* Sees minimum $15.5 bln iPhone cost in next four years
* Sees cash shortfall from iPhone, network upgrade
* Will refinance debt and turn to vendor financing
* Q3 share loss $0.10 vs Wall Street view loss $0.22
* Shares fall as much as 12 pct; Clearwire rises 22 pct
By Sinead Carew and Yinka Adegoke
Oct 26 Sprint finally owned up to the massive
bet it is making on iPhone, sending its shares down as much as
12 percent on Wednesday.
The No. 3 U.S. operator said it could need $7 billion in
new financing over the next few years to cover a cash shortfall
caused by heavy investments in the Apple Inc iPhone
introduction and a big network upgrade.
Sprint said it does not expect the benefits from iPhone to
exceed its costs until 2015. It also said it was negotiating a
new deal with majority owned Clearwire Corp , its
biggest client. Clearwire shares closed up 19.5 percent.
Sprint was sharply criticized for refusing to disclose
iPhone costs and its intentions for Clearwire at an Oct. 7
Besides the $7 billion network upgrade plan, Sprint has
committed to pay at least $15.5 billion to Apple in the next
four years for iPhone, but it expects that amount to be even
bigger because it is based on the number of phones it sells.
Sprint, whose market capitalization is $7 billion,
estimated the "net present value," or present value of
anticipated profits from the contract, at $7 billion to $8
billion over the next four years.
Analysts were skeptical the bet would work.
"To meet their target, they'd effectively have to turn
their entire company into an Apple shop," said Bernstein
analyst Craig Moffett.
Another analyst said investors should stay away until they
see clear signs Sprint will succeed.
"They're betting the house on two things at the same time,"
said Mizuho analyst Michael Nelson. "If they pull it off,
great. If they don't, their financial performance would get
materially worse, and they could have significant liquidity
Nelson said it would be at least a year before investors
could assess whether both plans are working because of the
timing of the network upgrade.
Sprint warned it would need to refinance $4 billion of debt
and raise up to $3 billion from vendor financing deals in the
next few years to cover iPhone and network costs and keep its
cash balance at a minimum of $2 billion.
Rating Agency Fitch said the company would need to go to
the market to improve it's liquidity as soon as possible or
face another review of its credit rating.
"We need to see it's a priority for the company," said
Fitch analyst Bill Densmore, who added that his current B+
rating of the company has "limited flexibility" for any
missteps by Sprint in executing its strategy.
IPHONE WORTH EVERY PENNY?
Sprint, which started taking iPhone orders on Oct. 7, said
it would pay Apple a subsidy that is 40 percent higher, or $200
more per device, than what it pays for other phones.
Chief Executive Officer Dan Hesse told analysts on a
conference call the iPhone would be worth the extra cost as it
has already lured record numbers of new customers to Sprint.
"IPhone has an expensive contract, but is worth every
penny," Hesse said, but he added it was too early to estimate
exactly how many iPhones he expects to sell.
Sprint promised that, over time, the iPhone would bring 50
percent more value to the company than any other handset.
In the meantime, the upfront costs from iPhone will cut
fourth quarter operating income by between $500 million and
$700 million to about $600 million to $800 million. Nelson had
earlier estimated that profit at $1.1 billion.
Sprint gave a 2011 free cash flow forecast ranging from a
loss of $200 million to a gain of $100 million. It had
previously promised positive 2011 free cash flow, which
generally refers to earnings including capital spending, but
excluding interest, taxes, depreciation and amortization.
The outlook overshadowed Sprint's smaller-than-expected
The company, which has struggled for years to stem customer
defections, said the loss narrowed to $301 million, or 10 cents
per share, from $911 million, or 30 cents per share, a year
earlier. Analysts on average expected a loss of 22 cents per
share, according to Thomson Reuters I/B/E/S.
But Sprint said it lost 44,000 customers in the quarter,
compared with the average expectation of a loss of about 11,000
from nine analysts contacted by Reuters.
Net operating revenue rose to $8.33 billion from $8.15
billion a year earlier, but missed Wall Street expectations of
Sprint Credit Default Swaps, or the cost of insuring its
debt, rose after the report. It now costs $1.475 million paid
upfront to insure $10 million of Sprint debt, on top of
$500,000 in annual payments. That is up from $1.25 million
upfront plus $500,000 annually the day before.
Sprint shares closed down 7 percent at $2.51 on the New
York Stock Exchange after falling as low as $2.38 earlier in
Clearwire finished up 19.5 percent at $1.96 on Nasdaq. It
lost a third of its value after Sprint comments at its Oct. 7
meeting led investors to believe it was a bankruptcy risk and
to worry that the parent might abandon it after the end of next
But Fitch's Densmore said it was unclear if the liquidity risks of Clearwire, which is currently seeking about $900
million in funding, have abated just because of Sprint's
announcement it is looking for a potential deal.
"The only way we get more comfortable is if Sprint reaches
and agreement and Clearwire is able to go out and get more
funding. There's some hurdles to that," he said.