February 21, 2006
Investor Quarterly Update: Fourth Quarter and Year-End 2005 Results
PDF version of this release (includes extended financial tables)
Wireless (pro forma)
- Revenues of $8.2 billion increased 10% from fourth quarter of 2004
- Adjusted Operating Income* of $515 million increased 15% year-over-year
- Adjusted OIBDA* of $2.6 billion increased 11% from the year-ago period
- Revenues were $1.7 billion, a 4% decrease year-over-year
- Adjusted Operating Income* of $87 million compares to $124 million in 2004
- Adjusted OIBDA* was $223 million, a 5% decrease year-over-year
- Revenues of $1.7 billion increased 4% year-over-year
- Adjusted Operating Income* of $494 million increased 3% year-over-year
- Adjusted OIBDA* was $753 million, even with the year ago period
In accordance with purchase accounting rules, Sprint Nextel's 2005 reported results are comprised of Sprint's stand-alone results, prior to the merger with Nextel Communications Inc., plus combined Sprint and Nextel results for the remainder of the year. Results from PCS affiliates acquired in 2005 are included as of the date that the applicable acquisition was completed.
To provide comparability with previously reported periods, Sprint Nextel also is providing pro forma Consolidated and Wireless results and certain other financial measures*. The pro forma results assume the merger of Sprint and Nextel occurred at the beginning of each reporting period presented and includes the impact of conforming the accounting policies and both financial and non-financial measures of the two companies. The Consolidated and Wireless pro forma information excludes Affiliate results prior to their respective acquisition close dates.
RESTON, Va. — 02/21/2006
Sprint Nextel Corp. (NYSE: S) today reported fourth quarter and year-end 2005 financial results. In the fourth quarter the company reported strong growth in Wireless and solid performance in Local and Long Distance.
Fourth quarter 2005 diluted earnings per share were $0.07 compared to $0.29 for the fourth quarter of 2004. The reported earnings in the fourth quarter 2005 include dilution of $0.08 from special items and $0.18 from amortization expense, which is predominately merger-related. Adjusted EPS before Amortization*, which removes the effects of these items, was $0.33 compared to $0.32 for the fourth quarter 2004. The increase in fourth quarter Adjusted EPS before Amortization* was aided by double-digit year-over-year Adjusted OIBDA* growth in Wireless, which was partially offset by increased depreciation expense and a higher income tax rate.
Fourth quarter 2005 reported revenues increased 63% compared to the year-ago period. Revenues were up 7% compared to the prior period pro forma results. On this same basis, Adjusted OIBDA* increased 7% and Adjusted Operating Income* was up 4%. Fourth quarter Free Cash Flow* was $1 billion.
For the full year, diluted earnings per share were $0.87 compared to a loss per share of $0.71 in 2004. The full year pro forma Adjusted EPS before Amortization* was $1.41 compared to $1.04, a 36% improvement.
Full year 2005 reported revenues were $34.7 billion, a 26% increase over 2004. On a pro forma basis, full year revenues of $44.1 billion increased 8% compared to 2004. On this same basis, Adjusted OIBDA* increased 9% to $14.2 billion while Adjusted Operating Income* of $4.8 billion in 2005 reflects a 40% increase.
"Our performance in the fourth quarter capped off a very exciting year for our company," said Gary Forsee, Sprint Nextel president and chief executive officer. "For all of 2005, we exceeded key financial goals that Sprint and Nextel each established at the start of the year and the goals we set for our combined company. This is particularly impressive when you consider that we were simultaneously undertaking the integration of two substantial organizations, building a new brand, preparing for the launch of EMBARQTM, which will be a new Fortune 500 company when the local communications operations separate from Sprint Nextel; introducing exciting new wireless data services, establishing a game-changing relationship with leading cable companies, and acquiring PCS affiliates and Nextel Partners.
"In the fourth quarter, we increased our share of customer decisions and subscriber growth in the wireless business and we again outperformed our peer groups in wireline. Wireless data revenues continued to grow at a very strong rate and the data contribution to Average Revenue Per User increased by a double-digit percentage sequentially. In the quarter our Local operations provided strong cash production and for the full year this contribution grew 11%. Local also finished off the year with strong momentum in high-speed Internet services. In Long Distance, we had double-digit growth in MPLS services and the growth in the number of cable-telephony customers utilizing our facilities was our highest ever.
"Our targets for the coming year call for a continuation of solid Wireless growth that is expected to be partially offset by a lower contribution from Long Distance. With our merger integration efforts well under way, we continue to gain confidence in our synergy plans and we expect to achieve operating synergies of nearly $1 billion in 2006. Given the substantially improved visibility into our net future cash resources, we now expect to continue to pay nominal quarterly cash common stock dividends following the planned second quarter separation of the local communications operations to our shareholders. The amount of this dividend will be determined by our board. In the future, the board also may consider additional cash distributions in the form of share buybacks or special dividends, subject to tax restrictions related to the separation. No plans for such distributions have been made at this time," Forsee said.
