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Investment Overview for Sprint (NYSE:S)
Below are key drivers of Sprint's value that present opportunities for upside or downside to the current Trefis price estimate for Sprint:
Mobile Plans & Phones
Sprint CMDA's wireless market share: We estimate that this figure will increase from about 9.6% in 2011 to about 11.5% by end of our forecast period. This will be driven by subscriber shift from iDEN to CDMA platform as well as general improvement in subscriber trends as Sprint turns around its business. However, if Sprint is unable to do so and this figure stagnates around 10%, there could be 30% downside to our price estimate. On the other hand, if Sprint does well and captures 13% market share by end of our forecast period, there could be a 30% upside to our price estimate.
SG&A as % of gross profits: We expect this figure to increase from around 54% in 2011 to about 63% by the end of our forecast period. However, if Sprint can improve gross profits via network modernization such that SG&A as % of gross profits comes down to 60% by end of our forecast period, there could be potential upside of 30% to our price estimate. On the other hand, if the figure continues to increase as past trends suggest and amounts to say 65% by end of our forecast period, there could be downside of 30% to our current price estimate.
- Internet & SMS Revenue per Sprint Mobile Subscriber: We estimate this figure to increase from about $17 in 2011 to a little over $24 by end of our forecast period, a little conservative estimate as Sprint has traditionally used its price advantage and cheaper plans to gain customers. However, if Sprint can rebuild its image and revert its past subscriber trends, it could gain ability to raise prices and grow revenues at a faster pace. In such a scenario, if Internet & SMS Revenue per Sprint Mobile Subscriber increases to over $28 by end of our forecast period, there could be upside of about 30% to our current price estimate.
Sprint Nextel resulted from the $35 billion merger of Sprint and Nextel in 2005. It makes money primarily through mobile phone subscription plans for consumers and businesses. And it is the third largest wireless service provider (behind Verizon and AT&T) in the US. It also provides its wireless network resources for resale to wholesale and regional operators. Sprint also offers voice and data communication services over legacy fixed-lines.
Mobile Internet as well as Mobile Plans & Phones divisions are the two most valuable divisions for Sprint.
Higher Voice Plan Pricing Overshadowed By Mobile Subsidies
We estimate that mobile plan pricing for postpaid subscribers stood a littler over $33 for 2011 and this is expected remain nearly flat with a negative bias as Sprint looks to keep prices on lower sides to gain subscribers. Voice pricing is higher than estimated data pricing but the later is expected to continue to rise in the future. Moreover, mobile phone subsidies negatively impact the cash flows to such an extent that Mobile Phones & Plans division ends up contributing a much lesser value to Sprint than Mobile Internet. Sprint, like other mobile phone operators, has to incur losses on smartphones that it offers to its customers in order to keep their prices down and incentivize data usage.
Growing mobile internet revenue per subscriber and higher gross margins
While voice pricing for both postpaid and prepaid plans has been on a decline, mobile internet revenue per subscriber has been on consistent rise. The figure has increased from about $10.80 per month per subscriber in 2007 to about $17 per subscriber in 2011. Although this is still lower than voice pricing, but higher gross margins for this division compared to mobile phones and plans make it more valuable. This is because overall gross margins for mobile phones and plans are suppressed due to phone subsidies.
Loss of Subscriber Base Since Sprint Nextel Merger
Sprint Nextel has been losing postpaid subscribers at a rapid pace in recent years. Most of these losses are due to sustained losses incurred on Nextel's iDEN network. However, with a bulk of the losses having occurred already and Sprint being able to transition a good number of Nextel customers to its CDMA network, the losses have declined in recent quarters. In fact, the most recent quarter saw a net add of about 161k postpaid subscribers. Sprint plans to start decommissioning the iDEN network in 2012 and expects it complete by 2015. As iDEN subscriber base declines slower than before and Sprint's CDMA base starts to increase, Sprint should now be able to show net postpaid adds every year.
Push for 4G LTE
Mobile operators have now started pushing for 4G networks that offer higher data speeds than 3G. AT&T and Verizon have rapidly expanded their LTE networks and Sprint has also jumped on the bandwagon. First to deploy LTE, Verizon has however maintained lead, with its LTE network covering almost thrice as many U.S. citizens as second-placed AT&T's does. Sprint is yet to deploy its LTE network but plans on using partner Clearwire's resources in addition to its own to aggressively build out LTE in order to make up for lost time. As a growing number of smartphone users demand high-speed wireless services, Sprint will need to put its plans to action as soon as possible. However, it runs the risk of being unable to control its capital expenditures as it starts to spend aggressively on LTE as well as increasing 3G capacity.
Highly leveraged balance sheet
Sprint has over $26 billion in debt right now and a market cap of only $11 billion, which clearly shows the high leverage that debt has on its balance sheet. On top of that, it is being forced to add even more debt as it has to finance not only its LTE plans but also the expensive iPhone subsidies. Sprint recently committed to purchasing at least $15.5 billion worth of iPhones from Apple over a four-year period. Twice in less than four months has Sprint accessed the bond market for $4 billion and $2 billion to pay for the burgeoning costs.
Scarcity of wireless spectrum
The wireless market is intensely competitive, with the number of wireless subscriber connections (327.6 million) exceeding the total population (315.5 million) in the U.S. As an ever increasing number of smartphone users demand higher speeds and congestion-free networks, wireless carriers are hard-pressed for additional spectrum in order to meet these demands. With AT&T abandoning its T-Mobile acquisition plans in the face of stern regulatory opposition, Sprint's LTE deal with Clearwire gives it a very comfortable spectrum position in an industry where spectrum availability could play a very huge role going forward.
Mobile Voice Plan Pricing Declines Offset by Data
Mobile voice plan pricing has seen a gradual decline, as competition has intensified and technology (primarily speed and reliability) and reach have improved. Increasingly, data access is a significant part of usage. So, while average voice revenues have been on a downward trend, the increased data revenue contribution has helped mitigate the impact on total ARPU.
SMS usage on a decline
SMS texting rates have started declining in several advanced SMS markets such as Finland, Netherlands and Hong Kong. Since the U.S. saw a boom in text-messaging a couple of years after these countries, we expect the trend to come to U.S. shores soon. The decline in SMS usage can be attributed to the growing use of smartphones that has caused customers to migrate from traditional modes of communication such as text-messaging or SMS to the more convenient and new age messaging services of social media (Facebook & Twitter), email and other IP-based messaging systems. The erosion in SMS usage may have a negative impact on most wireless carriers' data ARPUs as carriers generally charge much more per byte of SMS data sent than any other data sent over the Internet.
New Growth Areas
Sprint has been pushing beyond mobile service in order to continue to grow. The company has been investing in technology that would add wireless connectivity to cars, a market that Sprint believes could bring revenues of over $1 billion within a few years. Sprint has partnered with ECOtality, an electric car charging company, to connect its electric car chargers throughout the country. New developments will help drivers locate charging facilities through GPS, enable data tracking on charging habits, and facilitate other processes like billing and digital content delivery.
Trefis Forecast Rationale for Landline Gross Profit Margin
Gross Margin represents Gross Profit as a percentage of Revenue. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold
The historical gross profit margin has fluctuated around 35% to 45% levels. We expect it to remain in this range with a slightly negative bias, going forward.
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How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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