Sprint Earnings: Be Careful What You Wish For

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Sprint Nextel (NYS: S) entered the Garden of Cupertino at the beginning of the fourth quarter, took a bite of the apple, and three months later, found itself chewing on a worm. What the company's latest earnings statement clearly shows is that, yes, Sprint gained subscribers attracted by the third-place wireless carrier finally getting the rights to offer the iPhone, but that the costs of subsidizing those expensive smartphones had a negative effect on the bottom line.

That effect: Sprint's operating profit margin calculated on income before interest, depreciation, and amortization, or OIBDA, dropped 40% from the same period last year, to 9.5%. The good news here (of sorts) for Sprint is that it did not gain as many new subscribers as it had expected, so the loss was also lower than expected. Even so, the 1.6 million subscribers it did add to the network was the best number it has had in six years. It added a net total of 5.1 million subscribers for the year.

Sprint CEO Dan Hesse hinted during the earnings conference call that the company could probably have sold even more iPhones during the quarter if it entered a price war with its competitors. "We entered the fourth quarter expecting an even better performance, but during the quarter, we saw unprecedented discounting on devices, especially for our Apple products, which we decided not to participate in."

That sucking sound you may hear is Apple (NAS: AAPL) inhaling the profits from the 1.8 million iPhones Sprint sold, the 4.2 million iPhones that Verizon (NYS: VZ) sold, and the 7.6 million iPhones that AT&T (NYS: T) sold this last quarter. And, yes, the high cost of the iPhones also affected profit margins for these larger carriers.

The cost of Sprint's wireless products sold during the fourth quarter increased by 48% over the third quarter, yet net operating revenues for the company's wireless operations increased by only 5.4%. That equates to a net operating loss of $500 million for the company's wireless operations for the quarter, $256 million for the year. The net operating loss for Sprint's combined operations total $1.3 billion for the quarter, $2.9 billion for the year.

During the quarter, the company signed a new agreement with longtime 4G provider Clearwire (NAS: CLWR) giving Sprint access to its 4G WiMAX network for several more years. But with the advent of Sprint's new LTE network, which it plans on launching in mid-2012, the need for WiMAX services and devices will eventually disappear, and Hesse said that in 2013 the company will begin to introduce LTE devices onto Clearwire's proposed LTE network.

For 2012 and beyond, the best guidance we could get from the conference call was that costs of the iPhone and of network expansion would be such that operating income would get worse before it got better. Or, in the words of CFO Joseph Euteneur, "The expectation is that our OIBDA trough will be U-shaped through 2012 and then will start to ramp in 2013 followed by strong margin expansion in 2014."

Or i-shaped.

Apple obviously has certainly pulled in large profits from its iPhone, but investors shouldn't overlook those companies that supply the chipsets and other bits that Apple and the other smartphone makers need to produce their devices. For an inside look at three such companies that The Motley Fool's analysts think are good bets, get this special report. It's free!

At the time this article was published Fool contributorDan Radovskyowns shares of AT&T. The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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