Sprint’s Q3 Earnings Indicate A Turnaround Could Be Taking Hold

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Sprint (NYSE:S), the smallest of the four U.S. national carriers, posted a relatively encouraging set of Q3 FY 2015 results and provided more promising financial guidance for the fiscal year, driven partly by its aggressive cost cutting and recent customer gains, indicating that the carrier’s turnaround could be gaining traction. In this note, we take a look at some of the key takeaways from the company’s earnings.

We have a $5 price estimate for Sprint, which is significantly ahead of the current market price. We are currently updating our model to account for the earnings release.

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Overview of Results

Sprint’s quarterly revenues fell by about 10% year-over-year to $8.1 billion, amid lower service revenues arising from a shift towards device financing options, as well as lower equipment revenues on account of a greater mix of lease sales. Lease sales recognize revenues over time, unlike equipment installment and subsidy plans, which recognize comparatively higher revenues upfront. Sprint’s adjusted EBITDA improved to about $1.9 billion, up from about $1.04 billion during the same period last year, on account of lower SG&A expenses and a higher take rate for handset leasing, under which the associated cost is recorded as depreciation expense.

Stronger Postpaid Adds And Lower Churn

Sprint’s heavily spending on promotional schemes – which included offering 50% off the monthly plan rates charged by its rivals – seem to be paying off, as the carrier added a total of 366k postpaid phone customers for the quarter, marking a significant improvement from the year-ago period when it lost 205k postpaid customers. While this puts the carrier’s postpaid net adds ahead of AT&T (256k), it remained below Verizon (449k) and T-Mobile (917k). The adds should bode well for Sprint’s future revenue growth, since postpaid phone customers are typically more loyal and also tend to generate more revenues compared to prepaid and tablet customers. Postpaid subscriber acquisitions will remain a priority for Sprint in the near term, and the carrier mentioned that it might consider extending its 50%-off offer beyond its scheduled end in February. Sprint also posted its lowest-ever third quarter Sprint platform postpaid churn of 1.62%, marking an improvement of 68 basis points from the prior year quarter, driven by a better network experience and an industry-wide trends towards greater customer stickiness.

Costs Cuts, Improved Financial Outlook

Sprint is working towards a sustainable reduction of $2 billion or more in run rate operating expenses exiting fiscal 2016 . The carrier noted that it cut $500 million in expenses during Q3, with the fiscal year-to-date total expense reductions standing at $800 million. Sprint reduced its headcount by about 6,000 over the last 18 months, including 2,500 job cuts that it is currently carrying out. [1] These cost cuts and the carrier’s recent subscriber adds have allowed it to increase its financial outlook, guiding an adjusted EBITDA of between $7.7 billion and $8 billion for FY’15, up from previous guidance of $6.8 billion and $7.1 billion. The company projects an adjusted EBITDA of between $9.5 billion to $10 billion for FY’16.

While Sprint’s cash burn rate was lower compared to last year – $797 million vs.$1.8 billion – the burn is nevertheless concerning, given its high debt load and impending debt payments ($3.67 billion due in FY’16). [2] However, Sprint says that it expects to have sufficient liquidity to fund operations and debt maturities, leveraging its recently established handset leasing company and another network financing entity, that it is setting up in cooperation with its majority shareholder Softbank and others. Sprint estimates that this vehicle can provide between $3 billion to $5 billion of cash in  FY’16 by raising proceeds from Sprint’s existing network equipment, as well as some new assets associated with the network densification and a small portion of the carrier’s spectrum portfolio.

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Notes:
  1. Sprint Boosts Guidance, Says Turnaround Taking Hold, WSJ, January 2016 []
  2. Sprint Press Release []