Sprint Q3 Preview: Postpaid Phone Adds, Margins In Focus

Sprint (NYSE:S), the smallest of the four U.S. nationwide carriers, is expected to publish its Q3 FY’16 results on January 31, reporting on a quarter that is likely to have seen the carrier bolster its postpaid subscriber numbers and make further progress with its cost cutting. Below we take a look at some of the key factors to watch when Sprint publishes its results.

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We have a $6 price estimate for Sprint, which is roughly 30% below the current market price. See our current stance on Sprint here.

Postpaid Growth Momentum Will Continue

Sprint’s postpaid phone growth has been commendable over 2016, driven by attractive pricing plans that have allowed the carrier to add a net of 542k subscribers over the first nine months of 2016, while posting positive port ratios versus its three larger rivals over the last two quarters. We expect the trend to continue into Q3 FY’16, driven by the firm’s new unlimited plans, which offer the lowest pricing in the industry ($60 for a single line) as well as its move to offer 50% off on porting customers’ existing bills. Moreover, Sprint should benefit from the improved supply of the iPhone 7, and its decision to run its initial promos for the handset longer than its rivals. (related: Which Carrier Stands To Gain The Most From iPhone 7 Promos?) However, Sprint’s prepaid operations could continue to lose subscribers, as the carrier faces stronger competition from T-Mobile and AT&T. Moreover, the carrier’s decision to focus on its more profitable prepaid brands such as Boost and Virgin Mobile, while reducing exposure to lower-value brands, could also result in some customer attrition.

Operating And Interest Cost Reductions

Sprint’s adjusted margins could expand over the quarter, as the carrier pushes towards its target of achieving a sustainable reduction of $2 billion or more in run-rate operating expenses exiting fiscal 2016. For instance, the carrier has been cutting down on its network expenses (down by about 14% over the first half of fiscal 2016) amid lower backhaul and roaming costs, with SG&A expenses also falling by 19% year-over-year. Adjusted EBITDA margins improved from 31.2% in Q2 2015 to 39.3% in Q2 2016. Sprint has also been taking steps to cut its interest costs, which have been trending higher in recent years, inhibiting its return to net profitability. For instance, the carrier leveraged its spectrum assets as collateral to borrow as much as $3.5 billion last quarter, at an interest rate of just 3.36% (less than half the company’s current effective interest rate). This could result in a slight reduction in interest expenses going forward.

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