Cost Cutting, Subscriber Gains Drive Sprint’s Q2 Results

Sprint (NYSE:S) published its Q2 2017 results on Wednesday, October 25, reporting a stronger than expected set of earnings driven by its recent postpaid and prepaid phone subscriber gains and aggressive cost-cutting. The carrier did not conduct a conference call to discuss the results, amid speculation of a merger with rival T-Mobile, which could be announced as early as November (related: Will The T-Mobile – Sprint Merger Finally Come to Fruition?). In this note, we take a look at some of the key trends that impacted the company’s performance over the quarter.

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We have an $8.50 price estimate for Sprint, which is about 20% ahead of the current market price.

Postpaid Net Adds Slow Down, Churn Rises 

Sprint posted 279k postpaid phone net adds over the quarter, its ninth straight quarter of net additions. That said, adds were lower by about 20% compared to the year-ago period, largely due to higher competition from AT&T and Verizon, who reintroduced unlimited plans earlier this year. Postpaid phone churn also trended upwards by about 22 bps about 1.59%. Sprint’s aggressive promotions have been taking a toll on its revenue metrics, with average monthly billings per postpaid phone customer (service and equipment-related payments) declining from $71.70 in Q2 2016 to about $69. For instance, the carrier offered an unlimited plan at $50 for a single line – about $30 less than a comparable Verizon plan.

Prepaid Business Turnaround Progresses

The prepaid phone segment has emerged as a source of growth in the U.S. wireless market in recent years, and Sprint has underperformed its rivals, as it de-emphasized the pay-as-you-go segment, letting go of lower-value customers. However, things have seen a turnaround over the last two quarters, with Sprint adding 95k subscribers over fiscal Q2, compared to losses of almost 450k subscribers in Q2 FY ’16, driven by lower churn and higher gross additions in the company’s premium prepaid brand, Boost.

Cost Cutting Helps Cut Net Losses

Cost cutting is becoming increasingly important to driving long-term profitability for Sprint, with competition for postpaid phone customers intensifying, and ARPU potentially capped in the near-to-medium term due to unlimited data plans. The carrier is targeting $1.3 billion to $1.5 billion in year-over-year net reductions in its SG&A and cost of services expenses in the fiscal year 2017. Over the last quarter, the company cut down about $400 million in costs in these two areas, translating into a net reduction year-to-date of over $750 million. The cost cuts were driven by changes to its device insurance program as well as lower network and customer care related expenses.

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