Sprint Q2 Preview: Cost Cutting And Recent Postpaid Phone Adds To Drive Results

Sprint (NYSE:S) is expected to publish its Q2 FY’17 results over the next few days. During Q1, the company posted its first quarterly net profit in about three years, driven by aggressive cost-cutting and it’s possible that continued cost reductions, coupled with an expanding postpaid and prepaid customer base, could drive the carrier’s results over this quarter as well. In this note we take a look at some of the key factors that we will be watching when the carrier publishes earnings.

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We have an $8.50 price estimate for Sprint, which is about 20% ahead of the current market price.

Postpaid Net Additions

Sprint has been offering the most aggressive promotions in the wireless industry. For instance, the carrier offered an unlimited plan at $50 for a single line (increased to $60 in early October), with a $100 per month promotion for customers with two to five lines. That said, Sprint’s net adds haven’t been as strong as its rivals, likely due to its mixed reputation for coverage and also due to the fact that unlimited plans have now become the standard across the industry. For instance, Sprint added 88k subscribers over the quarter ended June, while Verizon added 358k subscribers despite its plans being significantly more expensive. T-Mobile added a total of 786k postpaid phone subscribers.  We will be watching Sprint’s progress on this front.

Postpaid Churn

Most major carriers have seen churn trend lower or remain at similar levels year-over-year, amid the increasing proliferation of unlimited plans, a growing number of devices per subscriber account and relatively standardized device promotions. However, Sprint’s postpaid churn figure inched higher by about 10 bps to 1.50% during Q1 FY’17, as it likely faced pressure from AT&T and Verizon, who relaunched their unlimited plans earlier this year to a very positive response from consumers.  While the quarter ended September typically sees a flurry of device promotional activity from major carriers, with the launch of new flagship devices (Samsung’s Note and Apple’s iPhone), the promotions were much less attractive this year, potentially helping carriers limit their churn levels.

Prepaid Phone Business

The prepaid phone segment has emerged as a source of growth in the U.S. wireless market in recent years, and Sprint has generally underperformed its rivals as it de-emphasized the pay-as-you-go segment, letting go of lower-value customers. While Sprint lost prepaid customers over the last calendar year, its net adds turned positive at about 35k in Q1 FY’17 and 195k in Q4 FY’16, driven by a stronger performance of the Boost brand, and fewer net losses in the Virgin brand. We expect the customer acquisition momentum to continue in the near term, and churn levels could also trend lower.

Cost Cutting In Focus

With competition for postpaid phone customers intensifying, and ARPU potentially capped in the near-to-medium term due to unlimited data plans, cost-cutting will be key for Sprint to drive sustained profitability. Over Q1, Sprint said that it saw about $370 million of combined year-over-year reductions in its cost of services and selling, general & administrative expenses. The company has cut costs by a total of $4 billion over the last nine quarters and expects an additional $1.3 billion to $1.5 billion of year-over-year net reductions over fiscal 2017. We will be looking for updates on the carrier’s progress.

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