Discussion of the following Consolidated results is on a pro forma basis.
- The growth in revenue in the fourth quarter 2005 was supported by double-digit year-over-year growth in Wireless, Local data services and Long Distance Dedicated IP services.
- Adjusted Operating Income* in the quarter reflects strong year-over-year improvement in Adjusted OIBDA* in Wireless partially offset by higher amortization costs and higher depreciation expense. The increased depreciation expense is mainly due to higher in service balances, and the addition of depreciation and amortization costs associated with PCS affiliate acquisitions.
- In the fourth quarter, income tax expense was 41% of pre-tax income compared to 34% in the fourth quarter of 2004. The increase is primarily due to an adjustment to a valuation allowance.
- In the fourth quarter of 2005, non-cash stock compensation and pension costs were $186 million compared to $163 million in the fourth quarter of 2004. These items totaled $742 million for the full year 2005 as compared to $655 million for the full year 2004.
- Total capital spending in the quarter was $2.15 billion, including approximately $100 million in re-banding capital expenditures. For the full year, total capital spending was $7.09 billion on a pro forma basis, including re-banding capital expenditures of approximately $380 million. Re-banding capital expenditures represent estimates of capital costs attributable to re-banding and costs to maintain wireless network quality throughout the re-banding process. These costs may ultimately vary depending on key assumptions concerning subscribers, call volumes and other factors over the life of the re-banding program.
Discussion of the following Wireless results is on a pro forma basis.
- In the fourth quarter, Wireless added 2.0 million net subscribers including 746,000 under the Sprint and Nextel post-paid brands, 624,000 under the Boost Mobile brand and 651,000 through wholesale channels and from PCS affiliates.
- For the year, total net subscriber additions were 6.8 million, including 3.4 million under the Sprint and Nextel post-paid brands, 1.5 million under the Boost Mobile brand and 1.9 million through wholesale channels and from PCS affiliates. Wireless ended 2005 with 47.6 million subscribers in those categories. Sprint Nextel expects to complete the acquisition of Nextel Partners in the second quarter 2006 following the receipt of regulatory approvals. Nextel Partners, which added 105,000 net subscribers in the fourth quarter, ended 2005 with 2 million subscribers.
- In 2005, Sprint Nextel acquired the following PCS affiliates: US Unwired, Gulf Coast and IWO. These acquisitions added more than 850,000 direct subscribers at the time of each applicable acquisition, and extended direct service territory to more than 15.7 million people. Future periods will reflect the more than 1.6 million direct subscribers added in connection with the acquisitions of PCS affiliates Alamosa and Enterprise Communications, both of which were completed in first quarter 2006. Those subscribers were included in the PCS affiliate category prior to the completion of the acquisitions. These acquisitions also extended the service territory to an additional 21 million people.
- Quarterly service revenues increased 11% year-over-year due to the growth of the customer base and acquisitions of PCS affiliates partially offset by a lower average revenue per user.
- Direct post-paid ARPU in the quarter was $63 compared to $65 one year ago reflecting lower overage and roaming revenues partially offset by increased data contributions. Post-paid churn was 2.1% in the quarter, which was down from 2.2% in the prior year and even with the third quarter.
- Boost ARPU was $37, equaling the third quarter. Boost churn was 4.6%, a sequential improvement from the third quarter.
- Wholesale and affiliate revenues in the quarter increased 9% compared to the year ago period due to higher wholesale customer counts partially offset by lower revenues due to affiliate acquisitions.
- For the full year, Adjusted OIBDA* of $10.2 billion exceeded capital spending by $4.6 billion, an increase of $600 million, or 15%, compared to 2004.
- Wireless expanded its high-speed Power Vision data service to reach a total of more than 200 markets containing a population of approximately 150 million people at year-end. In the quarter, wireless data services grew nearly 50% compared to the fourth quarter of 2004 and represented an industry leading $6 of post-paid ARPU.
- Wireless will join with major cable service providers to create new converged services and deliver a quadruple play offering of cable TV entertainment services, high speed internet access, wireline voice services and wireless voice and data services. These cable providers – Comcast Corporation, Time Warner Cable, Cox Communications and Advance/Newhouse Communications -- reach more than 75 million households and serve more than 41 million customers.
- Fourth quarter voice revenues declined 6% year-over-year due to growth in wholesale and cable telephony services that was offset by lower consumer and retail business revenues.
- Data revenues were down 2% in the quarter as growth in private line offset lower Frame Relay revenues.
