Sprint (NYSE:S) plans to announce its Q2 2012 earnings on Thursday, July 26th. We will be closely watching the company’s net postpaid subscriber additions for the quarter as well as the postpaid churn numbers to see if the management is continuing on its strong iPhone performance so far. The iPhone’s first couple of quarters at Sprint was good as the smartphone helped it add a good number of new subscribers to its core Sprint network despite an industry-wide saturation in wireless growth. Sprint started offering the iPhone on its network at the start of the fourth quarter last year, becoming the third carrier in the U.S. to offer the device after AT&T(NYSE:T) and Verizon (NYSE:VZ).
The carrier’s strong iPhone performance as well as an increasing optimism about its funding requirements for the ambitious Network Vision Project being met has caused its stock price to shoot up by almost 50% this year. (see Sprint Secures Capital To Fund Network Vision Equipment Upgrades; Fair Value $3.75) Its recent rollout of LTE in the first few markets has also bolstered the market’s perception of its ability to execute on an accelerated LTE build-out. As a result, Sprint has seen a meteoric rise in its stock price, which is now about 10% below our $3.75 price estimate.
Sprint needs to maintain strong iPhone sales
Sprint has been incurring heavy annual postpaid subscriber losses for a long time now, and its decision to carry the iPhone came as a solution to that problem. However, since Sprint was a tad late in jumping on the iPhone bandwagon, it had to make a huge upfront commitment of nearly $15.5 billion for the iPhone over a four-year period. This was a massive bet considering that the company has a highly leveraged balance sheet, with about $26 billion in debt on its books compared to a market capitalization of only around $10 billion.
This, in addition to its high capital requirement for the Network Vision project, caused its stock to take a beating last year. However, the wager seems to have paid off so far with the carrier having reported two strong quarters of postpaid net adds on its core Sprint network. Sprint added a net 263,000 subscribers to the Sprint platform last quarter, below the previous quarter‘s 539,000 but a tad more than net adds posted in Q1 2011. This came even as an increasingly saturated wireless market caused behemoths Verizon and AT&T to add fewer postpaid subscribers last quarter. The iPhone’s importance to Sprint can also be judged from the fact that it is bringing a lot of new customers to Sprint. (almost 42% of total iPhone sales, as of Q1 2012, were to subscribers new to Sprint)
During the earnings call, we will therefore be keeping a close watch on the company’s iPhone additions to see if it has been able to keep up with the encouraging statistics from the last two quarters. It will also bring more visibility around its chances of meeting the iPhone commitment, which we believe has been bolstered by the carrier’s recent decision to offer a prepaid iPhone under the Virgin brand. (see Sprint’s Prepaid iPhone Next Month Help It Meet Apple Commitment) The company may however continue to lose postpaid subscribers overall since we expect another quarter of postpaid iDen losses, which may have picked up pace after the company announced during the quarter that it will be phasing out iDen by mid-2013. (see Sprint To Build LTE Over iDEN’s Grave)
Longer-term, we expect the postpaid adds on the Sprint’s core platform to outpace the losses being incurred on the iDen front. The highly lucrative contractual postpaid subscribers that the iPhone has and will continue to bring in will increase data ARPUs in the long run and bolster data revenues.
With Verizon and AT&T far ahead in the LTE race, we will be expecting an update on Sprint’s LTE plans. Verizon’s LTE network covers about 230 million Americans currently and AT&T’s about 80 million. Verizon plans to cover another 30 million and AT&T another 70 million by the year-end. Sprint, on the other hand, has only just launched its LTE network and has it live in all of 15 markets in the U.S. (see Sprint Sets July 15 LTE Launch Date) While that is a small number compared to Verizon’s 337 and AT&T’s 47, we expect Sprint’s accelerated LTE deployment schedule to help it catch up with the two before the end of 2013.
This is a good thing for Sprint since LTE adoption has been sluggish so far. Verizon, despite its huge lead over the rest, has managed to convert only about 12% of its postpaid subscriber base to LTE. We expect LTE adoption to pick up after the launch of the iPhone 5, which we expect to sport LTE, and strengthen in 2013. So, longer-term, Sprint may not miss out by a lot so long as it continues to deliver on its current roll-out plans.
We also expect to see Sprint’s unlimited plans being as valuable to subscribers this year as they were earlier, if not more. While competitors AT&T and Verizon stopped offering unlimited plans to new subscribers last year and have recently moved on to tiered data share plans, Sprint has steadfastly remained committed to the same, even for LTE. Since the higher-speed 4G LTE network will cause subscribers to easily overshoot their tiered data plans, we see subscribers attaching more value to unlimited plans as LTE becomes mainstream. This should help Sprint rope in enough iPhone buyers going forward despite its near-term LTE disadvantage. (see Sprint Woos iPhone 5 Buyers With Unlimited Plans Despite LTE Disadvantage)