Key Takeaways From Sprint’s Q3 Earnings

Sprint (NYSE:S), the smallest of the four U.S. nationwide carriers, published its Q3 FY’16 results on Tuesday, indicating that its turnaround continues to gain momentum. The carrier posted its strongest postpaid phone subscriber growth in about four years, while continuing to cut costs and bolster revenues. However, the quarterly loss was slightly wider than street estimates. Below we provide some of the key takeaways from the earnings release.

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We have a $6 price estimate for Sprint, which is about 30% below the current market price. We will be updating our valuation model and price estimate to account for the earnings release.

Equipment Sales Drive Revenue Growth

Sprint’s revenue growth was primarily driven by equipment sales, which benefited from an increasing shift to equipment installment plans (~37% of all postpaid handset sales), which recognize a bulk of device revenues upfront. However, the firm’s service revenues trended lower, on account of discounting and the lower monthly service billings associated with EIPs. EBITDA margins also expanded, driven by cost cutting. Sprint has cut its operating expenses by about $1.6 billion year-to-date, driven primarily by lower roaming and backhaul expenses as well as the shutdown of its WiMAX network. Sprint is targeting $2 billion or more of run-rate operating expenses by the end of the fiscal year, with plans for further reductions in 2017 and beyond.

Postpaid Subscriber Growth Strong, But ARPUs Trend Lower

Sprint added about 368k postpaid phone subscribers, driven by the carrier’s competitive service pricing and improving network quality, beating larger rivals Verizon (167k adds) and AT&T (67k losses). However, the carrier’s postpaid churn rate, a measure of service cancellations, rose to 1.67% from 1.62% the year before, on account of stronger promotional activity across carriers over the holidays. That said, its ARPU declined by about 5% year-over-year amid discounting and the EIP shift. There is a possibility that its ARPU could remain under pressure, given recent pricing moves by major carriers. For instance, T-Mobile recently began offering all-in pricing for its latest One plans and Sprint ran a limited-time promo that offered its budget unlimited plans at $50 for one line, instead of the usual $60. (related: Why T-Mobile’s All-In Pricing Strategy Could Pay Off)

Prepaid Continues To Underperform

Sprint’s prepaid business continued to underperform, with 501k losses, amid strong completion from the budget prepaid brands including AT&T’s Cricket Wireless and T-Mobile’s MetroPCS. However, Sprint has been positioning its prepaid business to focus on profitability, bolstering premium brands such as Boost and Virgin Mobile, while reducing exposure to lower-value brands. Sprint noted that the Boost brand posted positive net adds for the month of December.

Sprint also made some moves to improve its financial position over the last quarter. For instance, the carrier raised about $3.5 billion of spectrum-backed senior secured notes, in a move that will reduce its interest costs and cost of capital as the notes are priced at 3.36%, which is less than half the carrier’s current effective interest rate. Sprint has also cut down on its network spending plans for FY 2016. Capital expenditures are now projected at $2 billion to $2.3 billion, below the $3 billion the company originally forecast.

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