The past week has seen quite a few developments in the telecom sector. Sprint’s (NYSE:S) stock has risen more than 20% since the company’s earnings call last week as expectations of a iPhone-led turnaround grew stronger following another strong quarter of postpaid net adds (excluding iDen losses) and growing ARPU. AT&T (NYSE:T) moved to secure more spectrum from smaller sources, having learnt from its botched attempt to acquire T-Mobile last year. Verizon (NYSE:VZ), meanwhile, looks likely to receive regulatory approval for its spectrum purchase from the cable companies but questions around their cross-marketing deals still remain.
Sprint announced a mixed set of Q1 results in its earnings report July 25th. The company said that its revenues grew more than 6% over the same period last year and that it added a net 442,000 postpaid subscribers to its core Sprint platform (excluding Nextel losses) banking on another quarter of healthy iPhone sales. However, that did not stop its net losses from mounting as it accelerated the depreciation of its outdated Nextel network and wrote down the value of its Clearwire investment. Net losses for the quarter came in at $1.4 billion, up from $847 million incurred a year ago.
What was however noteworthy was that despite the iPhone subsidies and the heavy capital expenses Sprint is incurring on the execution of its Network Vision strategy, it was able to generate $209 million of free cash flow during the quarter. Sprint’s OIBDA margins, adjusted for non-cash items such as D&A and iDEN lease exit costs, improved by 277 basis points sequentially and 69 basis points over the same period last year. The company also increased its guidance for the full year adjusted OIBDA “to a range of $4.5 billion to $4.6 billion”. (see Sprint’s Earnings Show Strong iPhone-Led Turnaround But Risks Remain)
Improving visibility of the benefits of the iPhone as well the Network Vision plan helped move the stock up by over 2o% post the earnings call. However, we believe that risks surrounding its high debt levels and burgeoning capital expenses still exist, which could have an adverse impact on cash flows in the coming quarters. Also, the carrier may not be able to sustain its strong Sprint platform net adds in the future as the primary source of the same, the iDEN subscriber losses it is sustaining, dries up by mid-2013 and the reality of a highly saturated wireless market starts catching up with the company. (see Sprint’s Stock Surge Capped At $4 With Growth Risks Ahead)
Having learned a lesson from the T-Mobile debacle last year, AT&T is targeting smaller acquisitions to meet its spectrum needs. The second largest U.S. wireless carrier announced recently that it has decided to acquire Nextwave Wireless, a small company that owns two bands of spectrum – one in AWS band and the other in WCS band. The total cost of the deal, which includes assumption of debt as well as $50 million in cash payments for the stake, is $600 million. In addition to Nextwave, the carrier has agreed to purchase WCS spectrum licenses from Comcast (NASDAQ:CMCSA) and Miami-based Horizon Wi-Com as well.
AT&T needs additional spectrum to augment 3G capacity as well as to build out a nationwide LTE network in order to catch up with Verizon, which is currently well ahead in the LTE race. In such a scenario, stitching together multiple spectrum deals can provide near-term solutions for AT&T, especially after the FCC has made it clear that any big-scale consolidation will be met with stiff opposition. Nextwave or Comcast or Horizon’s spectrum holdings alone may not be big enough to satiate all of AT&T’s needs but it would definitely make it easier for AT&T to overcome regulatory hurdles. Having a wider net of deals will help it get at least a few of them approved, if the FCC sees AT&T exerting too much control with all of them together.
Verizon, for its part, looks set to receive regulatory approval for its spectrum purchase from the cable companies after the recent spectrum swap deal with T-Mobile.  The carrier has also put some of its unused 700Mhz spectrum for sale, for which AT&T as well as other carriers may make a bid. Overall, the consolidation looks like a good thing to happen since it will help meet the subscribers’ soaring data demands and enable a nation-wide layout of next-generation efficient networks such as LTE by multiple carriers.Notes: