Sprint Q3
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Sprint Q3
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
Sprint Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> UNION CITY, Ca., October 15, 1996/FOOLWIRE/ --- Sprint reported their third quarter 1996 results this morning. Net income from continuing operations this quarter was $316 million, a 20% improvement. Earnings per share from continuing operations were $0.73 compared to $0.75 a year ago. This was in line with analyst estimates. Excluding after tax losses from their Sprint Spectrum and Global One joint ventures, third quarter earnings per share from continuing operations would have been $0.83 versus $0.77 a year ago, an 8% increase. This was achieved despite a 24% increase in average shares outstanding and a 200 basis point increase in their tax rate.
Sprint's total revenues for the quarter were $3.54 billion, an increase of $339 million or 10.6% from the year ago third quarter. Long distance reported a year over year revenue gain of $257 million or 14.1%. This is primarily due to strong minute growth and rapid increases in frame relay and Internet platform services. Adjusting for transfers of about $47 million in retail spreads to Global One, revenue growth would have been approximately 17%. Their local division experienced very strong growth in revenues this quarter. Revenues were up $135 million or 11.4% on double-digit growth in network access, local service, and equipment sales. Their product distribution and publishing operation grew revenues by $26 million, an 8.8% increase.
ECONOMIC VALUE ADDED. For the 12 months ending in September, economic value added which measures the spread between after-tax operating returns on capital and the cost of the capital deployed, was ahead of year-ago levels by approximately $200 million. This improvement in EVA is being driven by increased operating margins and higher asset turns.
FACTORS CONTRIBUTING TO GROWTH. During the quarter they continued to achieve excellent growth in volumes, revenues, margins, operating income, and operating cash flow. In long distance, they once again achieved double-digit volume growth in the consumer, business, and wholesale markets. Total minute growth was 21% this quarter, which was up from the 19% they reported in the second quarter.
Within their local operations, demand for second lines and a strong economy contributed to a 5.4% growth in access lines and a 10% year over year growth in access minutes of use.
OPERATING MARGINS AND INCOME. Sprint's total operating margin this quarter was 16.9% versus 16.6% in the second quarter and 15.5% a year ago. Total operating income of $599 million is a 20% improvement over the year-ago period and is up $18 million sequentially. The long distance operating margin for the quarter was 11.6% which compares to 11.5% in the second quarter and the 10% they reported a year ago. Long distance operating income of $242 million this quarter is up 32% from a year ago.
Spending on their consumer Internet access service, which will soon be widely available, impacted margin progress this quarter. The local division's operating margin this quarter benefitted from a richer product mix which was offset by higher spending. 25.7% margin is up from both the 25.6% they reported in the second quarter and the 24.6% they reported in the year-ago period. Local division operating income of $338 million is a 17% increase from a year ago. Product distibution and publishing increased its operating income by 10% this quarter as margins held constant.
OPERATING CASH FLOWS. Operating cash flows were nearly $1 billion this quarter. Operating cash flows were $130 million ahead of the third quarter a year ago, a 15% improvement. The overall cash flow margin of 28.1% is 20 basis points ahead of the second quarter and 110 basis points above last year's level.
Operating cash flows in the quarter amounted to $2.29 per share. Year-to-date operating cash flows of $2.94 billion are 18% above the comparable period of 1995. Despite this performance, according to Sprint, their stock currently trades significantly below intrinsic value with a cash flow multiple of less than 4.5 times. This is the lowest in the telecommunications group, an industry which Sprint feels as a whole has been discounted by an exaggerated level of investor pessimism.
GLOBAL ONE. Sprint's excellent position in the rapidly growing international and wireless arenas are two major sources of intrinsic value at Sprint. Global One, their international joint venture with their partners Deutsch Telecom and France Telecom, continued to build momentum during the quarter. Global One is providing voice services for several thousand commercial and government accounts. Since its launch on February 1st of this year, more than 70 carriers have signed up with Global One for transport services. More than 400 commercial and government accounts utilize Global One Internet Protocol Services. Global One revenues were $220 million during the quarter, which is about a 10% increase from the prior quarter. Their portion of operating losses from Global One was $24 million this quarter which, on an after-tax basis, diluted earnings by $0.04 per share.
SPRINT SPECTRUM. Sprint Spectrum continues its progress towards launch of a nationwide PCS service offering. The company is currently in the final phases of systems integration testing. Upon successful completion of this testing, several markets will be open for business. Sprint Spectrum recently announced that it will market its services under the Sprint PCS brand name.
