Sprint Announces First Quarter Results
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Sprint Announces First Quarter Results
APRIL 15, 2002
OVERLAND PARK, KAN.
The Sprint FON Group (NYSE: FON) is comprised of Sprint's Global Markets Division, Local Telecommunications Division, and product distribution and directory publishing businesses.
The Sprint PCS Group (NYSE: PCS) consists of Sprint's mobile wireless operations.
Sprint today announced first quarter consolidated revenues of $6.76 billion, an increase of 8 percent from $6.25 billion a year ago.
The PCS Group reported a first quarter loss per share of 15 cents, compared to the mean analyst estimate of a 20-cent loss for the quarter and a reported loss of 40 cents a year ago. First quarter diluted earnings per share for the FON Group was 32 cents compared to 36 cents a year ago and the mean analyst estimate of 30 cents per share. Excluding losses associated with ION, which was terminated in the fourth quarter of 2001, FON Group diluted earnings per share was 33 cents compared to 46 cents reported a year ago.
"Despite a challenging economy, we are seeing improvements in our traditional wireline business and continue to deliver outstanding results in our wireless business. Nevertheless, we remain focused on improving the efficiency of our operations enterprise-wide," said William T. Esrey, chairman and chief executive officer.
SPRINT PCS GROUP HIGHLIGHTS
The PCS Group, with its affiliate partners, reported strong growth in subscribers, including approximately 725,000 net direct subscriber additions and 228,000 net new affiliate subscribers.
Net operating revenues increased 41 percent in the quarter to $2.85 billion compared to $2.03 billion a year ago.
EBITDA (measured as operating income or loss plus depreciation and amortization) was $640 million, up strongly from $253 million a year ago.
The cost to acquire a new customer was down to $305 in the first quarter from $325 a year ago, and the cash cost per user for the quarter decreased to just under $32 from just over $35 a year ago.
Average monthly revenue per user (ARPU) for the quarter was $60 compared to $59 a year ago.
Customer churn for the quarter was approximately 3 percent, which was flat sequentially, but better than expectations for the quarter. Churn in the first quarter a year ago was 2.5 percent.
Capital expenditures of $603 million for the quarter reflected continued focus on capacity expansion, increased coverage for the company's nationwide wireless network and development of 3G capabilities.
"Our areas of focus at PCS this year continue to be increasing profitability, growth in our customer base by building upon Sprint's unsurpassed clarity in voice services and initiating nationwide third-generation (3G) data services," Esrey said. "This quarter, we have made progress on all fronts."
Sprint and its affiliates operate the nation's largest all-digital, single-frequency PCS wireless network with coverage now extending to a population of nearly 249 million, or approximately 87 percent of the country.
This summer, Sprint plans to be the first U.S. wireless carrier to deliver third-generation 3G) wireless services nationwide. Sprint's wireless data speeds are expected to average 50 to 70 kbps, with peak speeds bursting up to 144 kbps.
"The coming of 3G service to wireless is a true technology breakthrough. It compares to television's move from black and white to color broadcasting," Esrey said. "3G offers greater speeds and the applications that businesses and consumers need on a wide array of devices. With new data services such as e-mail and photo attachments, 3G will allow Sprint customers to stay connected with a broad range of applications."
In the quarter, Sprint continued to build on its aggressive plans to deliver 3G services to Sprint customers nationwide. First-quarter announcements included a pact between Handspring and Sprint to work together on a new Handspring Treo communicator featuring a color screen that will operate on Sprint's 3G network; Sprint introducing toolkits designed specifically for Java programmers who desire to place their applications on the Sprint 3G network; Sprint unveiling two sleek and stylish 3G phones from Samsung Telecommunications America; and Sprint announcing plans to enable its wireless customers to send and receive messages via the new Intercarrier Messaging feature of Sprint PCS Short Mail.
SPRINT FON GROUP HIGHLIGHTS
Net operating revenues declined 8 percent to $4.03 billion compared to $4.36 billion in the same period a year ago. On a sequential basis, revenues were slightly higher.
