Sprint Beats Estimates On Improved Subscriber Adds

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Sprint (NYSE:S) announced an improved set of fiscal third quarter results on Thursday, February 5, with positive postpaid subscriber adds in the three month period ending December 2014. Sprint announced that its postpaid net additions were 30,000 in Q3 FY15 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. Driven by the improvement in subscriber adds, Sprint’s revenue reported a less-than expected decline of about 2% to $8.97 billion, easily beating analysts’ consensus expectations of $8.68 billion compiled by Thomson Reuters.

The carrier continues to face 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 and quality, which is proving key to retaining and adding new subscribers in a saturated market. However, most of the company’s network upgrade has now been completed and its 4G LTE network now covers about 270 million people across the country. Its Spark upgrade program is also underway and currently covers 125 million people, against a target of covering 100 million people by the end of 2014. We expect this to help the carrier reduce its high churn levels and improve net monthly additions going forward. ((Press Release, Sprint, Feb 5 2015)) ((Presentation, Sprint, Feb 5 2015))

The company stated in its earnings call that the turnaround strategy adopted by new CEO Marcelo Claure was still in its initial stages but bearing fruit. This was reflected in its performance last quarter, when postpaid phone losses declined from 1.8 million in the first three quarters of the calender year to 205,000 in the fiscal third quarter. The LTE build-out, coupled with the iDEN shutdown, helped the carrier improve network efficiency, which together with company-wide cost reductions and lower subsidy costs helped offset pressure from strong sales. Sprint’s Wireless adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was flat y-o-y in the quarter.

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

See our complete analysis for Sprint

Subscriber Growth And Network Quality

Since Sprint’s new CEO Marcelo Claure took over in August, 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, AT&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. The carrier stated in its latest earnings call that it had significantly improved its network quality over the course of last year, pointing to Rootmetric’s soon-to-be-released second half-2014 carrier report. It claimed that its rank has improved in almost every area in Rootmetric’s latest report compared to the first half of 2014.

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 likely 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.

Network Coverage

Sprint’s LTE coverage – another important consideration for subscribers and a concern over the last few years – reached 270 million PoPs (points of presence) in December 2014 and is ahead of rival T-Mobile, which reached 250 PoPs around the same time. 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 in the near to medium term.

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. T-Mobile recently announced its ambitious target of increasing its LTE coverage to 300 million people in the country by the end of 2015 compared to its current coverage of about 264 million. For perspective, market leader Verizon’s LTE network presently covers about 303 million people in the U.S. Sprint stated that it would provide guidance for fiscal year 2015 on the next earnings call.

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