August 03, 2006
Sprint Nextel Reports Second Quarter 2006 Results
Wireless (pro forma)
- Revenues of $8.5 billion increased 8% from second quarter of 2005
- Adjusted Operating Income* of $693 million compares to $709 million in the year-ago period. This measure was partially impacted by increased amortization expense arising from affiliate acquisitions
- Adjusted OIBDA* of $2.94 billion increased 11% from the year-ago period
- Revenues were $1.6 billion, a 5% decrease year-over-year
- Adjusted Operating Income* of $162 million increased 12% from the year-ago period
- Adjusted OIBDA* of $275 million was 5% above the second quarter of 2005
RESTON, Va. — 08/03/2006
Sprint Nextel Corp. (NYSE: S) today reported second quarter 2006 financial results.
For the quarter, diluted earnings per share (EPS) from continuing operations were 10 cents, compared to 22 cents per share for the second quarter of 2005. The year-ago results do not include the Nextel operations or the acquired PCS affiliates and results from Local have been classified as discontinued operations in all periods presented. In the current quarter, reported earnings include 19 cents of merger-related amortization expense and 3 cents of charges for special items. The year ago period includes charges for special items of 2 cents.
For the quarter, Adjusted EPS before Amortization*, which removes the effects of special items and merger related amortization expense, increased 7% to 32 cents per share versus pro forma Adjusted EPS before Amortization* of 30 cents in the year-ago period. These results reflect growth in Adjusted Operating Income Before Depreciation and Amortization (OIBDA)* for both the Wireless and Long Distance segments and lower net interest cost, partially offset by higher Wireless segment depreciation expense.
In the current quarter, the company reported consolidated revenue of $10.0 billion, an increase of 76 percent on a reported basis and 5 percent compared to pro forma revenues in the 2005 second quarter. Consolidated Adjusted OIBDA* of $3.2 billion increased 10 percent compared to the second quarter of 2005 pro forma results. In the quarter, the company reported strong sequential and year-over-year improvements in Adjusted OIBDA Margins* in both the Wireless and Long Distance segments. Year-to-date Consolidated Free Cash Flow* provided by continuing operations was $1.6 billion.
Second quarter Long Distance revenues were again better than expected, but Wireless revenue gains from a larger subscriber base and industry-leading demand for data services were offset by an increased number of customers adopting lower priced voice service plans and lower pre-paid pricing. In the quarter, Wireless retail net subscriber additions were 708,000 on strong pre-paid but lower post-paid performance. Wireless acquisition and revenue trends are expected to cause full-year net operating revenues and Adjusted OIBDA* to be below prior targets. Financial guidance has been revised to reflect these trends and to incorporate the Nextel Partners and UbiquiTel acquisitions.
"In the second quarter, our distinctive asset mix again produced consolidated revenue growth that exceeded rates posted by the other large cap telecom service providers," said Gary Forsee, Sprint Nextel President and Chief Executive Officer. "In the period, we also had solid margin improvement, made good strides on merger and acquisition integration activities and produced strong cash flows. However, following the adoption of initiatives earlier this year to improve our customer credit mix and customer loyalty, we achieved higher quality post-paid additions in the quarter, but we did not meet our expectations on quantity. In addition, we had higher-than-anticipated migrations in our base to lower-priced service plans.
"As a result, we will produce slower growth in the near-term, and we have identified a series of actions that we will take to improve our competitiveness and accelerate value creation. These include:
- Refining our target markets and adjusting credit policies to improve the quality of our customer base;
- Creating a compelling marketing and branding message to highlight the advantages of our services and networks;
- Introducing innovative services and products;
- Restructuring our operations, including sales, service and distribution. Annual operating expense savings from these activities, which will be incremental to merger synergy savings, are expected to add 7 to 8 cents to annual EPS beginning in the second quarter of 2007; and
- Continuing to invest in network assets, including the extension of the largest 3G broadband service to a population area of 200 million by year-end.
