Sprint (NYSE:S) is expected to announce its Q3 earnings on October 30th. This is the first time in almost eight years that Sprint will report results without its legacy iDEN network, which it shut down at the end of Q2. Given that subscribers transitioning from the iDEN network have contributed significantly to Sprint’s core CDMA subscriber growth in recent quarters, it will be interesting to see how the carrier has performed in its absence. Increasing smartphone penetration and adoption of 4G LTE should, however, help the company offset any impact from the potential subscriber losses with sustained growth in ARPU levels. Sprint has been relatively slow at laying out its LTE network so far, with even T-Mobile racing ahead despite starting its LTE build-out much later. Investors will be keen to know if Sprint is looking to accelerate the build-out in the coming quarters, and if increasing competition from T-Mobile has started to meaningfully hurt Sprint’s iPhone sales.
This quarter’s results will also give a first peek into Sprint’s financial position following the cash infusion it received from Softbank – most of which is likely to have been used up in acquiring Clearwire early in the quarter. Consolidating Clearwire’s assets on its balance sheet will bolster Sprint’s spectrum position in the industry, but also see its margins take a hit. This impact could be offset by the closing of the iDEN network, which will help the carrier realize huge fixed cost savings from not having to run two disparate networks at the same time. We will be looking for management comments on the progress of the carrier’s Network Vision Plan, which should receive a boost from the addition of Clearwire’s spectrum in the coming years. Our $6.40 price estimate for Sprint is about in line with the current market price.
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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. While Sprint has so far managed to dodge the bullet by banking on an accelerated iDEN shutdown to add new postpaid subscribers to its core CDMA platform, the going could get a lot tougher in the coming quarters. So far this year, Sprint has added just over 200,000 postpaid CDMA subscribers despite recapturing almost three times as many from the iDEN network. To be 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 lags the wireless leaders, Verizon and AT&T, and is now behind T-Mobile’s as well, could hamper its wireless growth in the coming quarters (see Sprint Faces Subscriber Growth Concerns After iDEN Shutdown). While Sprint plans to cover 200 million PoPs with its LTE network by the end of the year, T-Mobile has already achieved the target about a quarter ahead of schedule.
Because of this, the iPhone is taking on increased importance for the company. 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 1.4 million in Q2 were down 7% y-o-y, almost 41% of these sales went to new Sprint customers. The introduction of the iPhone at T-Mobile may have been responsible for the y-o-y iPhone sales decline, but Sprint assuaged concerns by saying that it was well ahead of its volume commitment targets. However, we will continue to keep a close watch on this figure to see if T-Mobile is hurting Sprint further. The growing number of iPhone postpaid subscribers should continue to drive ARPU levels higher in the coming quarters, but at slower rates than last year.
High CapEx justified in the long run
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. As a result, Sprint’s wireless capital expenditures increased by about 70% y-o-y to over $1.7 billion last quarter. However, while Network Vision is proving to be expensive, a successful implementation of the strategy will reduce 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 is gradually re-farmed for CDMA/LTE. (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 should also see its data ARPU levels rise in concert. Sprint’s unlimited LTE plans, which it has recently started promoting with a lifetime guarantee, 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 likely lead subscribers to more easily overshoot their monthly quota for tiered plans (see Sprint Promotes Unlimited Plans As Verizon, AT&T Move To Shared-Data Plans). However, the carrier’s smartphone penetration in postpaid is already the highest among the major carriers at almost 80%, limiting the upside to its high postpaid ARPU of $64 if it doesn’t eventually make the transition to tiered data plans.