- IP revenues were up 9% in the quarter compared to the same period last year. Long Distance reported 20% growth in Dedicated IP due to strength in MPLS.
- Adjusted Operating Income* for the fourth quarter was $87 million versus $124 million a year ago. Compared to the year ago period, depreciation expense increased 22% primarily due to higher in service balances.
- For the full year, Adjusted OIBDA* of $1.0 billion exceeded capital spending requirements by nearly $650 million.
- The number of cable telephony subscribers utilizing Sprint Nextel's Long Distance and CLEC services accelerated in the quarter. At year's end, Sprint Nextel was providing managed telephony wireline services to five cable companies with a total of more than 826,000 users, a 33% gain from the end of the third quarter.
- In the fourth quarter, Local added 55,000 high-speed Internet customers bringing full year additions to more than 200,000. At the end of the year, 74% of Local lines were high-speed Internet-capable and penetration of capable lines was 13%.
- Switched access lines declined 4.1% compared to the end of 2004. Wireless replacement and broadband substitution continue to be the primary drivers of line losses.
- Revenue growth in the quarter was driven by 18% growth in data services and gains at North Supply offset by a 4% decline in voice revenues.
- Full year Adjusted OIBDA* of $2.9 billion exceeded capital spending by $2.1 billion. This is an increase of approximately $200 million, or 11% compared to 2004.
Sprint Nextel continues to make substantial progress on its preparations to separate its local communications operations into an independent company. In the fourth quarter 2005 the management team that is expected to lead the local company was finalized and significant planning on service agreements and systems requirements was completed. More recently, five initial members of the Board of Directors that will govern the company were designated, an initial Form 10 was filed with the Securities and Exchange Commission, and it was announced that the new company brand will be EMBARQ™. To date state commissions with regulatory authority over more than 80% of Local access lines have given their approvals for the separation. The separation is expected to be completed in the second quarter 2006.
Sprint Nextel's financial targets for fiscal year 2006 includes Wireless, Long Distance, and 11 months of results from Alamosa and Enterprise Communications, but do not include Local or Nextel Partners.
- Full year consolidated revenues are expected to be $41 billion, or more. This target assumes high single digit to low double digit growth in Wireless and a mid-to-high single digit revenue decline for Long Distance.
- The full year target for Adjusted OIBDA* is approximately $13 billion. Wireless service margins are expected to increase by approximately 200 bps and Long Distance margins are expected to be in the low teens.
- Capital spending in 2006 is expected to be approximately $6.3 billion inclusive of $600 million of re-banding capital.
- Total re-banding costs for 2006 are expected to be $1.4 billion, which includes $600 million of re-banding capital and $800 million of other costs that primarily will be recorded as spectrum assets.
The company will expand upon its discussion of these targets at a meeting with the institutional investment community scheduled for March 7th. Details on how to access the webcast of the meeting will be provided in a news release approximately one week before the meeting.
Sprint Nextel provides financial measures generated using generally accepted accounting principles (GAAP) and using adjustments to GAAP (non-GAAP). The non-GAAP financial measures reflect industry conventions, or standard measures of liquidity, profitability or performance commonly used by the investment community for comparability purposes. These non-GAAP measures are not measurements under accounting principles generally accepted in the United States. These measurements should be considered in addition to, but not as a substitute for, the information contained in our financial statements prepared in accordance with GAAP. We have defined below each of the non-GAAP measures we use, but these measures may not be synonymous to similar measurement terms used by other companies.
Sprint Nextel provides reconciliations of these non-GAAP measures in its financial reporting. Because Sprint Nextel does not predict special items that might occur in the future, and our forecasts are developed at a level of detail different than that used to prepare GAAP-based financial measures, Sprint Nextel does not provide reconciliations to GAAP of its forward-looking financial measures.
The measures used in this release include the following:
Adjusted Earnings per Share (EPS) or Adjusted Loss per Share are defined as income (loss) from continuing operations, plus special items, net of tax and the diluted EPS calculated thereon. Adjusted EPS before Amortization is defined as income (loss) from continuing operations, plus special items, net of tax, and the diluted EPS calculated thereon. These non-GAAP measures should be used in addition to, but not as a substitute for, the analysis provided in the statement of operations. We believe that these measures are useful because they allow investors to evaluate our performance for different periods on a more comparable basis by excluding items that do not relate to the ongoing operations of our businesses.
Adjusted Net Income is defined as income (loss) from continuing operations before special items. Adjusted Net Income before Amortization is defined as income (loss) from continuing operations before special items and amortization, net of tax. These non-GAAP measures should be used in addition to, but not as a substitute for, the analysis provided in the statement of operations. We believe that these measures are useful because they allow investors to evaluate our performance for different periods on a more comparable basis by excluding items that do not relate to the ongoing operations of our businesses. Adjusted Operating Income (Loss) is defined as operating income before special items. This non- GAAP measure should be used in addition to, but not as a substitute for, the analysis provided in the statement of operations. We believe this measure is useful because it allows investors to evaluate our operating results for different periods on a more comparable basis by excluding special items.