"In the year since we completed our merger, we have aggressively pursued our strategic focus on the mobility market, including completing the spin-off of our Local operations in the second quarter, closing several wireless acquisitions, achieving milestones on the integration of our iDEN and CDMA networks, planning for our 4G wireless network and establishing a partnership with cable companies for wireless and wireline services," Forsee said.
"In total, these activities have consumed significant resources and have had an impact on our reported near-term profits. However, we believe that our shareholders will benefit over the long run from each of these efforts. With our strategic repositioning largely complete, including our Board's recent approval of our 4G business case, we are now able to focus on creating value by providing direct returns to our shareholders," said Forsee. "Reflecting our strong balance sheet and investment grade credit rating, substantial free cash flows and confidence in our future, I am pleased to announce that our Board of Directors has authorized common stock purchases through the open market of up to $6 billion over the next 18 months. At yesterday's closing price, this level of investment would equate to approximately 10% of our shares outstanding."
In accordance with purchase accounting rules, Sprint Nextel's 2005 reported results are comprised of Sprint's stand-alone results prior to the Aug. 12, 2005, merger with Nextel Communications Inc., plus combined Sprint and Nextel results for the remainder of the year. Results from Sprint PCS affiliates acquired in 2005 and 2006 are included as of the date that the applicable acquisition was completed. At the end of the second quarter, Sprint Nextel completed the acquisition of Nextel Partners shares that it did not already own, and the acquired assets and liabilities are included in the Consolidated Balance Sheet. Through the second quarter of 2006 Sprint Nextel recognized equity income from its minority interest in Nextel Partners. Beginning in the third quarter the company will no longer recognize this equity income and full operating results will be included in the Statement of Operations.
In the second quarter of 2006, the company completed the spin-off of its Local operations (EMBARQ) and the results for each reported period reflect EMBARQ as discontinued operations. Effective with the date of the spin-off, certain revenues and profits associated with Long Distance customers within EMBARQ territories and general corporate overhead allocations have been revised from previous reporting formats. This had an immaterial impact on reported results.
To provide comparability with previously reported periods, Sprint Nextel also is providing pro forma Consolidated and Wireless results and certain other financial measures* for 2005 reporting periods. The pro forma results assume the merger of Sprint and Nextel occurred at the beginning of each 2005 reporting period and include the impact of conforming the accounting policies and both financial and non-financial measures of the two companies. The pro forma Consolidated and Wireless information excludes results of acquired affiliates prior to their respective acquisition close dates.
The following is a discussion of Consolidated pro forma results.
- Revenue growth in the quarter was due to an increase in revenue of the Wireless segment offset by lower Long Distance revenues.
- The year-over-year decline in Adjusted Operating Income* was due to growth in Adjusted OIBDA* in Wireless and Long Distance, offset by higher depreciation and amortization expense.
- Interest expense, net of interest income, was $282 million versus $340 million a year-ago and $310 million in the first quarter primarily due to higher interest rates on invested cash.
- In the quarter, Sprint Nextel netted $6.3 billion in cash and transferred $665 million in debt to EMBARQ in connection with the spin-off.
- In the quarter, the company paid $6.6 billion and assumed $1.2 billion of debt to acquire the 72% of Nextel Partners stock it did not already own.
- In the quarter, a $3.2 billion term loan and almost $420 million of long term debt was repaid.
- The effective tax rate for the quarter was 34.8% compared to 32.4% a year ago due to higher state income tax.
- At the end of the quarter, Net Debt* was $17.9 billion.
Discussion of the following Wireless results is on a pro forma basis.
- In the quarter, Wireless added 708,000 retail subscribers including 210,000 post-paid and 498,000 prepaid customers under the Boost Mobile brand. With the purchase of Nextel Partners, the total base is 51.7 million, an increase of 17% from the year-ago period. In the past 12 months, organic growth in the total subscriber base was 5.2 million.
