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Sprint (S) Down 7.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Sprint (S). Shares have lost about 7.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sprint due for a breakout? 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 catalysts.

Sprint’s Q2 Loss Wider Than Expected, Revenues Fall Y/Y

Sprint reported lackluster second-quarter fiscal 2019 results, wherein the top line decreased year over year. Despite challenging macroeconomic environment, continued focus on cost optimization, network improvement initiatives and digital transformation has helped it in improving customer relationships.

Net Loss

For the September quarter, net loss was $274 million or loss of 7 cents per share against net income of $196 million or 5 cents per share in the year-ago quarter. The sharp decline was primarily due to lower revenues for the quarter. The bottom line was wider than the Zacks Consensus Estimate of a loss of 1 cent.

Revenues

Quarterly total net operating revenues declined to $7,795 million from $8,433 million in the year-ago quarter mainly due to lower service revenues and equipment sales. The top line missed the consensus estimate of $8,165 million.

Overall service revenues were $5,273 million, down from $5,762 million in the year-ago quarter. The decline was due to lower Lifeline program revenues, resulting from the estimated reimbursements to federal and state governments for subsidies claimed contrary to Sprint’s usage policy. Equipment sales totaled $1,192 million, declining from $1,418 million. Equipment rentals, however, increased to $1,330 million from $1,253 million on postpaid customer additions.

Segment Results

Total net wireless operating revenues were $7,567 million compared with $8,169 million in the year-ago quarter, primarily due to lower equipment sales. Total service revenues declined to $5,045 million from $5,498 million. The decline was primarily on account of the estimated reimbursements to federal and state governments and continued amortization of prepaid contract balances as a result of adopting the new revenue standard — ASC 606 last year. Postpaid revenues totaled $4,218 million compared with $4,255 million a year ago. Prepaid revenues were $792 million, down from $954 million. Wholesale, affiliate and other revenues summed $35 million, substantially falling from $289 million. The segment’s operating income was $357 million compared with $920 million in the year-ago quarter. Adjusted EBITDA was $2,562 million compared with $3,276 million in the prior-year quarter for respective margins of 50.8% and 59.6%.

Net operating wireline revenues were $300 million compared with $328 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 loss for the segment was $48 million compared with operating loss of $84 million in the year-ago quarter.

Other Details

Total net operating expenses decreased to $7,558 million from $7,655 million. Operating income for the reported quarter was $237 million compared with $778 million a year ago. Overall adjusted EBITDA was $2,554 million, down from $3,256 million, and adjusted EBITDA margin declined to 48.4% from 56.5%.

Cash Flow & Liquidity

During the second quarter of fiscal 2019, Sprint generated $4,810 million of net cash from operating activities compared with $5,357 million in the year-ago quarter. As of Sep 30, 2019, the wireless carrier had $4,262 million in cash and equivalents with $33,268 million of long-term debt and finance lease obligations.

Going Forward

Sprint is optimizing its strength in digital transformation to increase digital sales and accelerate digital care initiatives while continuing to adopt artificial intelligence across different parts of the business. The company’s Next-Gen Network deployment continues to upgrade existing macro sites with LTE bands, thereby enhancing the coverage, capacity and time to improve customer experience in specific locations. Highlighting the LTE improvements, the company recently launched True Mobile 5G in select metro areas in the United States, creating a promising experience for wireless customers, including gaming and entertainment services, IoT and business applications.

Sprint remains poised to gain from growth opportunities of 5G rollout coupled with potential merger with T-Mobile. The company is also expected to utilize resources and technology to build a resilient 5G network across industries, in turn, increasing competition, boosting economic growth, creating employment, thereby emerging as a digital disruptor in the greater telecom space.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -61.29% due to these changes.

VGM Scores

Currently, Sprint has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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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