Operating income in the quarter decreased 14 percent to $460 million from $532 million a year ago. Excluding losses from ION, operating income for the quarter would have been $466 million compared to $677 million a year ago.
EBITDA was $1.11 billion, down 1 percent from $1.12 billion in the first quarter a year ago. Excluding losses from ION, EBITDA for the quarter would have been $1.11 billion compared to $1.23 billion a year ago.
Income from continuing operations was $286 million in the first quarter, a decline of 9 percent from $316 million a year ago.
Capital expenditures were $543 million for the quarter.
"This quarter, the FON Group demonstrated its resilience in the face of a challenging marketplace," Esrey said. "In our local operations, we continue to aggressively manage costs, improve operating profits, and sell our services in value-adding bundles. In our Global Markets Division, we are experiencing sales success in the enterprise data and Internet market despite aggressive pricing in the marketplace."
Local Telecommunications Division
Net operating revenues for the quarter were $1.55 billion, the same as the first quarter of 2001.
Operating income rose 10 percent in the quarter to $481 million from $438 million a year ago.
Voice grade equivalent lines grew nearly 12 percent from the first quarter a year ago. The number of access lines decreased 1.4 percent during the same period.
EBITDA in the quarter increased 7 percent to $767 million from $719 million in the previous first quarter.
The Local Telecommunications Division during the quarter continued to reduce operating costs, which contributed to strong operating income and operating cash flow growth, as well as expanded margins. Cost-containment measures reduced sales, general and administrative costs by 6 percent compared to a year ago. Total cost of services and products for the quarter also declined 6 percent from a year ago.
The division maintained strong sales of bundled services during the quarter, resulting in increased penetration of Sprint's long distance and wireless services in the local territories. The division sold over 400,000 consumer and business bundles during the quarter. Approximately 46 percent of Sprint's local residential lines and 38 percent of its business lines now use Sprint long distance services.
The local division's data-related service revenues continued to improve during the quarter, increasing 16 percent from the year ago period. The chief driver of the increase is a continued strong demand for special access services and increases in DSL.
Global Markets Division (the following discussion assumes that the Sprint ION termination event occurred prior to the periods addressed below)
Net operating revenues in the Global Markets Division for the quarter were down 9 percent from a year ago due primarily to lower long distance voice revenues. These declines were partially offset by growth in data and dedicated IP services. First quarter revenues were $2.34 billion compared to $2.56 billion a year ago. On a sequential basis, revenues improved three percent.
Operating loss was $69 million for the quarter compared to operating income of $170 million a year ago. Sequentially, losses decreased $70 million, excluding one-time items.
EBITDA in the first quarter decreased to $288 million from $443 million a year ago. Excluding one-time items, EBITDA increased by $100 million, sequentially.
Long distance calling volumes rose 13 percent for the quarter from a year ago.
In Global Markets, year-over-year comparisons illustrate the competitiveness of the long distance market, although there were encouraging sequential improvements. Total voice revenues, which declined 11 percent in the quarter compared to a year ago, rose sequentially. Despite aggressive pricing in the data market, asynchronous transfer mode (ATM) revenues rose nearly 40 percent from the same period last year.
During the quarter, dedicated IP service revenues grew 33 percent compared to the same period last year, but were offset by contractual step-downs in dial IP pricing as Sprint migrates to a significantly lower-cost dial IP infrastructure. Overall, Internet revenues for the quarter grew 5 percent compared to the same period last year. During the first quarter, Sprint closed on 28 new managed hosting contracts and more than 200 new IP consulting contracts.
On the international front, Sprint is building on the successful completion last year of its IP network in Europe and Asia. During the quarter, Sprint won new international agreements with companies based in Europe, Asia and the Americas.
In the first quarter, Global Markets decreased sales, general and administrative expenses 10 percent sequentially and 8 percent year-over-year. Operating expense levels benefited from the fourth-quarter restructuring and continued cost control measures.
