Sprint updates guidance

Sprint has updated its guidance for 2002 and given its first guidance for 2003, for both its PCS and FON group.

Perhaps the most significant piece of new guidance come in the form of 2002 free cash flow (FCF). While previous forecasts anticipated $500 million FCF for the year, the company has doubled guidance to $1 billion. The company cited lower capital expenditures and improved earnings before interest, taxes, depreciation and amortization (EBITDA) as the main factors in the new estimate.

Breaking down free cash flow along the company’s two major organizations shows Sprint’s FON group producing FCF of $1.7 billion. Sprint PCS will have a cash requirement of $700 million in 2002.

For 2003 the company expects total FCF to rise to $1.2 billion, all of which should come from the FON Group, with PCS breaking even. FCF in 2004 is forecast at $2 billion.

As a result of Sprint’s improved FCF, the sale of its directory business and anticipated proceeds from the sale of PCS equity units in 2004, the company expects to reduce its debt load to $14.1 billion by the end of 2004, down from $22.3 billion at the beginning of 2003.

While the improved FCF guidance is viewed as a positive by analysts, the way in which it was achieved will be hard to duplicate, said a note from Michael Bowen, principal analyst at Soundview Technology Group.

“The reality is that the predominance of Sprint Corporation’s FCF improvements will be driven by principal cuts in capital expenditures, primarily at Sprint PCS. We believe it will become increasingly difficult to continue pressing on capex as a lever to increase free cash flow.”

In the company’s FON group, which encompasses all its wireline operations, revenues for the fourth quarter are projected to be about $3.7 billion, down from the $3.81 billion posted in the third quarter. Full year revenues should be about $15.2 billion. The company anticipates FON’s revenues for 2003 to be down slightly at $15 billion.

Sprint also updated FON group’s earnings per share (EPS) guidance for the fourth quarter and full year 2002. Citing cost management initiatives and a favorable settlement on payphone access charges, the group is expected to post Q4 EPS in the 37- to 39-cent range, up from previous guidance of 34 to 36 cents. Full year EPS is expected to be $1.35 to $1.37. In 2003, FON group EPS is expected to be between $1.40 and $1.45. Like other carriers, the company expects 2003 EPS to take a hit due to increased pension costs--in FON group’s case, nine cents per share.

FON Group’s capital expenditures in 2002 will be about $2.2 billion, $100 million lower than previous guidance. Capex for 2003 is expected to rise slightly to $2.3 billion. FON group’s global markets division will get $800 million, to support demand growth for enterprise services. The local division budget of $1.4 billion will include investments for broadband and a transition from circuit to packet switching.

In the company’s PCS group, Sprint expects full year revenues to grow approximately 25% to $12 billion. Total revenue growth for 2003 should be in the mid to high single digits range, Sprint said.

This year’s capital expenditures by the PCS group should total about $2.8 billion, $300 million lower than previous guidance, primarily due to lower spending on cell site construction. In 2003, PCS’s capex is expected to fall even further, to between $2.3 billion and $2.4 billion. These investments will be targeted to expanding coverage and increasing network capacity.