Sprint Earnings: Solid Subscriber Adds, Promotions Hurt Revenues

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Sprint (NYSE:S) announced a mixed set of fiscal fourth quarter results Tuesday, with positive postpaid subscriber adds in the three month period ending March 2015. Sprint announced that its postpaid net additions continued to improve for the second straight quarter and increased by 211,000 in Q4 FY14, compared to 30,000 additions in Q3 FY14. With industry leading prepaid net additions of 546,000 and wholesale net additions of 492,000, Sprint reported overall net additions of 1.2 million subscribers in the quarter compared to a net addition of 967,000 in the previous quarter and a net loss of 383,000 in the prior year quarter. This helped the carrier retain its third position in the U.S. wireless subscriber market with 57.1 million subscribers, slightly ahead of T-Mobile’s 56.8 million. However, solid growth in subscriber adds could not drive Sprint’s top line as its overall revenue declined by about 7% year-over-year (y-o-y) to $8.3 billion as users shifted to discounted service plans.

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 280 million people across the country. Its Spark upgrade program is also underway and should help the carrier improve its network speed and capacity going forward. It currently covers over 125 million people. The gradual improvement in network quality and its extremely competitive pricing options helped the carrier reduce its high churn levels from the previous quarter, from 2.3% to 1.84% in Q4FY14. ((Presentation, Sprint, May 5 2015))

The company stated in its earnings call that the turnaround strategy adopted by new CEO Marcelo Claure was starting to bear fruit. This was reflected in its performance last quarter, when postpaid phone losses declined from 205,000 in the fiscal third quarter to 201,000 in the fiscal fourth 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) declined by 5% y-o-y to $1.74 billion but its Wireless EBITDA margin improved by 30 basis points y-o-y to 25.6% in the quarter. In terms of income, the carrier reported a net loss of $224 million, or 6 cents per share compared to a loss of 4 cents per share in the prior year quarter.

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Our price estimate for Sprint is about $6.20, which is more than 20% 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 Rootmetrics’ second half-2014 carrier report. In the report, its rank improved in almost every area compared to the first half of 2014 (see Verizon Best In Wireless Network Quality, Sprint Leads In Improvement).

Sprint’s cash flow situation slightly improved y-o-y in the quarter as it reported negative $914 million in free cash flow, compared to negative $1.1 billion in the prior year quarter. 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 do not present a positive picture, and it will likely need to raise capital to fund its turnaround plans. Sprint’s CEO Marcelo Claure said that if additional capital was required in the near term, they could consider raising it through three possible options- its spectrum assets, the bond market and the equity market.

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 And Capital Expenditures

Sprint’s LTE coverage – another important consideration for subscribers and a concern over the last few years – reached 280 million people in March 2015 and is slightly ahead of rival T-Mobile, which reached 275 million in the same period. 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. Sprint made capital expenditures of over $2 billion in the last quarter, reporting an increase of 38% y-o-y and over 30% sequentially. For fiscal year 2015 (ending March 2016), the carrier expects capital expenditures to be around $5 billion, compared to $6 billion incurred in fiscal 2014 and over $7 billion in fiscal 2013.

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