Sprint (NYSE:S) is expected to announce its Q2 2013 earnings on July 30. This quarter’s results will give a first peek into Sprint’s financial position post the cash infusion it received from Softbank – most of which must have been used up in acquiring Clearwire. However, both these developments are likely to have had little impact on Sprint’s operating performance given that the transactions were completed after the end of Q2 in July.
During the earnings call, we will be closely watching the carrier’s net postpaid subscriber additions, which would have felt the impact of the accelerated iDEN shutdown for the last time. The outdated push-to- talk iDEN service, which has been bleeding subscribers for years, was finally shut down towards the end of Q2 to make way for 4G LTE. Sprint’s recapture rate of iDEN subscribers will decide if its core CDMA platform did well in quarter that saw AT&T (NYSE:T) spend heavily on marketing and subsidies to gain subscribers in a saturated market. We will also watch for comments on the progress made by the carrier on the LTE deployment front where it is lagging rivals Verizon (NYSE:VZ) and AT&T by a wide margin.
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iDEN impact will be offset to an extent by the iPhone
The U.S. wireless market is getting increasingly saturated with the number of wireless connections having exceeded the population in mid-2011. This was reflected in Sprint’s dismal postpaid CDMA net adds of 12,000 last quarter, which came about despite being able to recapture about 50% of the exiting iDEN subscriber base. Without the iDEN network, which has seen a steady supply of subscribers for its core CDMA platform, Sprint may struggle to find new subscribers going forward. To be completely fair, even Verizon and AT&T are likely to have benefited from the iDEN migration in the past several quarters; so the issue won’t be Sprint’s alone. However, the fact that Sprint’s LTE coverage far lags the wireless leaders Verizon and AT&T could hamper its wireless growth in the coming quarters.
It is in this light that the importance of the iPhone comes to light. The carrier seems to have done a fine job with the iPhone, using it effectively to bring aboard high quality postpaid subscribers from rival platforms. Although iPhone sales of 1.5 million last quarter was flat y-o-y, almost 43% of these sales went to new Sprint customers. The increasing number of iPhone postpaid subscribers also helped push Sprint’s overall postpaid ARPUs up by about 2% y-o-y to about $64. Driven by increasing smartphone penetration, we expect Sprint’s postpaid ARPUs to continue to grow in the coming quarters, but at slower rates than last year.
High CapEx justified in the long run
What could also help Sprint’s ARPU rates going forward is a growing demand for data as people increasingly use mobile devices and access the web at 4G LTE speeds. In order to support the surging data demand and to position itself competitively against rivals, Sprint is aggressively investing in network upgrades and LTE deployment as part of its Network Vision initiative. The acquisition of Clearwire has also given it enough spectrum to put its aggressive plans to action and build a robust nationwide LTE network that would help it compete more effectively with Verizon and A&T.
However, Network Vision is proving to be very expensive. Last quarter, Sprint’s capital expenditures increased more than 75% over the same period last year to about $1.4 billion, and the high rate of spending is likely to sustain in Q2 and the coming quarters as well. However, a successful implementation of Sprint’s strategy will help it reduce operating expenses substantially by eliminating 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/WiMax would be utilized for a modernized CDMA/LTE network. (see Sprint To Build LTE Over iDEN’s Grave) Rolling out an LTE network will help it improve its service gross margins as well, since it is a much more efficient network to manage than the existing 3G networks.
As LTE adoption rates rise and the iPhone brings in highly lucrative postpaid subscribers, Sprint will also see its data ARPU levels rise in concert. Sprint’s unlimited LTE plans, which it is aggressively promoting by offering lifetime guarantee on them, 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)