Sprint Earnings Preview: Tightrope Walk Will Continue

Sprint (NYSE:S), the fourth largest U.S. wireless carrier, is slated to publish its fiscal second quarter earnings on Tuesday, November 3. The carrier has been walking a tight rope, as it burns through cash in order to stem customer attrition and improve network quality, while contending with shrinking revenues and a sizable debt load. However, we expect to see some stability on the subscriber front this quarter, as the carrier is likely to post positive postpaid net additions, ending several continuous quarters of subscriber losses. That said, revenue and cash flow metrics will remain under pressure, on account of new promotional offers and high capital expenditures. Here’s a quick review of what to expect when the carrier publishes its results on Tuesday.

We have a $5 price estimate for Sprint, which is roughly in line with the current market price.

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Expect Positive Postpaid Subscriber Additions, Lower ARPU

The first and most important step of Sprint’s turnaround plan is to stop subscriber losses, and carrier has been executing quite well in this regard, banking on competitive plans and promotional offers and gradual improvements to network quality. During FY’Q1, Sprint platform postpaid subscriber losses narrowed to 12,000 from about 620,000 during the same period in 2014. It’s likely that the metric will turn positive for Q2, as the company noted that it posted postpaid phone net additions for four months straight through August, marking the first time the carrier had done that in over three years. ((Sprint’s Claure: We’ve added postpaid phone customers for 4 months straight – first time in 40 months, FierceWireless, September 2015)) On the network front, the carrier has held or shared first place for 166 RootMetrics awards for network reliability, speed, data, and call or text performance so far in the first half of 2015 in 115 markets, and this should ensure better customer retention. Sprint has also came out with some innovative customer acquisition exercises during the quarter. For instance, in August, the carrier said that it would offer a full year of free wireless service to DirecTV customers who open a new line on its network. Sprint could also see an upside from the launch of the new iPhone, as it was perceived to have some of the most attractive leasing offers for the new devices.

Churn numbers may also witness a year-over-year improvement, driven by the carrier’s improving credit quality standards and network quality. During the previous quarter, Sprint noted that it grew the number of customers with prime credit by 47% among its gross handset additions. Although Sprint’s aggressive promotional pricing plans likely helped its subscriber metrics, they’re likely to have impacted ARPU and revenue numbers. During fiscal Q1, Sprint’s average billings per postpaid user fell by 3% y-o-y to $61.67. While this is a situation that Sprint cannot really afford to continue with given its limited liquidity and massive debt load, the carrier has no choice, since customer acquisitions represent the only sure way to remain competitive in the saturated U.S. wireless market. The carrier will have to eventually switch gears from merely stabilizing its customer base to focusing on improving revenues from existing customers as it bolsters network quality.

The Cash Flow Conundrum

Sprint burned through more than $2 billion in cash during FY’Q1, as operating cash flows were pressured by promotional offers, while network-related capital expenditures rose to over $1.8 billion. The high cash burn rate is concerning, given Sprint’s massive leverage (over $30 billion). While the magnitude of Sprint’s debt maturities thus far has been modest (it had $1.29 billion due in FY’2015, as of Q1), the company faces a sustained multi-year onslaught of large maturities (average $3 billion/year) that it will need to address beginning from FY2016. ^[1] Sprint will need to substantially improve cash flows from current levels or it could run the risk of having difficulty refinancing debt. That said, there have been a few encouraging trends that could reassure investors.

While Sprint has been spending fairly liberally on the customer acquisition front, it is being more circumspect with regard to its network improvement expenditures. The carrier has elected to sit out of the potentially costly 600 MHz spectrum auction due next year, taking a slightly more unproven route to expand and densify its network. For instance, Sprint intends to upgrade its existing macro cell sites to support 800 MHz, 1900 MHz and 2.5 GHz for LTE, while also deploying thousands of new macro sites and tens of thousands of small cells, in a move that should help to improve capacity as well as coverage. While the carrier has provided very few details on the economics and technical specifications of the build-out, it has noted that it would be “surgical and efficient” in deploying new sites, utilizing analytical tools to ensure that it is deploying them in the most effective locations. We will be interested in hearing updates on this front when the carrier announces its earnings.

Sprint has also been aggressive with its operating expense reduction, carrying out headcount reductions which eliminated about 2000 jobs (6.5% reduction of its total workforce). The company is also ramping up its distribution footprint in a cost-efficient manner, opening over 1,435 co-branded Sprint-RadioShack stores across the U.S. It is also rolling out its “Direct 2 You” initiative, where a Sprint employee delivers and sets up a mobile device at a customer location. The Wall Street Journal has reported that Sprint is preparing to cut as much as $2.5 billion in costs in the next six months, while indicating that another round of job cuts may be coming. ^[2] We will be watching for specific updates on this plan and where the cost savings are going to come from.

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1. Sprint Investor Briefing Q1 2015 [↩]
2. Sprint to Cut Jobs, Up to $2.5 Billion in Costs, WSJ, October 2015 [↩]