Sprint Earnings Preview: Subscriber Losses, Network Overhaul In Focus

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Sprint (NYSE:S) is scheduled to announce its Q1 fiscal 2015 earnings on Wednesday, July 30. The third largest wireless carrier in the U.S. is facing intense competition for new subscribers, with rival T-Mobile stepping up its “Uncarrier” promotions, AT&T (NYSE:T) responding aggressively with its Next plans and market leader Verizon(NYSE:VZ) banking on its superior network quality and “More Everything” offerings. Sprint has also been lagging rivals Verizon and AT&T in LTE coverage, which is proving key to retaining and adding new subscribers in a saturated market. In Q1, the carrier lost 231,000 net postpaid subscribers, compared to a net gain of 58,000 subscribers in the fourth quarter last year. [1]

For the second quarter, we expect Sprint’s postpaid subscriber losses to increase considering that both Verizon and AT&T posted postpaid user additions of more than a million each this quarter and T-Mobile is expected to gain subscribers as well. Sprint is likely to have lagged on the postpaid subscriber addition front because of network disruptions and unreliability issues faced by users on account of the carrier’s efforts to overhaul its existing CDMA network. Sprint is hopeful of a recovery in the latter half of the year, once the network upgrade is completed. However, growing smartphone penetration and LTE usage should continue to help Sprint increase its data ARPU (average revenue per user) levels going forward. Like Verizon and AT&T, we expect Sprint to continue to see its margins improve on decreasing subsidy costs, helped along by the cost savings that the carrier is realizing from the shutdown of its iDEN network and ongoing Network Vision initiatives.

Our price estimate for Sprint is about $8.50, which is about 10% ahead of the current market price.

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Rising Competition Weighing Subscriber Adds

With the wireless market becoming increasingly saturated, carriers have become aggressive with their pricing strategies in order to gain market share. T-Mobile started the trend with its Uncarrier initiatives, stealing market share from rivals in the process. AT&T’s aggressive response to T-Mobile, when it pushed its Next installment plans and discounted the service prices of its Mobile Share plans, further intensified the competition. Although reluctant to get into a price war initially, Verizon raised it up a notch with its recent More Everything and Edge plan offerings. The promotional activities and discount offerings seem to have worked well for AT&T and Verizon, with both of them reporting postpaid subscriber gains of 1.07 and 1.45 million, respectively, in the three month period ending June 30 this year.

The adverse impact of rising competition on Sprint can be gauged from the fact that it reported a net loss of 231,000 postpaid and 364,000 prepaid subscribers in the first quarter. This was the second worst quarterly performance by the carrier in the last two years. Within this figure, if one were to look at the more lucrative handset customers, Sprint’s net postpaid loss was even bigger. This was also reflected in the carrier’s overall retail churn rate in Q1, which increased by 3 basis points to 2.18% in the postpaid segment and by 113 basis points (1.13 percentage points) to 4.35% in the prepaid market. We expect Sprint to report a further increase in its churn rate this quarter owing to the record user gains registered by its rivals in the largely saturated U.S. wireless market. Verizon and AT&T reported retail postpaid churn rates of 0.94% and 0.86%, respectively, in the second quarter this year.

Watching For Network Vision Progress

In addition to rising competition, an important factor contributing to Sprint’s poor showing on the subscriber front has been the service disruptions caused by its Network Vision plans. The carrier is seeing higher than normal customer churn in regions where the build-out is less than 70% complete. Most of the Network Vision build-out was expected to reach completion by the end of June this year and Sprint is likely to provide an update in its earnings release on Wednesday.

Sprint’s LTE coverage – another important consideration for subscribers and a concern over the last couple of years – was expected to reach 250 million PoPs (points of presence) by the end of the second quarter and become less of a disadvantage compared to rivals. There is usually a lag associated with churn figures improving after network upgrades, as a result of which the subscriber recovery should be gradual. With Sprint’s Spark plans expected to pick up speed after the Network Vision rollout, we expect the carrier to become a lot more competitive towards the end of 2014 and beyond.

Sprint’s Spark strategy will help it make use of Clearwire’s 2.5GHz spectrum to add data capacity and potentially push 4G speeds to more than five times what is currently prevalent in the industry. However, the implementation of Spark will require significant capital expenses. Considering that the Network Vision rollout is expected to have been substantially completed by now, it will be interesting to see whether Sprint maintains its fiscal 2015 CapEx estimate at last year’s elevated level of $8 billion.

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Notes:
  1. Press Release, Sprint, April 2014 []