Sprint Earnings Preview: Subscriber Additions, Spark Strategy In Focus

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Sprint (NYSE:S) is scheduled to announce its Q2 fiscal 2015 earnings on Monday, November 3. 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, market leader Verizon (NYSE:VZ) banking on its superior network quality and “More Everything” offerings and AT&T (NYSE:T) responding aggressively with its Next plans. Sprint has also been lagging rivals Verizon and AT&T in LTE coverage and network quality, which is proving key to retaining and adding new subscribers in a saturated market. The carrier lost 334,000 wireless subscribers in the previous quarter and has seen net losses of wireless subscribers for seven of the last eight quarters. Looking for a turnaround, the carrier appointed Marcelo Claure, founder/CEO of wireless distribution company Brightstar, as the new CEO in August this year. ((Press Release, Sprint, July 30 2014))

The new CEO was quick to devise a turnaround strategy and introduced a new set of shared data plans called Family Share Pack, providing customers more data per connection at lower costs than rivals. Sprint’s aggressive marketing and discounts were aimed at regaining its lost momentum in adding new subscribers, and it seems that its efforts are going to pay off, at least in some measure. According to Consumer Intelligence Research Partners, Sprint was ahead of T-Mobile in adding new subscribers in the July-September period, with the former accounting for 43% of all new customers additions, compared to T-Mobile’s 39%. Verizon and AT&T trailed the smaller carriers with 26% and 17% shares in new customer additions, respectively (these percentages combined exceed 100% because new customers include both first-time phone buyers and those joining from other service providers). Considering that T-Mobile added 2.3 million new customers in this three month period, we expect Sprint to report similar figures in its upcoming earnings report. [1] [2]

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

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Watching For Update On Clearwire’s 2.5 GHz Spectrum

In addition to rising competition, an important factor contributing to Sprint’s poor showing on the subscriber front in the last two years has been the service disruptions caused by its Network Vision plans. The carrier witnessed higher than normal customer churn in regions where the build-out was less than 70% complete. However, most of the Network Vision build-out is now complete and should be less of a limiting factor going forward.

Sprint’s LTE coverage – another important consideration for subscribers and a concern over the last couple of years – reached 254 million PoPs (points of presence) last month and is now slightly ahead of rival T-Mobile, which is expected to reach 250 PoPs by the end of the year. There is usually a lag associated with churn figures improving after network upgrades, and as a result the subscriber recovery should be gradual. Now that the Network Vision upgrade is complete, we expect Sprint’s Spark plans to pick up speed and help the carrier become 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. It will be interesting to see what Sprint sets as its coverage expansion target (markets or PoPs) for the 2.5 GHz spectrum for fiscal year 2015.

ARPU Likely To Remain Under Pressure

The network modernization plan is helping Sprint to reduce its operating expenses substantially by eliminating the duplicate fixed costs of maintaining different networks. It is allowing for better 3G/4G coverage and reducing roaming costs, as the spectrum previously used for iDEN is increasingly utilized for the CDMA/LTE network. Rolling out an LTE network is helping Sprint improve its service margins as well, since it is a much more efficient network to manage than the existing 3G networks. In the fiscal first quarter, Sprint’s adjusted wireless EBITDA margins increased by 770 basis points (7.7 percentage points) y-o-y to 25.3%.

Wireless margins were also helped by the increasing adoption of Sprint’s “Framily” plans (now transformed to Family Share Packs), which drove device sales through its Easy Pay installment plans. This is because the carrier was able to recognize a greater portion of the device’s upfront cost as revenues when subscribers financed their devices through installment plans. The accounting change helped the carrier realize significant margin gains, as Easy Pay accounted for 28% of all device sales during the quarter.

However, increasing penetration of the Family Share Packs will pressure ARPU levels, since the separation of the wireless and device bill has led to lower service plan prices for subscribers. In the last quarter, the carrier’s postpaid ARPU declined by $2.13 or over 3% y-o-y to $62.07, driven by the gradual user migration to “Framily” plans and a higher mix of tablets in the device base. Considering that this trend is likely to continue in the near term, Sprint’s higher margins are likely to come at the expense of its ARPU.

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Notes:
  1. Are Sprint’s tactics working? Sprint led T-Mobile in Q3 subscriber growth, report says, Geekwire.com, Oct 20 2014 []
  2. T-Mobile Q3 show continued subscriber growth, may catch Sprint in Q4, ZDnet.com, Oct 28 2014 []