, Internet revenues generated from the sale of services to our Wireless segment declined in the three and nine-month periods ended September 30, 2011 by $23 million and $70 million, respectively, due to a decline in prices. Sale of services to our Wireless segment represented 9% and 7% of total Internet revenues in the three and nine-month periods ended September 30, 2011 as compared to 10% and 9% for the three and nine-month periods ended September 30, 2010. In addition, revenue slightly decreased due to fewer new IP customers that are also being acquired at lower market rates as a result of increased competition.

Net cash provided by operating activities of approximately $2.6 billion in the first nine months of 2011 decreased $746 million from the same period in 2010. The decrease resulted from an increase in vendor and labor-related payments of $2.1 billion, which primarily related to an increase in the average cost of postpaid and prepaid devices sold and related increases in inventory, increased roaming due to higher 3G and 4G data usage, as well as $124 million in pension contribution payments made during the first nine months of 2011. This was offset by $1.0 billion of increased cash received from customers primarily due to increases in total subscriber net additions and $290 million received for spectrum hosting. In addition, cash paid for interest decreased by $375 million, of which $292 million was associated with interest capitalization as a result of Network Vision and was included as an investing activity. Subscriber revenue earned but not billed represented about 9% of our accounts receivable balance as of both September 30, 2011 and 2010. We also expect to make an additional pension contribution of approximately $12 million in the fourth quarter of 2011.

The terms and conditions of our revolving bank credit facility require the ratio of total indebtedness to trailing four quarters earnings before interest, taxes, depreciation and amortization and certain other non-recurring items, as defined by the credit facility (adjusted EBITDA), to be no more than 4.5 to 1.0. In October 2011, our credit facility was amended to prospectively redefine adjusted EBITDA to exclude costs comprising equipment net subsidy, as defined by the amended agreement, to the extent such costs exceed $1.1 billion in any of the six consecutive fiscal quarters ending March 31, 2013. The amount added back related to this exclusion cannot exceed $1.75 billion in any four consecutive fiscal quarters and is limited to $2.7 billion in the aggregate for the six consecutive fiscal quarters ending March 31, 2013. Beginning in April 2012, the ratio will be reduced to 4.25 to 1.0, and further reduced to 4.0 to 1.0 in January 2013. As of September 30, 2011, the ratio was 3.4 to 1.0 as compared to 3.7 to 1.0 as of December 31, 2010 resulting from our reduction of total indebtedness during the first quarter 2011. Under this revolving bank credit facility, we are currently restricted from paying cash dividends because our ratio of total indebtedness to adjusted EBITDA exceeds 2.5 to 1.0. The terms of the revolving bank credit facility provided for an interest rate equal to the London Interbank Offered Rate (LIBOR), plus a margin of between 2.75% and 3.50%, depending on our debt ratings, which was amended to a margin of 2.75% to 4.0% in October 2011. As a result of that amendment, in addition to the downgrades of our credit ratings noted previously, the current interest rate on our credit facility is approximately 4.44% as of October 31, 2011. Certain of our domestic subsidiaries have guaranteed the revolving bank credit facility.

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