Sprint’s Q4 Takeaways: Will The Magic Box Strategy Work?

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Sprint (NYSE:S), the smallest of the four U.S. nationwide carriers, published a relatively mixed set of Q4’16 results on May 3. While the carrier posted a slightly wider-than-expected loss amid a relatively lackluster postpaid phone performance and mounting competition, its revenues beat expectations, driven in part by stronger equipment sales. Below we provide a brief overview of the quarterly results and take a look at a new device called Magic Box that Sprint recently announced to improve its network coverage and performance.

We have a $7.50 price estimate for Sprint, which is roughly in line with the current market price.

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Postpaid Phone Growth Slows As Prepaid Turns The Tide

Sprint posted a total of 42k postpaid phone net additions during Q4. While this marks an improvement of about 20k over the year-ago period, it was sharply below the carrier’s average net adds of close to 300k over the prior three quarters. This could be due to seasonally lower gross adds and also due to higher competition. For instance, during the previous quarter, T-Mobile upgraded its unlimited plans while offering all-in pricing (effectively a price cut) while larger players Verizon and AT&T reintroduced their unlimited data plans for mainstream customers after a gap of close to five years. That said, Sprint’s postpaid phone churn figures remained relatively flat at around 1.58%. ARPU declined by about 6% year-over-year to $57 amid higher competition and a continued shift towards device financing plans. Sprint’s prepaid business had a solid quarter, with 180k subscriber adds, compared to a loss of 264k subscribers in the year ago period, driven by growth of the Boost brand and lower losses at its  Virgin brand. Boost customers typically have ARPUs of roughly $40 per month (compared to ~$30 for the broader prepaid business), hence this should improve overall profitability of the prepaid business.

Sprint’s New Small Cell Strategy Relies On Customers, Could Prove Risky

Sprint has been looking to conserve cash, and its capital expenditures were the lowest among the major carriers over last year. The carrier has been looking to improve coverage by deploying an increasing number of small cells while leveraging its deep portfolio of 2.5 GHz spectrum. During the earnings conference call, the company unveiled a new self-configuring LTE small cell that it calls Magic Box, which subscribers can set up at their homes, improving coverage for themselves and for others in the vicinity (~100 meter coverage outdoors). While other major carriers also offer devices to boost signal strength, they either need to be connected to a broadband connection or just act as a repeater, amplifying signals from macro cells. Sprint’s device, on the other hand, will have a dedicated wireless channel to the nearest Sprint cell tower, reducing interference, while improving coverage and data performance.

Sprint intends to offer the device to “qualified customers” free of charge and expects to deliver millions of units over the next few years. The strategy has multiple benefits, as it will allow Sprint to expand coverage in a relatively cost effective manner, without having to build out network back haul or sign-up for long-term leases. Set-up costs will also be negligible, as the solution is effectively plug-and-play for customers. That said, there are some concerns as well. With the new device, Sprint is effectively transferring some of the control it has over network performance to customers, which could prove risky, even if it provides additional incentives for customers who house these devices. While the carrier will also deploy other small cell solutions such as the air pole, strand mount and femto cells, the Magic Box strategy could be important in residential areas.

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