Sprint Earnings Preview: Cost Management, Prepaid Business In Focus

Sprint (NYSE:S) is slated to publish its fiscal Q1 results on July 25. We expect the company’s results to be driven by operating cost reductions and its recent postpaid phone subscriber gains, although this could be partially offset by its recent prepaid and tablet connection losses. Below, we take a look at some of the key factors to watch when Sprint publishes earnings Monday.

We have a $4.50 price estimate for Sprint, which is slightly ahead of the current market price.

Postpaid Subscriber Gains Should Continue

Adding postpaid phone subscribers has been a cornerstone of Sprint’s turnaround plan. and the carrier has been performing quite well on this front in recent quarters. During fiscal Q4, Sprint added a net of 22k postpaid phone customers, marking its third straight quarter of positive net adds, and it’s likely that the trend will continue into Q1 as well. AT&T and Verizon have been letting go of their feature phone subscribers amid a focus on higher value smartphone subscribers and it’s possible that many of these customers could find Sprint’s offers appealing, such as its 50% off smartphone plans. Sprint’s network has also been improving, with its LTE coverage extending to 300 million POPs as of the last quarter, up by roughly 7% year-over-year.

Will The Prepaid Business Rebound? 

Sprint’s performance on the prepaid front has been comparatively weak, amid challenges from both AT&T’s Cricket brand and T-Mobile’s MetroPCS as well as its own de-emphasis on the less lucrative pay-as-you-go segment. During the previous quarter, the carrier lost a net of 264k prepaid subscribers, while prepaid churn figures deteriorated to 5.65%. While Sprint attributes the decline partly to its focus on improving margins, it is somewhat concerning as major carriers (other than Verizon) are becoming increasingly interested in prepaid wireless in a saturating wireless market, as prepaid plans shift to monthly billing cycles, while the gap between prepaid and postpaid ARPUs also narrows. We will be closely watching Sprint’s prepaid subscriber trends for the quarter. 

Cost Management In Focus As SoftBank Diverts Funds To New Acquisitions

Sprint is looking to prune its cost base by cutting its labor costs, network expenses, as well as IT and administrative expenses, targeting a sustainable reduction of $2 billion or more in run-rate operating expenses exiting fiscal 2016. During the previous quarter, the carrier’s SG&A expenses were down 17% y-o-y while its cost of service fell by 6% amid lower network backhaul and roaming expenses. This belt-tightening may have to continue, given that Sprint’s parent firm SoftBank –  which investors have been banking on as a backstop – could find it more difficult to fund the carrier as it prepares to buy U.K.-based chip designer ARM Holdings for about $32 billion in an all cash deal announced on Monday. While SoftBank CEO Masayoshi Son reiterated his commitment to Sprint’s turnaround in late June, an acquisition of this magnitude could nevertheless divert SoftBank’s attention and financial resources.

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