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Sprint (S) Up 107.3% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Sprint (S). Shares have added about 107.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Sprint due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Sprint Q3 Loss Narrower Than Expected, Revenues Fall Y/Y

Sprint reported lackluster third-quarter fiscal 2019 results, wherein the top line decreased year over year amid stiff price wars to fend off competition. However, continued focus on cost optimization and digital transformation with network improvement initiatives, despite incremental costs associated with network coverage and capacity improvements, helped it in improving overall customer experience during the quarter.

Net Loss

For the December quarter, net loss was $120 million or loss of 3 cents per share compared with net loss of $141 million or 3 cents per share in the year-ago quarter. The improvement was mainly driven by a non-cash tax benefit of nearly $300 million to reduce the valuation allowance related to certain historic net operating loss carryforwards. The bottom line was narrower than the Zacks Consensus Estimate of a loss of 5 cents.

Revenues

Quarterly total net operating revenues declined to $8,080 million from $8,601 million in the year-ago quarter. The decline was primarily due to lower wireless service revenues and equipment sales. The top line missed the consensus estimate of $8,191 million.

Overall service revenues were $5,416 million, down from $5,699 million in the year-ago quarter. Equipment sales totaled $1,372 million, a decline of 13.7% from $1,589 million, which was primarily due to lower average selling price per postpaid device sold. Equipment rentals declined to $1,292 million from $1,313 million. The year-over-year decline was due to a reduction in the average number of leased devices.

Segment Results

Total net wireless operating revenues were $7,859 million compared with $8,351 million in the year-ago quarter, primarily due to lower service revenues, equipment sales and equipment rentals. Total service revenues declined to $5,195 million from $5,449 million. The fall was primarily on account of lower Lifeline program revenues and continued amortization of prepaid contract balances as a result of the adoption of revenue standard — ASC 606.

Postpaid revenues totaled $4,229 million compared with $4,236 million a year ago. Prepaid revenues were $740 million, down from $924 million. Wholesale, affiliate and other revenues were $226 million, down from $289 million. The segment’s operating loss was $83 million against net income of $609 million in the year-ago quarter. Adjusted EBITDA was $2,535 million compared with $3,111 million in the prior-year quarter for respective margins of 48.8% and 57.1%.

Net operating wireline revenues were $296 million compared with $316 million a year ago. This decline was primarily due to fewer IP-based data services customers as the company continues to migrate customers from TDM to Ethernet-based data services. Operating income for the segment was $226 million against operating loss of $67 million in the year-ago quarter.

Other Details

Total net operating expenses decreased to $8,014 million from $8,122 million. Operating income for the reported quarter was $66 million compared with $479 million a year ago. The sharp decline was mainly attributable to accelerated amortization expenses related to the discontinuation of Virgin Mobile brand.

Overall adjusted EBITDA was $2,548 million, down from $3,101 million, for respective margins of 47% and 54.4%.

Cash Flow & Liquidity

For the first nine months of fiscal 2019, Sprint generated $6,765 million of net cash from operating activities compared with $7,582 million in the year-ago period. As of Dec 31, 2019, the wireless carrier had $3,179 million in cash and equivalents with $33,507 million of long-term debt and finance lease obligations.

Merger Update

Sprint is poised to gain from potential growth opportunities of resilient 5G network rollout from its impending merger with T-Mobile. Management informed that both the companies have received approval from the Committee on Foreign Investment in the United States and Team Telecom, with favorable results from 18 of the 19 required state utility commissions, excluding California Public Utilities Commission.

T-Mobile has already divested Sprint’s prepaid assets to DISH Network in accordance to the closing conditions by the Federal Communications Commission and Department of Justice for the creation of a fourth-largest wireless carrier to curb monopolistic practices. As of now, the companies are waiting for a decision from the court with regard to a recently concluded trial related to a lawsuit filed by a group of State Attorneys General.

Going Forward

Sprint is undergoing digital transformation to increase digital sales and accelerate digital care initiatives while continuing to adopt AI across different parts of the business. The company’s Next-Gen Network deployment continues to upgrade existing macro sites with the deployment of Massive MIMO, thereby enhancing LTE performance, coverage, capacity and time to improve customer experience in specific locations.

Highlighting the LTE improvements, the coverage of the company’s True Mobile 5G, launched in the previous quarter, was expanded to 20 million users in nine select metropolitan areas in the United States. Markedly, 5G subscribers residing in these areas are experiencing dramatically faster speeds with Sprint’s average 5G download speed of 215 Mbps, more than 5X faster than Sprint LTE. The latest addition creates a promising experience for wireless customers, including gaming and entertainment services, IoT and business applications.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -93.33% due to these changes.

VGM Scores

Currently, Sprint has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Sprint has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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