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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 decrease from about 10.2% in 2013 to about 9.5% in 2015, before gradually improving towards the end of our forecast period. This is likely to be driven by subscriber shift towards high speed 4G and data as well as Sprint's improving network quality. However, if Sprint is unable to do so and this figure stagnates around 9.5%, there could be 5% downside to our price estimate. On the other hand, if Sprint does well and captures 11% market share by end of our forecast period, there could be a 20% upside to our price estimate.
Mobile SG&A as % of gross profits: We expect this figure to decrease from around 52% in 2013 to about 37% 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 34% by end of our forecast period, there could be potential upside of 15% to our price estimate. On the other hand, if the figure does not decline as much and amounts to say 40% by end of our forecast period, there could be downside of 20% to our current price estimate.
- Internet & SMS Revenue per Sprint Mobile Subscriber: We estimate this figure to increase from about $23 in 2013 to a little over $31 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 $34 by end of our forecast period, there could be upside of about 15% to our current price estimate.
Sprint Nextel resulted from the $35 billion merger of Sprint and Nextel in 2005. Following shutdown of the Nextel network in 2013 and the subsequent acquisition of a majority stake in Sprint Nextel by Softbank, the company reverted to its old name, Sprint Corporation.
The company makes money primarily through mobile phone subscription plans for consumers and businesses. 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 $27 for 2013 and this is expected to decline going forward 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 $18 per month per subscriber in 2011 to about $23.5 per subscriber in 2013. 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.
Push for 4G LTE
All carriers have established large 4G networks in the country. 4G LTE offers data speeds up to ten times higher than 3G. First to deploy LTE, Verizon has maintained lead, with its LTE network covering almost the entire U.S. Sprint has deployed its LTE network to about 260 PoPs (points of presence) now and plans to use Clearwire's 2.5 GHz spectrum, in addition to its own 800 MHz spectrum, to enhance its network in order to compete with the market leaders. 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 about $40 billion in debt right now and a market cap of just over $25 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 and discounts.
Scarcity of wireless spectrum
The wireless market is intensely competitive, with the number of wireless subscriber connections (336 million) exceeding the total population (316 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.
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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