Adjusted OIBDA is defined as operating income plus depreciation, amortization and special items. Adjusted OIBDA Margin represents Adjusted OIBDA divided by non-equipment net operating revenues for wireless and Adjusted OIBDA divided by net operating revenues for Local and Long Distance. Adjusted OIBDA Service Margin is the ratio of Adjusted OIBDA to net operating revenues less equipment revenues. Although we have used substantively similar measures in the past, which we called "Adjusted EBITDA," we now use the term Adjusted OIBDA and Adjusted OIBDA Margin to describe the measure we use as it more clearly reflects the elements of the measure. These non-GAAP measures should be used in addition to, but not as a substitute for, the analysis provided in the statement of operations. We believe that Adjusted OIBDA and Adjusted OIBDA Margin provide useful information to investors because they are an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, spectrum acquisitions and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Adjusted OIBDA and Adjusted OIBDA Margin are calculations commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the telecommunications industry.
Free Cash Flow is defined as the change in cash and equivalents less the change in debt, investment in certain securities, proceeds from common stock and other financing activities, net. This non-GAAP measure should be used in addition to, but not as a substitute for, the analysis provided in the statement of cash flows. We believe that Free Cash Flow provides useful information to investors, analysts and our management about the cash generated by our core operations after interest and dividends and our ability to fund scheduled debt maturities and other financing activities, including discretionary refinancing and retirement of debt and purchase or sale of investments.
This news release includes "forward-looking statements" within the meaning of the securities laws. The statements in this news release regarding the business outlook, expected performance, as well as other statements that are not historical facts, are forward-looking statements. The words "estimate," "project," "forecast," "intend," "expect," "believe," "target," "providing guidance" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are estimates and projections reflecting management's judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. With respect to these forward-looking statements, management has made assumptions regarding, among other things, customer and network usage, customer growth and retention, pricing, operating costs, the timing of various events and the economic environment.
Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include:
- the uncertainties related to the benefits of the Nextel merger, including anticipated synergies and cost savings and the timing thereof;
- the uncertainties related to and the impact of the contemplated spin-off of Sprint Nextel's local communications operations;
- the effects of vigorous competition and the overall demand for Sprint Nextel's service offerings in the markets in which Sprint Nextel operates;
- the costs and business risks associated with providing new services and entering new markets;
- the impact of any adverse change in the ratings afforded Sprint Nextel's debt securities by ratings agencies;
- the ability of Wireless to continue to grow and improve profitability;
- the ability of Local and Long Distance to achieve expected revenues;
- the effects of mergers and consolidations in the communications industry and unexpected announcements or developments from others in the telecommunications industry;
- the uncertainties related to Sprint Nextel's investments in networks, systems, and other businesses;
- the uncertainties related to the implementation of Sprint Nextel's business strategies,
- the impact of new, emerging and competing technologies on Sprint Nextel's business;
- unexpected results of litigation pending or filed against Sprint Nextel;
- no significant adverse change in Motorola, Inc.'s ability or willingness to provide handsets and related equipment and software applications or to develop new technologies or features for the iDEN network;
- the network performance, including any performance issues resulting from the reconfiguration of the 800 Megahertz band of the iDEN network that is contemplated by the Federal Communications Commission's Report and Order, released in August 2004 and supplemented thereafter;
- the costs of compliance with regulatory mandates, particularly requirements related to the Federal Communications Commission's Report and Order and deployment of enhanced 911 services on the iDEN network;
- the risk of equipment failure, natural disasters, terrorist acts, or other breaches of network or information technology security;
- the risk that third parties are unable to perform to Sprint Nextel's requirements under agreements related to Sprint Nextel's business operations;
- the possibility of one or more of the markets in which Sprint Nextel competes being impacted by changes in political or other factors such as monetary policy, legal and regulatory changes or other external factors over which Sprint Nextel has no control; and
- other risks referenced from time to time in Sprint Nextel's filings with the Securities and Exchange Commission (SEC), including its Form 10-K for the year ended December 31, 2004, as amended, and its quarterly reports on Form 10-Q for the subsequent quarterly periods.
About Sprint Nextel
Sprint Nextel offers a comprehensive range of communications services bringing mobility to consumer, business and government customers. Sprint Nextel is widely recognized for developing, engineering and deploying innovative technologies, including two robust wireless networks offering industry leading mobile data services; instant national and international walkie-talkie capabilities; and an award-winning and global Tier 1 Internet backbone. For more information, visit www.sprint.com.