To put to rest fears that it may be mismanaging its Network Vision Plans, Sprint (NYSE:S) announced that its LTE network will go live in five cities on July 15th. The five cities in question are Atlanta, Dallas, Houston, San Antonio and Kansas City. With Baltimore soon to follow, the company will make good on its promise of launching LTE in six cities by the mid-year.
Earlier this week, a report had raised questions on Sprint’s ability to coordinate its ambitious Network Vision strategy in the face of a shift of employees from its network management partner Ericsson to Sprint. Sprint’s stock tanked 6% as a result.
While investors’ concerns regarding the escalating capital expenditures and a possible mismanagement of the ambitious project is understandable, we believe the employee transfer is a sign of the positive changes that Sprint’s network is undergoing as a result of the Network Vision Plan as against 2009 when it had signed on Ericsson to manage its relatively stable network. To an extent, Sprint’s announcement of the official date of LTE launch should also alleviate concerns that the carrier may not be able to deliver on its aggressive plans.
We have a $3.75 price estimate for Sprint’s stock, which is about 50% higher than the market price.
Sprint playing LTE catch-up
While Sprint is launching its first LTE markets, bigger rival Verizon already has its LTE network up and running in about 304 markets across the U.S. and covers more than 200 million Americans currently. AT&T is behind Verizon in terms of LTE coverage but it still covers about 75 million Americans and plans to add an equal number by the year-end. As the iPhone 5 launch draws near, it has become highly imperative for Sprint to have LTE ready in at least a few cities before the launch. (see Sprint’s LTE Plans Are Coming Up Short As iPhone 5 Approaches)
In order to bridge the gap, Sprint is aggressively executing on what it calls its Network Vision strategy to get most of its LTE network ready by the end of 2013. The carrier is trying to phase out iDen gradually and consolidate its network holdings into one 2G/3G/4G network using a combination of CDMA and EV-DO. In fact, Sprint has announced that it is planning to shut down the iDEN network completely by next summer. The freed up iDEN spectrum will then be used to boost its LTE network in 2014. (see Sprint To Build LTE Over iDEN’s Grave)
The announcement of iDEN’s impending shutdown in about a year’s time will however cause the remaining iDEN subscribers to jump ship and may deepen the market share loss in the short-term if Sprint is unable to transfer enough of them to its CDMA network. However, the iPhone’s addition has helped the company report two strong quarters of postpaid net adds on its core Sprint CDMA network since the 4S launch. (see Sprint’s iPhone Bet Is Starting To Pay Off, $3.75 Fair Value) We expect CDMA’s strong showing to continue and help Sprint stem the overall postpaid losses in due course of time as iDEN is gradually phased out.
Margin Improvement and ARPU increase
A successful implementation of the Network Vision strategy will reduce the operating expenses substantially by eliminating the duplicate fixed costs of maintaining different networks. It will also allow for better 3G/4G coverage and reduce roaming costs as the spectrum previously used for iDEN would now be available for the CDMA/LTE network.
As LTE adoption rates rise and iPhone brings in the highly lucrative postpaid subscribers, Sprint will also see its data ARPU levels rise in concert. Sprint’s unlimited LTE plans will help it maintain its niche and differentiate itself from rivals’ tiered data plans. Unlimited plans will likely be more valuable for LTE than they were for 3G since LTE is a higher-speed technology and will cause subscribers to easily overshoot their monthly quota for tiered plans. (see Sprint Promotes Unlimited Plans As Verizon, AT&T Move To Shared-Data Plans) The iPhone, for its part, will bring in the high data users and continue to have a positive impact on ARPU levels. Sprint’s postpaid ARPU for its core CDMA platform in the most recent quarter jumped $3.70, or 6.6% versus the same period last year, as the iPhone accounted for a huge number of new subscribers to Sprint.