Sprint PCS Flags After Earnings Report

Updated from July 28

Sprint PCS(PCS Quote - Cramer on PCS - Stock Picks), the wireless arm of Sprint, was down as much as 8% Tuesday, after an earnings report that analysts saw as good -- but not good enough.

Analysts were pleased that the company on Tuesday reported a narrower-than-expected second-quarter loss, shrinking churn and an increase in revenue per unit, but were concerned that subscriber acquisition and retention costs jumped. There is also some feeling that the improvement in the quarter is already reflected in the share price.

"We believe the current share price assumes not only a stable industry climate, but also a near-perfect corporate execution, while completely ignoring the uncertainties associated with the PCS tracking stock structure," Deutsche Bank Securities analyst Viktor Shvets wrote in a note to clients on Tuesday. Shvets, whose company has a banking relationship with PCS, maintained his "sell" rating on the stock.

In recent trading, PCS was off 36 cents, or 5.4%, to $6.26, while its larger sister company, the Sprint FON Group(FON Quote - Cramer on FON - Stock Picks), was off 34 cents or 2.2% to $14.85 a share after reporting that earnings and revenue dropped about 8% during the June quarter.

On Tuesday, PCS announced that it narrowed its net loss to $92 million, or 9 cents a share, compared to a loss of $170 million, or 17 cents a share, a year ago, according to generally accepted accounting principles. Operating revenue was $3.09 billion, up 2.6% year over year.

Sprint FON, which runs the parent company's long-distance and local telephone operations, earned $99 million, or 11 cents a share, on revenue of $3.5 billion. A year ago, the company made a 12-cent profit on revenue of $3.8 billion on a GAAP basis.

The wireless group also said that churn was down for the quarter and forecast a loss that was lower than analysts' estimates. The FON group said revenue would be down for the full year, but took down capital expenditures in the upcoming year.

FON's earnings performance in the June quarter was better than analysts had expected. The Thomson First Call consensus was for a pro forma profit of 33 cents; the company earned 35 cents a share. Revenue was in line with expectations.

PCS ended the regular trading day up 30 cents, or 4.8%, to $6.62 a share. FON was flat for the day, closing at $15.19 a share.

For the wireless group:

Average revenue per user was $62, compared to $61 in the same period last year and $59 in the first quarter. But customer acquisition costs climbed to $415 from $350 a year ago, an increase of 18.6%. The cost was lifted, in part, by subsidies for handset purchases, used as an incentive instead of subscriber minutes.

P/>The wireless company added 617,000 net new wireless customers, triple the first-quarter gain of 199,000. PCS now has 18.8 million customers, including wholesale customers and those belonging to affiliated companies.

Fewer wireless customers are defecting, the company said: Churn of 2.4% improved from 3.1% in the first quarter and compares to 2.9% in the second quarter a year ago.

The PCS Group's year-to-date free cash flow of $275 million increased by $521 million compared to the six months that ended June 2002, driven by increased cash from operating activities and substantially lower capital expenditures.

Excluding items, Sprint expects the wireless group to lose 43 cents to 48 cents per share for the full year; analysts were expecting a loss of 48 cents. Net service revenue will increase mid-single digits, previously the company expected an increase mid- to high-single digits.

Goldman Sachs analyst Frank Governali maintained his underperform rating on the stock, saying in a note on Tuesday:

"Operating progress seems fully priced into the stock, and operating metrics are likely to erode for all carriers, including PCS, in 2H03 as (number portability) approaches. While management continues to do a good job making up for past problems (driving declines in churn, reducing bad debt expense, improving the customer mix and driving some growth through data,) this appears to be priced into the stock. Goldman Sachs has a banking relationship with PCS.

PCS is up 51% so far this year.

The company expects FON for the full year to earn $1.35 to $1.40 a share, excluding items, on revenue targeted to decline between 6% and 7%. Capital expenditures in the FON Group are expected to be about $1.8 billion next year, which the company said is a $200 million reduction from its previous forecast.