Competitors Smack Sprint Around Though Selloff Overdone
In Sprint’s (NYSE:S) recently announced earnings higher customer acquisition costs, lower average revenues per customers and a decline in postpaid subscribers stood out as worrying trends. This is apart from its lack of a clear 4G strategy that has also been a persistent concern and contributed to the stock’s 20% slide post-earnings. Although Sprint is growing its overall user base, higher competition from AT&T (NYSE:T) and Verizon (NYSE:VZ) is forcing it to spend more on promotional deals and subsidies to acquire these customers, which are increasingly prepaid subscribers who spend less on average. [1]
We have updated our estimates and our revised $4.75 price estimate for Sprint stock is about 15% above market price.
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Competition is Leading to Higher Subsidy Costs
The dependence on telecom providers’ smartphone portfolio is only growing given the juicy data revenues that heavy smartphone users bring in. Both AT&T and Verizon have demonstrated how important this can be given their success with offering the iPhone.
Earlier this year, AT&T started offering iPhone 3GS for $49, which then forced Sprint to increase the subsidy on the smartphones that it sells. Sprint has also started to shift from mail-in rebates to instant rebates program, in which customers can choose for instant rebates for smartphones rather than the earlier method of claiming the rebate through mail after a specified period of time (which lends itself to people forgetting to mail in their rebates). These competitive pressures drive up the cost of doing business for Sprint.
Lower Average ARPU Levels
Sprint lost around 101,000 postpaid retail subscribers while it gained around 670,000 prepaid retail subscribers in the last quarter. [2] Prepaid subscribers typically have lower ARPU levels compared to postpaid, and this gap widened in this quarter, as prepaid ARPU declined sequentially while postpaid ARPU increased sequentially. [1] This also meant that the average ARPU declined during the quarter, which put further pressure on the gross margins.
See our complete analysis for Sprint stock here
Notes:- Sprint Q2 2011 earnings conference call transcript, SeekingAlpha, July 28th, 2011 [↩] [↩]
- Sprint Q2 2011 earnings news release, July 27th [↩]