Sprint Q2 Review: The Turnaround Gathers Pace

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Sprint (NYSE:S), the smallest of the four U.S. nationwide carriers, published its Q2 FY’16 results on Tuesday, October 25th, indicating that its turnaround plan was gathering momentum. [1]  While revenues grew, driven by postpaid subscriber growth and equipment sales, net losses also narrowed amid significant operating cost reductions. Below, we provide some of the key takeaways from the carrier’s earnings release and what to expect going forward.

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We have a $6 price estimate for Sprint, which is about 10% below the current market price.

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Sprint’s Operational Performance Was Solid

Sprint added a total of 347k net postpaid phone subscribers during Q2, marking an increase of about 5x compared to last year, leveraging its improved network and promotions, which include offering 50% off rival’s plan prices. The carrier was also postpaid net port positive against Verizon, AT&T and T-Mobile during Q2, meaning that it won more customers from each carrier than it lost to them. Postpaid phone churn levels – a measure of the number of subscribers leaving the carrier – were also the best in the firm’s history, declining 12 bps year over year to 1.37%, driven by improving customer quality, network improvements and a higher number of subscribers per postpaid account. However, things were more mixed on the prepaid front, with the firm losing a net of 427k prepaid users for the quarter, amid stronger competition from T-Mobile and AT&T, and its decision to focus on more profitable prepaid brands such as Boost and Virgin Mobile, while reducing exposure to lower-value brands.

Sprint reduced its overhead costs by about $600 million (cost of services down $350 million and SG&A down $230 million) year over year during Q2, while indicating that it was on track to achieve $2 billion or more in run-rate operating expense reduction by the end of FY’16. The firm is targeting further reductions in 2017 and beyond.

Debt Load Remains A Concern, But Sprint Is Moving To Cut Interest Costs

Sprint’s net debt stands at a stubbornly high $31 billion, while its interest expenses rose by about 16% year ove year to about $630 million. Interest expense, which stood at about 7.5% as a percentage of total revenues, have been a major factor inhibiting Sprint’s return to net profitability. However, the carrier has been making some progress in reducing its interest burden, by leveraging its spectrum assets as collateral to borrow as much as $3.5 billion, at an interest rate of just 3.36% (less than half the company’s current effective interest rate). Sprint will essentially transfer the airwaves to a wholly owned special purpose vehicle that will in turn raise funds via notes in a private placement. Sprint will in turn lease back the spectrum, which is being used in 77% all its 2.5 GHz enabled sites and 33% of its 1.9 GHz enabled sites, under a long-term agreement. This should allow the firm to rein-in future cash interest expenses, by retiring upcoming maturities with higher coupon payments.

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Notes:
  1. Sprint Q2 Earnings Release []