Sprint at Risk? - Analyst Blog

The latest wireless industry buzz is on Sprint Nextel's (S) imminent danger, with Clearwire Corp. (CLWR) running a risk of defaulting its loan agreements. Sprint Nextel owns a hefty 54% stake in Clearwire and offers speedy data services to customers via 4G WiMax (a wireless broadband technology) network in collaboration with the latter.

Nagging losses and uncertainty over raising funds lead to doubts over Clearwire's ability to continue its operations. Over the past few months, Clearwire has been in negotiations for new funding with new and existing customers including Sprint and T-Mobile, a unit of Germany's Deutsche Telekom AG (DTEGY). Earlier this month, Clearwire stated that it would lay off 15% of its workforce and shrink other costs to conserve cash.

We believe Clearwire's inability to raise funds or operate as a “going concern“ will hurt Sprint's financial position. After years of struggle, Sprint has finally narrowed its subscriber losses by using the Clearwire network.The 4G WiMax deployment also offers a major prospect in the wireless market that might boost Sprint's revenues.

Sprint's third quarter adjusted net loss per share of 18 cents surpassed the Zacks Consensus Estimate by 10 cents. Revenue increased for the first time in three years and was also above the Zacks Consensus Estimate. During the third quarter, Sprint gained approximately 644,000 subscribers, which represented a net addition of 364,000 retail subscribers and 280,000 wholesale and affiliate subscribers. This was reportedly the best wireless subscriber growth since 2006.

The expansion of 4G services is vital to Sprint's survival in the U.S. wireless market, given its continued market share erosion. Consequently, we expect Sprint to invest some money into the venture, as it depends on Clearwire for advanced services. Clearwire and Sprint are now in talks on whether Sprint should increase its investment in the company.

Currently, Sprint extends its 4G network in 62 U.S. markets with the Clearwire network. This reach keeps the companywell ahead of its rivals AT&T Inc. (T) and Verizon Communications Inc. (VZ). AT&T plans to roll out its 4G services in 2011 and Verizon plans to launch 4G services in 38 markets in the fourth quarter of 2010.

Although Sprint's 4G deployment is dependent on Clearwire, we believe the former is well positioned to leverage the growing wireless market in the U.S. with its rich portfolio of popular smartphone offerings and more advanced devices in the pipeline. Consequently, we are currently reiterating our long-term Neutral rating on Sprint, supported by its Zacks #3 (Hold) Rank.

 
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