SPRINT SPECTRUM AGREEMENT WITH RADIO SHACK. Sprint and Sprint Spectrum also recently announced a ground-breaking distribution agreement with Radio Shack. Under this agreement, Sprint branded telecommunications products and services will be marketed through 6800 Radio Shack locations throughout the country. Radio Shack has been a leading distributor for APC, Sprint Spectrum's affiliate in the Washington DC/Baltimore area. They are confident that Radio Shack will be able to duplicate this success on a national basis and at the same time provide a major new sales channel for Sprint's long distance, Internet access, paging, and local service offerings.
SAMSUNG DEAL AND LONG TERM FINANCING FOR SPRINT SPECTRUM. Sprint Spectrum completed several new vendor contracts during the quarter, including a handset agreement with Samsung worth about $600 million over the next three years. The company also completed its long-term financing arrangements during the quarter. In the third quarter their share of Sprint Spectrum's operating losses amounted to $48 million which had an after-tax impact of $0.06 per share.
AFTER-TAX CHARGE TAKEN IN Q3. In the third quarter Sprint redeemed $50 million of long-term debt early. As a result of this transaction, they took an extraordinary after-tax charge of $3.8 million or $0.01 per share.
CAPITAL EXPENSES. Capital expenditures for the quarter were $569 million. Capital expenditures by division were $260 million in the local division and $297 million in long distance. They continue to expect that full year capital expenditures for their core businesses will total approximately $2.2 billion. They currently expect 1995 equity contributions for Sprint Spectrum will be about $350 million. The majority of these contributions have already been made. Sprint is currently actively bidding on additional PCS licenses in the current round of auctions being conducted by the FCC. This could require a significant level of capital late this year or in early 1997. They do not anticipate any capital calls for Global One in 1996.
DEBT-TO-CAPITAL AND SHARE REPURCHASE. At the end of the quarter debt-to-total capital stood at 28%. They have nearly completed the 10 million share repurchase program authorized earlier this year. Last week the board approved a resolution allowing them to buy shares for employee-related share issuing requirements which has typically been 4-5 million shares annually.
LOCAL DIVISION HIGHLIGHTS. The division ended the quarter with more than 7 million access lines. They installed an average of more than 1000 access lines per day. Access line growth over the last year was 5.4%. The increase continues to be fueled by strong economic growth in their service areas and the changing way their customers use telecommunications services in their business and personal lives. Their Nevada and Florida properties continued to see particularly strong growth with year over year access line growth rates reaching 10.6% and 5.8% respectively. At the end of the quarter the division had 5.1 million residential access lines, a 3.9% increase over last year's Q3. Within their territories, more than 8% of their customers now have more than one line. Business lines continue to grow at double-digit rates, increasing to 1.9 million access lines in service. This is a 10% increase year over year.
FACTORS CONTRIBUTING TO GROWTH IN LOCAL DIVISION. Year over year access minutes of use growth is 10%. Growth continues to be strong in all of their operations. For the quarter, network access revenues exceeded 1995 revenues by more than 12%. Local service revenues also grew more than 12% compared to the same period in 1995, primarily due to their access line and enhanced network service growth. Revenue from enhanced network services was up over 50% from the year ago period led by strong acceptance of Class and advanced intelligent network services such as caller ID which was up over 150%. Telephone instrument revenues have increased 24% from Q3 1995. 35% of these revenues are from products they produced in 1996.
Also contributing to this growth is a more flexible pricing philosophy they have adopted, specifically for their enhanced network services. Customers can choose flat rate/unlimited use, packages of services, or per use charges. Currently the usage sensitive service is available on 85% of their access lines and represents more than 10% of their enhanced network service revenues.
INTERNAL PRODUCTIVITY & COST STRUCTURE IMPROVEMENTS. They continue to direct efforts toward improving their cost structure with process improvement and restructuring initiatives. The transition to four regions is complete. They continue to see positive movement in their productivity measures. Employees per 10,000 access lines was 37.7 as of the end of the third quarter, an improvement from 40.6 last year. Year-to-date revenue per employee has also consistently improved, ending the period at $144,000, up 11.4% from last year. They expect to see accelerating improvement in productivity as they progress through their process improvement and restructuring efforts.
