Translating financial press coverage of telecom to the business user environment

READ THIS! Has that ever been the title of an email you've received from a senior manager or a lateral peer in your company, with a link to an article from the financial press about one of your suppliers, maybe even your lead carrier?

Betcha it has. Telecom managers don't have the luxury of buying primarily from niche, specialized players of interest only to the trade press. Our key suppliers are some of the biggest brand names in America -- Verizon, Sprint, and of course the quintessential brand name of them all -- AT&T. So you don't always get full control over the messages that key colleagues get about your chosen suppliers.

Trying to manage the flow of public buzz and concern about these vendors has taken up an increasing amount of time for professional telecom managers in large companies. But it's an important management task that must be handled proactively.

It's in this context that a TC2 client forwarded an article posted on Yahoo Finance by a sort of financial audit firm. The article was called "Ten Big Companies That Are Veering Toward Bankruptcy" and one of the companies cited was Sprint.

The article's overall and accurate point was that bankruptcies can occur when three bad things collide -- high debt, a poor economy, and either product obsolescence or a loss of competitive advantage vs. other players in the same industry. In the author's opinion, Sprint qualified for the last component of the trifecta by virtue of its brand degradation and relative inability to attract and hold consumer wireless subscribers compared to AT&T and Verizon Wireless.

The client, however, noted that the financial tools to which his company has access show an improvement in Sprint's financial standing through the second quarter. Although he didn't put it this way, that was basically a reference to Sprint's increase in free cash flow compared to the first half of 2008. So how on earth could this author say Sprint is going bankrupt?

Well, I'm trained as a journalist, so the first thing I noticed was a classic phenomenon: the headline didn't match the story. The article didn't actually say all ten companies were going bankrupt. Rather, you had to consider the medium and the message to get an accurate takeaway.

In a bull market, people sell financial information primarily by promoting hot stocks that people can buy. In a bear market (which we're still in despite this year's intermediate rally), people sell financial information primarily by trashing struggling stocks that people can short. Of course it should be the other way around -- buy low, sell high, right? But you can't change human nature.

So this article was a clear appeal to prospective short-sellers to give them ideas on stocks to go after. It could have been more accurately called "Ten Big Companies That It's Plausible to Foresee a Bankruptcy Scenario, Any One of Which Could Prove Us Right." But that would obscure the fact that the article isn't taking responsibility for the resulting actions of its target market -- bearish stock market players -- if they choose the wrong stock from the list to attempt to run down.

In that context, for business users, the article makes some decent points about Sprint (which does have heavy debt and still too much churn in its subscribers), but in the sense of planning for change, not pushing the panic button. A much more complete picture emerges from combining positive and negative trends and understanding the impact on the enterprise user market specifically.

Sprint does have substantially improved free cash flow from extremely depressed levels in the corresponding periods last year. But this improvement is largely a result of ongoing operational cost cuts and severe cuts in capital expenditures. Sprint's capex declined 69% in the first half of 2009, from $2.006 billion last year to $612 million this year.

This financial measure does protect Sprint's liquidity, but does not represent an improvement in Sprint's business outlook. Its operating margin on wireless is only about 22%, roughly half of Verizon's 46% and AT&T's 40%. On an accounting basis, Sprint is still posting net losses. It has about $4.6 billion in cash reserves, but also approximately $20 billion in debt. And it's a matter of perspective whether it is appropriate to cite the cash reserves as "money in the bank" or simply a subtraction from the gross debt pile to reach a net debt calculation.

Our perspective is that carriers do not easily maintain their market presence once they start slashing capital expenditures -- except for resellers, telecom is simply a capital-intensive business. And Sprint is struggling in its basic business, particularly in the face of the move to smartphones where AT&T has the iPhone and Verizon promotes BlackBerry, while Sprint is promoting the Palm Pre.

Meanwhile, Sprint's current credit rating is BB. That's low but not nearly indicative of near-term bankruptcy, especially when you recognize the value (as we do but the stock market essentially does not) of Sprint's wireline enterprise base. However, we also believe that the value of this base is at risk of degrading, particularly if an experienced and diverse telecommunications player (such as Deutsche Telekom) does not step up soon to purchase some or all of the company.

The bottom line is that Sprint is not exactly on the brink, but that it's wise to recognize that the company is facing significant challenges, including financially, and is likely to undergo some sort of significant ownership or structural change, and you do want to be able to explain that change when it comes. That's part of the very purpose of this blog, and in fact, I wouldn't mind if you send a note titled READ THIS! to your key management colleagues with a link to this post and our other notes about Sprint, which you can find by putting "Sprint" in the blog search tool.