Sprint Manages To Stay Ahead Of T-Mobile With Postpaid Subscriber Growth Surprise

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There is finally some good news for Sprint (NYSE:S) investors, with the carrier announcing positive postpaid subscriber adds in the fiscal third quarter. As part of the preliminary data released recently, Sprint announced that its postpaid net additions returned to positive territory (30,000) after three quarters of consistent declines. With prepaid net additions of 410,000 and wholesale net additions of 527,000, Sprint reported overall net additions of 967,000 subscribers in the quarter ending December 2014. The carrier is expected to report its full Q3 results on February 2nd. ((Sprint Press Release, Jan 8 2015))

In the quarter ending October 2014, Sprint lost 272,000 net postpaid subscribers, compared to a loss of 181,000 postpaid subscribers in the previous quarter, though it was better than its loss of 360,000 posted in the same period last year. The 272,000 figure included tablet net adds of 261,000, which means that Sprint’s loss of the more lucrative handset subscribers was even worse. With overall subscribers totaling 55 million at the end of September 2014, Sprint was very close to being overtaken by T-Mobile (NYSE:TMUS) as the third largest carrier in the U.S. However, the latest preliminary subscriber data from both companies suggests that Sprint is still the third largest wireless player in the country, although T-Mobile has significantly narrowed the gap. Total subscriber count for Sprint and T-Mobile currently stands at 56 million and 55 million, respectively. To keep things in perspective, market leaders AT&T and Verizon had 118.7 million and 106 million subscribers at the end of September 2014, respectively.

Our price estimate for Sprint is about $6.50, which is significantly ahead of the current market price.

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See our complete analysis for Sprint

What Matters Most: Subscriber Growth, Margins, ARPU?

Since Sprint’s new CEO Marcelo Claure took over in August last year, the company has launched a number of innovative offerings to attract customers including the “Cut your bill in half” event, “Double the Data” and “iPhone for Life”. Sprint’s marketing efforts so far have focused on the fact that it is significantly cheaper than its competition, namely Verizon (NYSE:VZ), AT&T (NYSE:T) and T-Mobile. Whether users will enjoy comparable quality of network and service across the country is another question, with the carrier and subscribers having contrasting opinions. Nonetheless, the important question from an investor’s perspective is this – how can a company with $26 billion in net debt, negative free cash flows and negative operating margins afford to engage in aggressive price wars?

The fact is that the carrier is burning cash to improve its market share, and gaining postpaid subscribers is perhaps the only sure way to remain competitive. The company is willing to compromise on margins and average revenue per user (ARPU) in the process, because these won’t matter if subscribers continue to leave. The more important question is – how long can it sustain such aggressive pricing? The company’s balance sheet and cash flow situation does not present a positive picture, and it will definitely need to raise capital to fund its turnaround plans. Therefore, the company does not have a lot of time to turn around its ailing fortunes. The company needs rapid gains in postpaid user adds and an overhaul in customer perception of its network. If subscribers regain trust in its network, it will be a lot easier for them to seriously consider its innovative offers. So, in the near term, the company can continue with its aggressive price cuts to gain subscribers, but it will need to bank on network quality and strong ARPU for sustainable growth going forward.

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