Sprint Earnings Preview: Postpaid Subscriber Adds, Network Coverage In Focus

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Sprint (NYSE:S) is scheduled to announce its Q4 fiscal 2014 earnings on Tuesday, May 5. 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 announced improved results last quarter, with positive postpaid subscriber adds in the three month period ending December 2014. Sprint announced that its postpaid net additions were 30,000 in fiscal Q3 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.

When Sprint comes out with its fiscal fourth quarter results Tuesday, we expect the carrier to report positive postpaid net additions similar to the previous quarter. However, it is likely that its total user adds might not be enough to retain its third position in the U.S. wireless subscriber market. T-Mobile reported strong first quarter numbers last week, recording its eighth consecutive quarter of 1 million plus user adds. With a total of 56.8 million wireless subscribers by the end of March 2015, T-Mobile has raced ahead of Sprint’s reported user base of 55.9 million (December 2014). However, even if Sprint falls behind T-Mobile in total subscriber count, it is likely to retain its third position in terms of total postpaid subscribers. It had 29.9 million postpaid subscribers by the end of December 2014 compared to T-Mobile’s 28.3 million by the end of March 2015.

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Our price estimate for Sprint is about $6.20, which is significantly ahead of the current market price.

See our complete analysis for Sprint

Subscriber Adds In Focus

Sprint has been looking to improve its subscriber adds dramatically since Marcelo Claure took over as CEO in August last year, considering that it is perhaps the only sure way to remain competitive. The carrier is burning cash to improve its market share and its balance sheet and cash flow situation suggest that it may not be able to sustain such aggressive pricing for long. 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. In the latest Rootmetrics report, Sprint reported a significant improvement in the quality of its network and leaped ahead of T-Mobile to take third place overall (see Verizon Best In Wireless Network Quality, Sprint Leads In Improvement).

Network Coverage

Sprint’s LTE coverage – an 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. Its Spark upgrade program 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))

Sprint’s Spark strategy will help it make use of Clearwire’s 2.5 GHz 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 is likely to provide guidance for fiscal year 2015 in the upcoming earnings call.

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