What Will 2016 Have In Store For Sprint?

Sprint (NYSE:S) has been walking a tightrope over the last few years. The company has been burning through cash as it looks to bolster its subscriber base and improve network quality, while contending with shrinking revenues and a considerable debt load. In mid-2015, Sprint was overtaken by T-Mobile in terms of total subscribers, relegating it to the fourth spot in the U.S. wireless market. So what will 2016 look like for Sprint? In this note, we take a look at what to expect from the carrier in terms of key subscriber metrics, its ambitious network overhaul strategy and its cost cutting plans.

We have a $5 price estimate for Sprint, which is about 35% ahead of the current market price.

See our complete analysis for  AT&T | Verizon | Sprint

How Will Key Subscriber Metrics Trend? 

The most important part of Sprint’s turnaround plan is stopping subscriber losses, and the carrier performed fairly well in that regard through the first nine months of 2015. This was largely driven by its aggressive promotional offers – which included offering new customers half-off their bills from their existing carriers and leasing the latest iPhone for as little as $1 a month – as well as its gradually improving network quality. During fiscal Q2, the carrier’s lucrative postpaid phone net additions came in at 237,000, compared to a loss of 500,000 for the prior year period, taking its Sprint platform postpaid net adds into positive territory for the first nine months of the year. We expect Sprint to continue its promotional activities going into 2016, as driving postpaid subscriber growth is the only sure way to remain competitive and drive revenue growth in a saturating U.S. wireless market.

On a related note, Sprint’s churn figures should also continue to improve, driven by better credit quality of recently acquired customers and network improvements. During its most recent quarter (fiscal Q2), Sprint posted its best-ever Sprint platform postpaid churn of 1.54%, marking a 64 basis point year-over-year improvement. However, Sprint’s ARPU could remain a mixed bag going into 2016. The carrier’s postpaid average billings per user increased by 2% year-over-year to $70.64 during Q2, on account of the increasing shift towards equipment installment plans and the associated higher installment billings and lease revenues. However, there is a possibility that the recent promotional offers could put some pressure on service revenue growth in 2016. Even so, Sprint’s gradual network improvements should help the carrier improve pricing power and ARPU over the long run (related: Sprint’s 50% Off Plans Look Aggressive, But Might Be Necessary).

Can Sprint Pull Off Its Ambitious Network Improvement Plans? 

Network quality remains the biggest differentiating factor in the wireless business, as having a stronger network allows a carrier to bolster its brand image and charge premium pricing. Sprint has set a target of matching or exceeding rivals Verizon and AT&T in terms of network performance within the next two years. However, while Sprint has been spending fairly liberally on the customer acquisition front, it is being more circumspect with regard to network improvement expenditures. The carrier elected to sit out of the potentially expensive 600 MHz spectrum auction due this year, taking a more unproven route to densifying and expanding its network (see Is Sprint Making A Mistake Bowing Out Of The 600 MHz Spectrum Auction?). 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 little color on the economics and technical specs of the planned build-out, it has noted that it would be “surgical and efficient” in deploying new sites, utilizing analytical tools to ensure that they are being deployed in the most effective locations. The progress of the network improvement will be a critical factor to watch in 2016.

Cash Flow Management Will Be Crucial 

Sprint has been burning through cash at a high rate – over $2.3 billion in the first half of the fiscal year – which is a concern given its high debt load. While the magnitude of debt maturities so far has been relatively modest, the carrier faces a sustained multi-year onslaught of large maturities (average $3 billion/year) that it will have to deal with beginning in fiscal 2016. ^[1] Cutting back on network and promotional spending is not really a viable option at this juncture, so the carrier is likely to focus on reining in its operating cost base while also resorting to some financial engineering.

Sprint announced an aggressive restructuring plan that could see it achieve a sustainable reduction of $2 billion or more in run-rate operating expenses in fiscal 2016. This equates to roughly 10% of its operating expenses. While the carrier did not spell out the details, management expects the reductions to come from all areas of the business including labor, network operating expenses, IT and administrative expenses. Sprint is also looking to reduce the liquidity tied up in its device financing business, working with parent company SoftBank and others to establish a handset leasing company, which would effectively allow it to shift lease costs to a third party and free up cash for operations. Similarly, Sprint is also expected to unveil a leasing vehicle for its network equipment. These moves could allow the company to better manage its cash flows throughout the ongoing restructuring phase.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Quarterly Investor Update [↩]