Sprint Earnings Preview: How Are Subscriber Net Adds Trending?

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Sprint (NYSE:S), the third largest U.S. wireless carrier, is scheduled to report its Q1 FY’15 earnings on August 4 [1] In recent quarters,Sprint’s primary focus has been to stem attrition and to grow its subscriber base as quickly as possible, while continuing its investments in improving its network quality. While this strategy has come at a cost, with revenues and margins remaining under pressure, the company has no other options, since customer growth and network improvements are perhaps the only sure way to remain competitive in the long-term. This is certainly going to be a tightrope walk for Sprint, and the markets have been apprehensive about the firm’s fortunes, with the stock declining by roughly 25% this month over concerns about the company’s financial viability and high leverage. However, Sprint’s largest shareholder, SoftBank, has indicated that it remains committed to turning the company around. For this quarter, we will be watching the company’s progress in bolstering its net postpaid subscriber additions while restricting churn numbers. We will also be looking for updates on the firm’s network upgrades.

We have a $5.70 price estimate for Sprint, which is significantly ahead of the current market price. We will be revisiting our estimates following the earnings release.

See our complete analysis for  AT&TVerizonSprint

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Postpaid Net Adds And Churn Numbers 

Since Sprint’s new CEO Marcelo Claure took charge in August 2014, the carrier has launched a number of innovative offerings to attract subscribers, 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 the competition. These plans have helped the company stem its postpaid subscriber losses and led to overall subscriber growth. For fiscal Q4, Sprint announced that its postpaid net additions continued to improve for the second straight quarter, coming in at 211,000 subscribers compared to net losses of 231,000 in the prior year quarter. ((Sprint Q4 2014 Earnings Press Release)) The carrier reported overall net additions of 1.2 million subscribers in the quarter compared to a net loss of 383,000 in the prior year quarter. The crucial postpaid churn number also improved to 1.84% from 2.30% last quarter, banking on the carrier’s extremely competitive pricing options and a gradual improvement in network quality. 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 as of March. However, Sprint is likely to have faced intense competition for new subscribers. T-Mobile has stepped up its “Uncarrier” promotions and noted that it had added a net 2.1 million new customers in the second quarter, taking its total subscriber base to 58.9 million customers as of Q2 CY’15. There is a possibility that Sprint could fall behind T-Mobile in terms of market share.

However, the solid growth in subscriber adds could not drive Sprint’s top line in Q4, since the recent promotions have come with a cost – including upfront switching and subsidy costs, as well as reduced ARPU due to lower rates and unlimited data plans. Overall revenue declined by about 7% year-over-year (y-o-y) to $8.3 billion as users shifted to discounted service plans. Sprint’s Wireless adjusted EBITDA also declined by 5% y-o-y to $1.74 billion.

Updates On Network Upgrades And Quality

Sprint’s LTE coverage, which is an important consideration for subscribers, reached nearly 280 million people as of the end of March, as the company continued to build out 4G LTE on its 800 MHz and 2.5 GHz spectrum. In comparison, AT&T (NASDAQ:T) and Verizon (NYSE:VZ) had roughly 308 million LTE points of presence covered, while T-Mobile was at roughly 280 million (although it plans to beef up to 300 million POPs by the end of 2015). Sprint is also shifting its focus from just coverage towards improving the speed and quality of its LTE network as it doubles down on its Spark program. 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. The Spark upgrade program covered roughly 125 million people as of February. ((Press Release, Sprint, Feb 5 2015)) Sprint’s CEO believes the company’s network performance will match or exceed rivals within two years. Sprint has indicated that it could increase prices on unlimited data plans later this year, while potentially eliminating these plans altogether in the future, as it looks to shore up its ARPU. We believe that network improvements will be crucial first step towards implementing this strategy. (related: Sprint Mulls The End Of Unlimited Data; How Could It Impact The Stock?)

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Notes:
  1. Sprint Press Release []