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The third-largest U.S. wireless carrier, Sprint Nextel Corp. S), reported better-than-expected third quarter 2012 results, before the opening bell. Adjusted loss per share of 13 cents strongly outpaced the Zacks Consensus Estimate of a loss of 57 cents. Sprint outperformed Zacks Consensus expectations on strong revenue growth and continued focus on the core Sprint platform.

Adjusted net loss per share excludes accelerated depreciation of 13 cents Including this special items, the company reported net loss per share of 26 cents compared with 10 cents in the year-ago quarter. Revenue grew 5% year over year to $8.763 billion, slightly below the Zacks Consensus Estimate of $8.803 billion.

The year-over-year growth was driven by higher wireless service revenue that compensated for lower wireline revenues. Adjusted OIBDA (operating income/loss before depreciation, amortization, asset impairments and abandonments) improved 8% year over year to $1.3 billion in the reported quarter.

Segment Results

Wireless operating revenue increased 7% year over year to $8 billion.

Sprint lost approximately 423,000 subscribers in the reported quarter, representing a net loss of 437,000 in retail subscribers and net addition of 14,000 in wholesale and affiliate subscribers.

Sprint lost 456,000 net post-paid customers during the quarter, more than the loss of 246,000 customers in the year-ago quarter. The Sprint platform added 410,000 post-paid customers while the Nextel platform lost 866,000. With regard to prepaid subscription, Sprint added 459,000 users while the Nextel platform lost 440,000 prepaid customers.

At the end of the third quarter, Sprint had 56 million customers (including 32.1 million post-paid, 15.4 million prepaid and 8.4 million wholesale and affiliate) compared with 52.1 million in the year-ago quarter.

Sprint sold nearly 1.5 million Apple Inc. (AAPL) iPhones and about 40% of the iPhone customers were new to Sprint.

Wireless post-paid ARPU increased to $61.18 from $57.65 in the year-ago quarter, boosted by higher monthly recurring revenue. This is the largest year-over-year post-paid ARPU growth in the company's record. Prepaid ARPU declined to $26.77 from $27.19 in the year-ago quarter.

Sprint platform post-paid churn (customer switch) rate improved to 1.88% in the reported quarter from 1.91% in the year-ago quarter. Sprint platform prepaid churn also improved to 2.93% from 3.43% in the prior-year quarter. The year-over-year improvement was attributable to continued improvements in the Virgin Mobile and Boost brands.

On July 15, Sprint launched its 4G LTE networks initially in five major markets namely Atlanta, Dallas, Houston, Kansas City and San Antonio, covering 15 cities. In addition, the company introduced four LTE smartphones - Galaxy Nexus, LG Viper 4G LTE, HTC EVO 4G LTE and Samsung Galaxy S III.

Wireline revenues dropped 12% year over year to $939 million owing to reduced interconnection charges and continued declines in voice and cable IP customers.

Liquidity       

Sprint has strengthened its balance sheet with approximately $6.33 billion in cash and cash equivalents as of September 2012 compared with $4.0 billion in the same month last year. Net debt increased slightly to around $15 billion from $14.7 billion at the end of 2011.

The company spent $1.1 billion in the second quarter compared with $818 million in the year-ago quarter. Sprint generated a negative free cash flow of $487 million versus $273 million in the year-ago quarter.

Guidance

For full year 2012, Sprint expects net service revenue to grow 4-6% and adjusted OIBDA of $4.5-$4.6 billion. Capital expenditures are estimated to be approximately $6 billion.

Sprint is advancing on its Network Vision plan as expected. The company expects to add about 12,000 sites by the end of this year and complete the majority of its deployment in 2013.

Our Take

Sprint is showing signs of turning around its business and is focusing entirely on the growth of its core Sprint platform business. Increasing smartphone sales, attractive product and service offerings, shutting down of iDEN networks and the roll out of 4G LTE networks would boost Sprint's wireless growth prospects going forward. Further, the improving liquidity position makes the stock attractive for the long term.

However, lofty iPhone subsidies, higher spending on Network Vision plan and aggravated competitive threats from the major rivals - Verizon Communications Inc. (VZ) and AT&T Inc. T) - could be dilutive to future margins and free cash flow.

We currently maintain our long-term Neutral recommendation on Sprint. For the short term (1-3 months), the stock retains a Zacks #3 (Hold) Rank.

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