With Apple (NASDAQ:AAPL) launching its latest iPhones today, Sprint (NYSE:S) seized the opportunity to announce the addition of 34 new markets to its growing LTE coverage. The third largest wireless carrier in the U.S. now has its LTE network up and running in about 185 markets across the country. However, having started late, Sprint has a fair bit of catching up to do with the industry leaders Verizon (NYSE:VZ) and AT&T (NYSE:T). While Verizon is nearly done with its initial LTE deployment having covered nearly 500 markets with its LTE network, AT&T’s LTE coverage extends to around 400 U.S. markets. Competition for Sprint is increasing from T-Mobile’s end as well, with the latter’s LTE network already up in about 154 markets despite being the last among the top four to launch LTE.
Despite these headwinds, the long-term story for Sprint remains compelling. The carrier has shut down its legacy iDEN network and is splurging on a Network Vision strategy to increase LTE coverage to about 200 million POPs by the end of the year. It has bought out Clearwire using a recent cash infusion from Softbank and will be using the huge swathe of acquired 2.5 GHz spectrum to bolster LTE capacity in densely populated areas. Acquiring Clearwire’s loss-making business will however depress Sprint’s margins and cause its debt load to burgeon. However, we expect this impact to be more than offset by the cost-savings Sprint will realize from having a wider coverage as well as not having to run two disparate networks, iDEN and CDMA, at the same time. Our $6.35 price estimate for Sprint is about in line with the market price.
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LTE lag could exacerbate saturation issue
The U.S. wireless market is getting increasingly saturated with the number of wireless connections having exceeded the population in mid-2011. While Sprint has so far managed to dodge the bullet by banking on an accelerated iDEN shutdown to add new postpaid subscribers to its core CDMA platform, the going might get a lot tougher in the coming quarters. In the last two quarters combined, Sprint has added a little over 200,000 postpaid CDMA subscribers despite recapturing almost thrice as many from the iDEN network. Now, without the iDEN network, which has seen a steady supply of CDMA subscribers in the past, it will be challenging for Sprint to find new subscribers. To be completely fair, even Verizon and AT&T are likely to have benefited from the iDEN migration in the past several quarters; so the issue won’t be Sprint’s alone. However, the fact that Sprint’s LTE coverage far lags the wireless leaders, Verizon and AT&T, could hamper its wireless growth in the coming quarters.
It is in this regard that the importance of the iPhone comes to light. The carrier seems to have done a fine job with the iPhone, using it effectively to bring aboard high quality postpaid subscribers from rival platforms and bolster ARPU levels. The 1.4 million iPhones sold in Q2 may have been 7% lower than what Sprint managed last year, but almost 41% of these sales went to new customers. The introduction of the iPhone at T-mobile may have been responsible for the y-o-y iPhone sales decline, but Sprint has assuaged concerns by saying that it is still well ahead of its volume commitment targets. The growing number of iPhone postpaid subscribers is helping push up Sprint’s overall postpaid ARPUs which rose by about 1% y-o-y to a record $64.20 last quarter. Driven by increasing smartphone penetration, we expect Sprint’s postpaid ARPUs to continue to grow in the coming quarters, but at slower rates than last year.
High CapEx justified in the long run
In order to support the surging data demand and to position itself competitively against rivals, Sprint is aggressively investing in network upgrades and LTE deployment as part of its Network Vision initiative. However, while Network Vision is proving to be expensive, a successful implementation of the strategy will reduce operating expenses substantially by eliminating duplicate fixed costs of maintaining different networks. It will also allow for better 3G/4G coverage and reduce roaming costs as the spectrum previously used for iDEN would be utilized for the CDMA/LTE network. (see Sprint To Build LTE Over iDEN’s Grave) Rolling out an LTE network will help it improve its service gross margins as well, since it is a much more efficient network to manage than the existing 3G networks.
As LTE adoption rates rise and the iPhone brings in highly lucrative postpaid subscribers, Sprint will also see its data ARPU levels rise in concert. Sprint’s unlimited LTE plans, which it has recently started promoting with a lifetime guarantee, will help it maintain its niche and differentiate itself from rivals’ tiered data plans. Unlimited plans will likely be more valuable for LTE than they were for 3G since LTE is a higher-speed technology and will cause subscribers to easily overshoot their monthly quota for tiered plans. (see Sprint Promotes Unlimited Plans As Verizon, AT&T Move To Shared-Data Plans)