Product Distribution and Directory Publishing
Net operating revenues were $330 million in the quarter down from $494 million a year ago due to continuing declines in telecommunications equipment spending.
Operating income was $57 million down 27 percent from $78 million a year ago.
Within PDDP, Directory Publishing revenues were up modestly year-over-year with 5 percent growth in operating income.
Financing actions during the quarter
During the quarter, Sprint took the following steps to increase the company's financial flexibility and address the market's concern about the company's liquidity:
Sprint signed a commitment letter for a $1 billion term-loan facility. Due to an upsizing of Sprint's recent debt offering, the amount of the facility was reduced to $700 million. The facility is secured by certain assets relating to Sprint's directory publishing business. To date, Sprint has not drawn against this facility. Sprint has retained investment banking advisors to explore the value the company could obtain if it were to sell the directory publishing business.
Sprint announced plans to expand its existing accounts receivables financing program to include PCS Group receivables. Sprint expects that the program expansion will be in excess of $500 million and available by end of second quarter
Sprint completed a $5 billion debt offering of 3-, 10- and 30-year senior notes. The $5 billion offering is the result of upsizing a planned $2 billion offering.
As a result of these steps, Sprint's 2002 expected cash requirements are fully funded.
BUSINESS OUTLOOK
The following statements are based on current expectations. These statements are forward looking, and actual results may differ materially.
Although encouraged by its first quarter performance, Sprint is not materially changing guidance for either the FON or PCS Groups.
Sprint continues to expect FON Group earnings per share, excluding ION losses, to approach $1.40 for 2002. Sprint continues to believe full-year FON Group revenues could decline at a low single-digit rate in 2002. Full-year EBITDA is still expected to reach approximately $4.6 billion. FON Group capital expenditures for the year are now expected to be approximately $2.7 billion. As a result, Sprint now expects the FON Group to generate approximately $500 million in free cash flow this year.
Sprint continues to believe the PCS Group will achieve its previously forecast 3 million net additions for the full-year, assuming a consistent share of customer acquisitions and a modest improvement in churn. ARPU is expected to remain stable at around $60, assuming a continuation of strong voice minutes-of-use. Sprint continues to target full year EBITDA for the PCS Group at $3 billion and full-year capital expenditures to be approximately $3.4 billion. In light of the recently passed economic stimulus bill, Sprint anticipates a $400 million tax refund that will be credited to the PCS Group due to the utilization of PCS-generated losses. As a result, Sprint now expects the PCS Group to require about $1.1 billion of funding in 2002.
On a consolidated basis, Sprint's funding requirements have been reduced to approximately $600 million in 2002 given the actions described above. While our expected funding requirements have been met for 2002, other financing alternatives such as the PCS accounts receivables program and possible sale of the directories business will further augment Sprint's financial flexibility.
CONFERENCE CALL INFORMATION
Conference calls elaborating on the company's first quarter results and the business outlook are scheduled for the afternoon of April 15. Management will discuss FON Group earnings at 4:30 p.m. EDT in a conference call with a live Q&A session. The call-in numbers are (toll free) 866-215-1938 or 800-473-8796. For international callers, the numbers are 816-650-0742 or 816-650-0765. A continuous replay will be available immediately following the conference call and can be accessed by dialing (toll free) 888-775-8696 or, internationally, 402-220-1326. This replay will be available through April 29, 2002.
The PCS Group earnings report will be discussed in a conference call with a live Q&A session at 5:45 p.m. EDT. The call-in numbers are (toll free) 1-866-215-1938 or 800-473-8796. For international callers, the numbers are 816-650-0742 or 816-650-0765. A continuous replay will be available immediately following the conference call and can be accessed by dialing 888-775-8673 (toll free) or 402-220-1325 internationally. This replay will be available through April 29, 2002.
Live audiocasts of the conference calls will also be available simultaneously at www.sprint.com. Please note that questions can not be submitted by those listening to the webcasts. Replays of both calls can be accessed on our web site through April 29, 2002.
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