Will Sprint’s Q3 Results Quell Investor Concerns?

Sprint (NYSE:S), the smallest of the four U.S. national carriers, will be reporting its FY Q3 earnings on Tuesday, January 26. This is a week earlier than initially expected, as the company looks to quell investor concerns after its stock dropped to multi-year lows (down 30% year-to-date) amid concerns that it may not be able to meet its financial obligations and also due to reports that the company is prepping for a radical and potentially risky network overhaul. ^[1]  In this note, we take a brief look at what to expect and what we will be watching when Sprint reports earnings Tuesday.

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

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

Postpaid Adds To Remains Positive, How Will ARPA Trend?

During fiscal Q2, Sprint’s lucrative postpaid phone net additions came in at 237,000, taking Sprint platform postpaid net adds into positive territory for the first nine months of CY 2015. We expect the momentum to continue into the December quarter, given Sprint’s 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 (related: Sprint’s 50% Off Plans Look Aggressive, But Might Be Necessary). Sprint’s churn figures should also hold up reasonably well (1.54% in Q2), driven by better credit quality of recently acquired customers and an industry-wide trend towards greater customer stickiness. That said, per user revenue metrics could remain a mixed bag. While overall revenues including installment plan billings could trend higher on a year-on-year basis, on account of higher equipment revenues, there is a possibility that the recent promotional offers could put some pressure on service revenue growth.

Details Of The Network Improvement Plan

While Sprint has been spending quite liberally on customer acquisition and promotional activity, it is being fairly thrifty with regard to its network spending, opting for non-traditional methods of expanding the network. It has elected to sit out of the potentially costly 600 MHz spectrum auction due this year, taking a more unproven route to densifying and expanding its network, upgrading 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. Now, Re/code recently reported that Sprint has finalized plans for a radical network overhaul, moving its towers from space leased by American Tower and Crown Castle to government-owned properties, where rent is often much cheaper. Additionally, the carrier is reportedly looking to cut down on the roughly $1 billion a year it pays to AT&T and Verizon for use of their backhaul services, with plans to leverage microwave technology to link its cell towers to telecom networks. Carriers typically sign multi-year leases with infrastructure providers, so the potential changes could take a while to implement, but either way, this could prove a risky bet for Sprint as it could result in network hiccups, something the carrier can ill afford at this juncture. We will be interested to hear further details from the carrier.

Updates On Cost Cutting And Cash Flow Management

Sprint’s cash burn rate has been high – over $2.3 billion H1 FY2015– and this is concerning given its high debt load. While the magnitude of debt maturities so far has been relatively modest, the carrier needs to service or refinance large maturities (average $3 billion/year) beginning from fiscal 2016. Since cutting back on network and customer acquisition spending is not at option at the point, the carrier is focusing on reducing its operating cost base. Towards the end of last year, Sprint announced an aggressive restructuring plan that could see it achieve a sustainable reduction of $2 billion or more in run-rate operating expenses (10% of OpEx) during fiscal 2016. Reductions are expected to come from all areas of the business including labor, network operating expenses, IT and administrative expenses. We will be interested to hear further details about the plan from the carrier.

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1. Sprint Press Release [↩]