- Total retail gross additions were approximately 3.8 million, compared to 3.5 million a year ago and 4.1 million in the first quarter. Post-paid gross additions were 2.7 million, a decline of 10% sequentially and 8% year-over-year. Sequentially, declining sub-prime credit gross additions offset increased prime credit additions.
- Post-paid churn in the quarter was 2.1%, matching the first quarter of 2006. Boost churn was 6.0% in the quarter, versus a normalized rate of 5.4% in the first quarter.
- Total operating revenues increased 8% compared to the year-ago period. Service revenues increased 9% due to a larger retail subscriber base from internal growth and acquisitions, offset by lower average revenue per user (ARPU) and lower wholesale and affiliate revenues.
- Direct post-paid ARPU was under $62, a decline of 6% from a year ago and 1% sequentially. The annual decline is due to lower average monthly voice price plans and reduced overage charges offset by strong growth in data. About a third of the annual ARPU decline is attributable to acquisitions of affiliates. Sequentially, lower average monthly voice price plan revenues were partially offset by higher data revenues. Boost ARPU was under $34 in the quarter due to lower pricing and lower average usage, compared to $36 in the first quarter and $38 for the year-ago period.
- Data service revenues increased nearly 70% compared to the year-ago period and contributed $7.25 to direct post-paid ARPU, compared to $7.00 in the first quarter. The company announced today that it will expand its 3G broadband wireless services to an area covering 200 million people by year end and that it will begin to deploy the next step in 3G technology beginning in the fourth quarter.
- Adjusted OIBDA Margin* improved to 37.6% compared to 35.0% in the first quarter and 36.9% in the year-ago period, benefiting from a growing customer base and cost efficiencies offset by lower ARPU.
- Cost of services increased 12% year-over-year due to a larger subscriber base, network expansion and deployment of broadband services. Selling, general and administrative expense was 2% higher than a year ago, but down 8% sequentially on lower marketing spending, reduced headcount and lower variable compensation cost. As a percentage of revenue, SG&A declined 170 basis points year-over-year and 260 basis points sequentially.
- Year-to-date, Adjusted OIBDA* exceeded capital expenditures by $3.5 billion compared to $2.2 billion in the year-ago period.
- Strong enterprise demand for Multi-protocol Label Switching (MPLS) services contributed to a 22% annual increase in quarterly IP revenues.
- Voice revenues declined 5% year-over-year due to lower consumer and enterprise revenues, offset by higher wholesale and affiliate revenues.
- Legacy data revenues declined 13% year-over-year in the quarter as customers increasingly adopt IP-based services. Frame Relay and ATM declined at a double-digit rate, while Private Line declined at a single-digit rate.
- At the end of the quarter Sprint Nextel was providing services to approximately 1.2 million cable telephony customers. The company announced today that it has significantly expanded its services agreement with Time Warner Cable.
- The Adjusted OIBDA Margin* for Long Distance was 16.8%, compared to 15.2% in the year-ago period and 14.1% in the first quarter due to lower costs.
- Total operating expenses declined 7% year-over-year and 5% sequentially. In the quarter, Long Distance incurred higher costs to support the cable efforts which were offset by lower selling, general and administrative expense due to lower headcount and variable compensation cost.
- Year-to-date Adjusted OIBDA* exceeded capital expenditures by $219 million compared to $383 million in year-to-date 2005.
Sprint Nextel's prior guidance did not include the Nextel Partners and UbiquiTel acquisitions. The following financial targets reflect these acquisitions effective July 1.
- Full-year 2006 consolidated revenues are expected to be $41 billion to $41.5 billion, versus prior guidance of $41 billion or more. The revised guidance reflects lower revenues for Wireless, offset by expected revenues of $900 million to $1 billion from the Nextel Partners and UbiquiTel acquisitions.