FILING TO PROVIDE LOCAL SERVICE. Sprint has spent a great deal of time mapping the direction of the company. Since June, Sprint has taken the first steps at becoming a national local company by filing for competitive local exchange carrier with C-license status. As of today, they have filed in 47 states and the District of Columbia. Public utility commissioners have approved Sprint to provide competitive local telephone service in 18 states.
Sprint feels it is ideally positioned to be a national provider of seamless integrated telecommunications services to residential and business customers. Strategically Sprint has the assets, infrastructure, and expertise to expand their local presence through their existing local national network, the resale of service of an encumbent provider, and through the nationwide wireless network of Sprint Spectrum. Their expansion will be governed by 3 key triggers -- economics, competitive conditions, and the regulatory environment within the market.
LONG DISTANCE DIVISION HIGHLIGHTS -- INTERNET PASSPORT. In August they began a phased introduction of Sprint's Internet Passport, their Internet access service for consumers and small businesses. Initial rollout to customers has gone smoothly and they anticipate an accelerated consumer response as they begin to advertise the product more widely. They are planning a series of enhancements to the service beginning with the agreement they announced with Viacom yesterday. This agreement establishes a framework under which Sprint will negotiate distribution contracts with Viacom subsidiaries including Blockbuster Entertainment, Simon and Schuster, Nolan and Prentiss Hall publishing, MTV, and others.
BUSINESS MARKET HIGHLIGHTS. In the business market they achieved double-digit volume growth in both the large and small business customer segments. During the quarter they closed new and add-on business with Arco, Ernst & Young, Deutsch Bank, and Travelers. Commercial acceptance of their online multimedia service took a significant step forward with sales to new customers including Warner Brothers, MCA/Universal Pictures, General Motors, and Chiat/Day Advertising.
PREPAID LONG DISTANCE CARDS & CUSTOMER INCENTIVE PROGRAMS. Sprint continues to dominate the prepaid card business with new business from Sony Electronics and Annhaeuser Busch. Their Friday's Free program continues to be the key driver of their success in the small to medium business market. Friday's Free was just extended into a 2-year optional program.
DATA SERVICES -- SPRINT LINK. Sprint continues to maintain its leadership across the spectrum of data services. An area that was particularly strong this quarter was frame relay with revenues more than doubling from a year ago level. Revenues from Sprint Link, their commercial Internet access product and other Internet protocol services are also growing very rapidly. X.25 revenues slowed this quarter as they are transitioning America Online's traffic to an AOL-owned network. Under this arrangement, Sprint will continue to provide network management services to AOL.
WHOLESALE LONG DISTANCE SERVICES. Their wholesale group had a terrific quarter with year-over-year growth in volume and revenues each up more than 20% from last year. They are competing very successfully with traditional reseller business winning several new accounts and getting increased commitments from existing customers. Late in the quarter they began to carry traffic from Bell Atlantic and Nynex as both launched out-of-reach and long distance services. Going forward, the opportunity to carry Auerbach Wireless in-region and out-of-region traffic and a competitively priced product portfolio will continue to drive their growth in the wholesale segment.
DOMESTIC RESIDENTIAL LONG DISTANCE. Domestic residential revenues were substantial contributors to the quarter's strength, increasing 17% from last year. The Sprint Sense family of flat-rate products continued to gain market share and mindshare as they added the most frequently recalled member enhancement -- 10 cents a minute, 24-hours a day to the number called the most.
Sprint was ranked #1 in overall consumer satisfaction by JD Powers. Simple pricing, higher value to the consumer, and excellent customer service were the keys to this success.
Their successful joint marketing programs with TCI and Comcast and Cox continue to exceed expectations bringing in an average of 50,000 new customers per month.
OUTLOOK FOR THE BALANCE OF THE YEAR. They currently expect to report double digit volume and revenue growth for their business, consumer, and wholesale segments in the fourth quarter. Their total fourth quarter year over year volume and revenue comparisons in long distance will likely trend down from the third quarter due to two factors. First, lower government volumes and revenues which should be temporary because they have secured new government contracts which will kick in in Q2. Second, higher Global One related transfers will also affect year-over-year comparisons which will increase to approximately $71 million.
They will continue to invest in their consumer Internet access product in the fourth quarter which will continue to impact margin progress. Growth in local service revenues should continue to be propelled by the current sources of demand.
Global One will likely continue generating losses over the next several quarters as it develops its market. As Sprint Spectrum begins to launch services over the next several weeks, related earnings dilution will increase. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |