Novice Investing - Sprint Losing Its Breath

Date: Monday 13th 2008f October 2008 06:20:25 PM

Sprint Losing Its Breath - 05/12/2008

By: Hari Wibowo

In late January 2008, Sprint Nextel Corp. (S) reported a 109,000 net subscribers loss. We have calculated that, based on revenue subscriber per month of $ 30, the net impact on revenue will be $ 39.24 Million. A small change compared to Sprint's annual revenue of $ 40.14 Billion. What we worried at the time was the continued deterioration of Sprint's business model going forward, especially when competitors such as Verizon Wireless and AT& T were reporting subscriber growth.

One quarter later, Sprint's subscriber loss has ballooned to One Million. That is right. One million subscribers. Sprint reported net loss of $ 505 Million for the quarter. This brings annual revenue loss of $ 2.1 Billion if Sprint keeps its momentum. Recent balance sheet shows available cash at Sprint at $ 2.25 Billion, barely enough to survive this condition for another year. Using the same assumptions as above, the one million net subscriber loss will impact revenue by $ 392.4 Million and net profit by $ 235 Million annually. Now, we are talking survivals.

Sprint management seemed to predict this downturn ahead of time. They had announced 6.7% reduction of their workforce when Sprint announced its 4th quarter 2007 result back in January 2008. This will save the company some $ 700 Million per year. Thus, the impact of this one million subscriber loss can be weathered if Sprint can turnaround within the next one or two quarters. Beyond that, Sprint will need to cut cost a lot more than that. Talking about size, Sprint may have more subscribers defection ahead from its current 52 Million subscribers.

With its negative net cash of $ 18.5 Billion (or $ 6.51 per share), there are an inherent risk of bankruptcy when you invest in Sprint. However, Sprint does have big subscribers bases which is appealing to potential acquirers. In recent week, there is rumor of Deutsch Telecom (which owned T-mobile) interested in acquiring Sprint due to its big subscriber bases.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Sprint Nextel Inc. (S) or any other securities.

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