- Full-year Adjusted OIBDA* is targeted to be $12.6 billion to $12.9 billion, versus prior guidance of approximately $13 billion. The revised target reflects the contribution of approximately $400 million from Nextel Partners and UbiquiTel, offset by a lower contribution from Wireless. The full year Long Distance Adjusted OIBDA* contribution is targeted to be approximately $900 million.
- Full-year merger and integration costs are expected to be approximately $600 million.
- Full-year capital spending is targeted to be approximately $7 billion to $7.1 billion, inclusive of all capital spending and intangible investments associated with the iDEN network re-banding initiative.
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) is defined as income from continuing operations, before special items, net of tax and the diluted EPS calculated thereon. Adjusted EPS before Amortization is defined as income from continuing operations, before special items and amortization, 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 relate to acquired amortizable intangible assets and not 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 Incomeis 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 OIBDAis defined as operating income before depreciation, amortization, restructuring and asset impairments, 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 Long Distance. Although we have used substantially 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 cash equivalents less the change in debt, investment in certain securities, proceeds from common stock and other financing activities, net, from continuing operations. 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.
Net Debtis consolidated debt, including current maturities, less cash and cash equivalents, current marketable securities and restricted cash. This non-GAAP measure should be used in addition to, but not as a substitute for, the analysis provided in the balance sheet and statement of cash flows. We believe that Net Debt provides useful information to investors, analysts and credit rating agencies about the capacity of the company to reduce the debt load and improve its capital structure.
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 Sprint-Nextel merger, including anticipated synergies and cost savings and the timing thereof;
- the potential impact of difficulties we may encounter in connection with the integration of the pre-merger Sprint and Nextel businesses, and the integration of the businesses and assets of certain of the third party affiliates, or PCS Affiliates, that provide wireless personal communications services, or PCS, under the Sprint® brand that we have acquired, and Nextel Partners, Inc., including the risk that these difficulties could prevent or delay Sprint Nextel's realization of the cost savings and other benefits we expect to achieve as a result of these integration efforts and the risk that Sprint Nextel will be unable to continue to retain key employees;
- the effects of vigorous competition, including the impact of competition on the price we are able to charge customers for the services we provide and on Sprint Nextel's ability to attract new customers and retain existing customers; and the overall demand for Sprint Nextel's service offerings, including the impact of decisions of new subscribers between Sprint Nextel's post-paid and prepaid services offerings and between Sprint Nextel's two network platforms; and the impact of new, emerging and competing technologies on Sprint Nextel's business;
- the impact of overall wireless market penetration on Sprint Nextel's ability to attract and retain customers with good credit standing and the intensified competition among wireless carriers for those customers;
- the costs and business risks associated with providing new services and entering new markets, including with respect to Sprint Nextel's development of new services expected to be provided using the next generation broadband wireless network that we plan to deploy;
- 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 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 communications industry;
- the uncertainties related to Sprint Nextel's investments in networks, systems, and other businesses, including investments required in connection with Sprint Nextel's planned deployment of the next generation wireless network;
- the uncertainties related to the implementation of Sprint Nextel's business strategies, including those relating to whether the actions that Sprint Nextel plans to take to improve competitiveness and accelerate value creation will be successful in achieving those goals and the related cost savings;
- unexpected results of litigation 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 impact of adverse network performance, including any performance issues resulting from reduced network capacity and other adverse impacts resulting from the reconfiguration of the 800 Megahertz band used to operate the iDEN network, as 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;
- equipment failure, natural disasters, terrorist acts, or other breaches of network or information technology security;
- the inability of third parties to perform to Sprint Nextel's requirements under agreements related to Sprint Nextel's business operations;
- 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, including its Form 10-K for the year ended December 31, 2005, as amended, in Part I, Item 1A, "Risk Factors."
Sprint Nextel believes these forward-looking statements are reasonable; however, you should not place undue reliance on forward-looking statements, which are based on current expectations and speak only as of the date of this release. Sprint Nextel is not obligated to publicly release any revisions to forward-looking statements to reflect events after the date of this release.
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.