Sprint Worth $4.25, Sheds Weight to Get Into Fighting Shape

Sprint (NYSE:S) is undertaking a major restructuring of its sales and marketing unit merging both its consumer and enterprise wings into a single body, CEO Dan Heese said in a note to employees Friday. ^[1] The carrier is looking to shuffle its management functions to make its operations more efficient in a bid to free up cash for its investments in the iPhone as well as in the Network Vision Project. Placed a distant third in the wireless industry behind telecom giants Verizon (NYSE:VZ) and AT&T (NYSE:T), the carrier is fighting to keep up and recently tapped the bond market for $4 billion to help fund its expansion plans.

See our full analysis of Sprint’s stock here

Sprint already had a highly leveraged balance sheet prior to the recent offering. Adding on additional debt made its balance sheet even less attractive and limited the company’s operational flexibility, the effects of which are starting to show with the company’s recent restructuring moves.

We expect the restructuring to make the company more lean and efficient, helping it meet the elevated interest expenses without having to cut down on its costly but more important iPhone and network investments.

The iPhone Deal

Over the past few quarters, Sprint has been steadily losing postpaid customers who are on long-term contracts with higher average monthly bills and are therefore significantly more valuable than prepaid subscribers. Last quarter, the company lost almost 44,000 postpaid subscribers. In order to stem this loss and therefore increase its ARPU levels in the long term, Sprint placed a massive bet on the continued popularity of the iPhone by signing a $15.5 billion contract with Apple to sell the phone for four years.

This bet may work out in the long term but in the near term, Sprint will have to take a hit on on its gross margins as it subsidizes the iPhone heavily in return for the long-term contracts. However, the restructuring will decrease its sales and marketing expenditures, thereby reducing the impact on its overall operating margins.

CapEx Needs

In addition to the huge subsidy costs, Sprint will also be investing significantly to improve its network infrastructure, as part of  its Network Vision project. Not only is it planning to roll out its own 4G LTE network, Sprint will also be funding Clearwire’s LTE plans to complement its own network.

These rising costs led the company to issue capital expenditure guidance of approximately $3 billion for 2011, a jump of more than 30% over last year. The company also increased its capex estimates related to the LTE rollout and Network Vision to about $10 billion in 2012 and 2013. ((Sprint Nextel Reports Third Quarter 2011 Results, Sprint Press Release, Oct 2011))

We believe that the huge investments that the company is making on its network upgrade and the iPhone will reap dividends in the long-run. (see Sprint Still Worth $4.25 Despite iPhone Deal, Debt Concerns) However, the company will see its cash flows suffer in the near-term. But if the near-term hit to cash flows forces the company to take some tough decisions in order to make the organization leaner and more efficient, it could add more long-term value to the investments it is making.

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1. Four Sprint execs out in reorganization, Reuters, January 6th, 2012 [↩]