‘Show me’ seems to be sentiment from financial community toward Sprint as job cuts loom
Sprint reported its second fiscal quarter results this week, which failed to impress investors and left financial analysts scratching their heads. Sprint managed to post its first full quarter of postpaid “phone” growth in more than two years, but the carrier’s financial position and lack of clarity on improving that position left investors and analysts cold.
The carrier did indeed manage to add high-value smartphone customers during the quarter, which stemmed a long-slide of customer defections that earlier this year resulted in the carrier being surpassed by T-Mobile US as the nation’s No. 3 operator in terms of customer base. Sprint also managed to post more than 1 million net connection additions to its network during the quarter, which was just short of the 1.2 million direct connections added by Verizon Wireless and less than half of the total connections posted by AT&T Mobility and T-Mobile US.
A strong reduction in postpaid customer churn was one of the keys to the latest growth, with Sprint noting the result was a company record low, and that it was the only nationwide carrier to post a sequential drop in postpaid churn.
Another key to Sprint’s postpaid growth was the migration of 199,000 prepaid customers to its postpaid ledger, with 175,000 of those customers actually switching from being a Boost Mobile or Virgin Mobile customer to now being a Sprint customer. In explaining the process, Sprint CEO Marcelo Claure said select prepaid customers were contacted by Sprint and offered the ability to make the switch, which involved selecting a new Sprint device and rate plan.
“So we’re going to change the relationship from a prepayment to a postpaid relationship, and again, what we’ve seen as the early trends of this is the churn curve changes dramatically and you start spending more money because now pretty much you have the ability to use your phone more without being constrained by the limit that you had in prepaid before,” Claure said.
Taking out those migrated customers dimmed Sprint’s claims of attracting new postpaid customers, with the assumption that those customers coming from the prepaid business accounted for a vast majority of the 237,000 net “phone” postpaid additions for the quarter.
Claure also reiterated the carrier’s plans to remove costs out of the organization in an attempt to turnaround its financial position. The carrier had previously stated plans for taking out in excess of $2 billion from its operations, with some of that coming from planned job cuts. One report indicated those cuts could begin by Jan. 30.
Claure noted the carrier is slowly moving away from the device subsidy model, stating the carrier is “potentially evaluating our exit of subsidy.”
“We’ve seen that the industry has changed,” Claure told analysts. “We were one of the drivers for this industry to change. And it’s fair to say, that I will say at the beginning of the year, you’re going to see a significant drop in our subsidy activations, maybe not for our base, you know, we’re very respectful that our base has been used to buying phones under subsidy, and we’re always going to give a choice to our base. But potential new customers at the beginning of next year, I think you’re going to see us more focusing on lease with an ability to lease to own due to the fact that customers want to own their devices.”
Both T-Mobile US and Verizon Wireless have moved away from device subsidies, with Sprint and AT&T Mobility the only two nationwide operators allowing new customers to pay a lower price upfront for their mobile device.
In terms of network spending, Sprint posted a $600 million year-over-year increase in capital expenses, though noted the growth was due to device leasing agreements in its indirect sales channels. While general network spending remained flat, Claure did note Sprint’s significant activity in terms of its small cell deployments and that the carrier is “very pleased with the early progress.”
Sprint is rumored to be looking at deploying up to 70,000 small cells as part of an extensive network densification program.
Perhaps most disappointing to the investment community was the lack of insight into the carrier’s plans to form a device leasing subsidy designed to handle the financial impact of Sprint’s device leasing and equipment installment plans. Sprint and its parent company SoftBank have for months been touting the financial benefits of this program, but details on those benefits remain sparse with Sprint management pushing off formal release of the details for several more weeks.
“As it relates to funding our turnaround, we continue to work with SoftBank and other recognized companies to set up a lease company to monetize device lease by our customers,” Claure explained. “We have agreed upon most of the commercial terms, we’re currently finalizing the documentation and we expect to close our first tranche in the next few weeks.”
Once revealed, Sprint could see a bounce to its stock price, although the details will be heavily scrutinized.
“While these were very positive developments, Sprint investors need much hand holding on the path to free cash flow,” wrote Wells Fargo Securities senior analyst Jennifer Fritzsche in a research note. “Unfortunately, in the absence of any specifics in the announcement regarding the leasing co and partners, that did not come. … There also seemed to be much confusion regarding guidance – Sprint remains a ‘show me’ story in our view – but it is not broken. With better network stats, a significant improvement in churn, a cost cutting plan very much in place, and details on lease co coming in a matter of weeks, there are still catalysts to point to.”
Claure recognized that investors have become leery of Sprint’s continued claims to improve its overall operating position.
“Ultimately, we must find a way to grow and optimize the business at the same time,” Claure said. “I understand that some people will be skeptical, believing that those are two mutually exclusive outcomes. Nevertheless, we’re extremely confident that we can execute on both at the same time with the guiding principle that the changes we make in the operating model must be executed in a way that minimizes any disruption to the sales momentum we’re achieving or the customer experience.”
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