Sprint Expects Bigger Things From PCS Unit

Communications Today, Dec 5, 2001

Sprint PCS [PCS] expects 40 percent revenue growth during this quarter and projects 30 percent growth for 2002, but investment analysts aren't enthusiastic that the carrier's revenue growth will translate to higher earnings.

Parent company Sprint [FON] yesterday released earnings guidance for its wireless unit for the fourth quarter and for next year. Sprint expects fourth- quarter revenues of $2.7 to $2.8 billion to cap a year from which it expects to tally 50 percent revenue growth over last year to $9.7 to $9.8 billion.

Sprint also projected wireless revenues of $13 billion in 2002 driven by subscriber growth and by maintaining monthly average revenue per customer levels of more than $60. Sprint PCS expects to add 4.2 million subscribers this year, exceeding the 3.8 million estimate it made at the start of the year, and to add 3.6 million to 3.7 million customers next year. It expects customer churn to be around 3 percent for the fourth quarter 2001, and to drop into in the upper 2- percent range next year.

Sprint expects its PCS unit to generate an operating loss of $600 million this year, but to reach positive operating income of $400 million next year. The carrier's capital expenditures will be $3.6 billion this year and $3.5 billion next year as it expands coverage, increases capacity and deploys next- generation CDMA infrastructure. Sprint PCS' cash requirements next year are expected to be $1.8 billion, which its parent plans to meet through issuing additional debt and monetizing assets.

Goldman, Sachs [GS] analysts don't agree with Sprint's expectation for Sprint PCS showing a profit. "We estimate that Sprint PCS will turn free cash flow positive in 2004, and that during 2002 the company will have free cash flow losses of approximately $2.1 billion," according to a Goldman, Sachs research note.

"The company will incur significant capital expenditures as it continues to build out its network in secondary markets and complete its upgrade to [a next-generation CDMA footprint] scheduled for mid 2002," Goldman, Sach analysts added. "We estimate [capital expenditures] over the next two years will be approximately $7 billion."

Jefferies & Co. analysts are pessimistic about Sprint PCS' subscriber growth projection because of the "account spending limit" (ASL) program the carrier employs to sign up high-risk customers. "While pricing schemes such as the account spending limit plans have expanded the company's appeal to a new market segment, we are taking a slightly more cautious stance on Sprint PCS given the potential impact for higher churn and bad debt expense associated with ASL customers," according to a Jefferies research note.

Jefferies has reduced its estimate for Sprint PCS' subscriber growth by 575,000 to 3.275 million while projecting the carrier's churn rate next year to be 3 percent. It also cut its projection for Sprint PCS' revenues by $200 million to $11.2 billion due to its reduced subscriber forecast. >TK Qualcomm [QCOM]: AT&T Wireless [AWE]: Sprint [FON]: