Sprint (NYSE:S) plans to announce its Q3 2012 earnings on October 25th. 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 few quarters at Sprint have been good with the smartphone helping 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, especially with the recent Softbank deal, has caused its stock price to shoot up by more than 140% this year. (see Softbank Can Lift Sprint’s Fundamentals With $20 Billion Investment) 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 7% ahead of our $5.30 price estimate.
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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 (including capitalized operating leases) compared to a market capitalization of only around $8 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 three strong quarters of postpaid net adds on its core Sprint network. Last quarter, Sprint added a net 442,000 subscribers to the Sprint platform, almost twice as many as it did in the prior year quarter and 70% higher sequentially. While this figure was boosted by the number of iDEN subscribers Sprint was able to migrate to its core CDMA network, it also came in a highly saturated market that has caused behemoths Verizon and AT&T to add fewer postpaid subscribers this year.
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 40% of total iPhone sales, as of Q2 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 previous 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, in fact, have picked up pace after the company announced recently 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 expect an update on Sprint’s LTE plans. Verizon’s LTE network covers more than 250 million Americans currently and AT&T’s about 80 million. Verizon plans to cover another 10 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 19 cities in the U.S. While that is a small number compared to Verizon’s 419 and AT&T’s 77, we expect Sprint’s accelerated LTE deployment schedule to help it catch up with the two by 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 16.5% of its postpaid subscriber base to LTE so far. We expect LTE adoption to pick up with the recent launch of the iPhone 5, 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)