Will Sprint’s Postpaid Phone Momentum Continue Into Q2?

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Sprint(NYSE:S), the smallest of the four national wireless carriers, is expected to publish its Q2 FY’16 earnings on October 25th. Below, we outline some of the key factors that we will be watching when the firm reports earnings.

We have a $6 price estimate for Sprint, which is about 15% below the current market price. 

Postpaid Phone Strength Should Continue

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Sprint has been performing well on the postpaid phone front, leveraging its network enhancements, well-received promotions such as offering new customers 50% off their current bills, and some weakness at Verizon and AT&T, who have been letting go of feature phone customers. Sprint added a net of 173k customers during Q1 FY’16, compared to a loss of about 12k customers in the year ago quarter and we expect the trend to continue into Q2. Sprint also stands to benefit the most from the launch of Apple’s iPhone 7. While nationwide U.S. carriers have been offering the device for free with trade-in promos, Sprint will only offer the promotion with its leasing scheme, rather than via equipment installment plans (EIP), reducing its loss per sign-on by as much as half compared to its bigger rivals (related: Why Sprint stands to gain the most from iPhone 7). This will enable Sprint to offer its promos for an extended period of time (most rivals ended their promos in late September), winning over more subscribers.

Prepaid Business In Focus

Sprint’s prepaid business has been shrinking, on account of competition from AT&T’s Cricket brand and T-Mobile’s MetroPCS, as well as its own de-emphasis on the low-value pay-as-you-go segment. The carrier lost about 331k prepaid subscribers during Q1 FY’16, while its prepaid churn stood at 5.55%. The decline is somewhat concerning, as the prepaid market is actually becoming more attractive to wireless carriers due to a shift to monthly billing cycles and a narrowing gap between prepaid and postpaid ARPUs. We will be closely watching Sprint’s postpaid metrics for the quarter.

Margin Expansion Could Continue 

Sprint has been boosting its EBITDA margins in recent quarters (up by about 500 bps year-over-year to 31% during Q1 FY’16). Although this partly attributable to the shift towards handset leasing, which moves costs to the depreciation header, the carrier has also been cutting down on its network and SG&A expenses (down by about 12% each, during Q1). It’s likely that Sprint’s margins continued to expand in Q2, as its revenue base rose, driven by its recent postpaid subscriber growth and also as it looks to achieve a sustainable reduction of $2 billion (roughly 10% of total OpEx) or more in run-rate operating expenses exiting this fiscal year.

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