Sprint Q4 Preview: Recent Customer Gains, Cost Cuts Could Drive Results

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Sprint (NYSE:S), the smallest of the four U.S. national wireless carriers, is expected to publish its fiscal Q4 earnings on May 3. We expect the carrier’s results to be driven by its recent postpaid phone subscriber adds, improving churn levels and cost reduction efforts. Below is a brief rundown of what to expect when Sprint publishes earnings Tuesday.

We have a $4.25 price estimate for Sprint, which is about 15% ahead of the current market price.

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  • Sprint has been posting positive postpaid phone subscriber adds over the last three quarters. During Q3, it added a total of 366k postpaid phone customers, marking its highest postpaid phone net adds in three years. The carrier should continue to maintain its recent momentum, given its heavy spending on promotional schemes – which included offering 50% off the monthly plan rates charged by its rivals Verizon, AT&T and T-Mobile.
  • The recent postpaid subscriber adds should bode well for Sprint’s service revenue growth. However, it is possible that Sprint’s equipment revenues could trend lower, amid an increasing mix of lease-type device sales. Lease sales recognize revenues over time, unlike equipment installment and subsidy plans, which recognize comparatively higher revenues upfront.
  • Sprint’s postpaid ARPU could trend lower, amid a shift towards leasing and equipment installment plans. The number fell by about 8% year-over-year to $60.30 during Q3.  However, average billing per user (which includes lease payments or EIP instalments) could remain flat or trend upwards.
  • Sprint’s platform postpaid churn during Q3 FY 2015 stood at 1.62%, marking an improvement of 68 basis points over the prior year quarter. We expect the number to remain strong during Q4, driven by a better network experience, an industry-wide trend towards greater customer stickiness and stricter credit standards. Low churn figures could help to keep customer acquisition costs in check.
  • Sprint is working towards a sustainable reduction of $2 billion or more in run rate operating expenses, targeting labor costs, network expenses, as well as IT and administrative expenses. Sprint reduced its headcount by about 6,000 over the last 18 months, including 2,500 job cuts that it carried out during the last quarter. While the carrier expects to incur about $1 billion in costs related to this transformation program in the next two fiscal years, we should see some reductions in operating costs this quarter.

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