Sprint (S) is expected to announce its Q1 2013 earnings on April 24. During the earnings call, we will be closely watching the company’s net postpaid subscriber additions for the quarter as well as the postpaid churn numbers to see if the management is continuing on its strong iPhone performance so far.
The iPhone’s first year at Sprint was good with the smartphone helping it add a healthy number of new subscribers to its core Sprint network despite an industry-wide saturation in wireless growth. However, it is likely that a seasonal weakness in smartphone sales has had a negative impact on net adds, but that may not be such a bad thing for it would help margins recover from the holiday quarter’s impact. The net adds figure is also important for it will give us insights into Sprint’s performance in the absence of its iDEN network, which has been a steady source of subscribers for its core CDMA network but will be shut down by mid-2013 to make way for 4G LTE. We will also be watching for comments on the progress made by the carrier on the LTE deployment front, where it is lagging rivals Verizon (VZ) and AT&T (T) by a big margin.
The carrier’s strong iPhone performance as well as increasing optimism that its funding requirements for the ambitious Network Vision Project will be met, especially with Dish and Softbank jostling for a stake in the carrier, has caused its stock price to shoot up by almost 30% in less than four months this year. Sprint’s stake in Clearwire has proved to be very attractive to acquirers looking to tap the future growth in data demand using Clearwire’s huge spectrum reserve. (See also: "Softbank Can Lift Sprint's Fundamentals With $20 Billion Investment.") As a result, Sprint has seen a meteoric rise in its stock price, which is now about 20% ahead of our $6 price estimate.
Sprint Needs to Maintain Strong iPhone Sales
Sprint has been incurring heavy annual postpaid subscriber losses for a long time now, and its decision to carry the iPhone came as a solution to that problem. However, since Sprint was a tad late in jumping on the iPhone bandwagon, it had to make a huge upfront commitment of nearly $15.5 billion for the iPhone over a four-year period. This was a massive bet considering that the company has a highly leveraged balance sheet, with about $26 billion in debt (including capitalized operating leases) compared to the then market capitalization of only around $8 billion.
This, in addition to its high capital requirement for the Network Vision project, had caused its stock to take a beating in 2011. However, the wager seems to have paid off so far with the carrier reporting multiple strong quarters of postpaid net adds on its core Sprint network since the iPhone deal. Last year, Sprint added a net 1.5 million subscribers to the core CDMA platform, almost 20% more than it did in 2011 and 70% higher sequentially. While this figure was boosted by the number of iDEN subscribers Sprint was able to migrate to its core CDMA network, it also came in a highly saturated market that caused rivals such as AT&T to have flat postpaid net adds last year.
The iPhone’s importance to Sprint can also be judged from the fact that it is bringing a lot of new customers to Sprint (almost 38% of total iPhone sales in Q4 2012 came from subscribers new to Sprint). During the earnings call, we will therefore be keeping a close watch on the company’s iPhone additions to see if it has been able to keep up with the encouraging statistics from the previous quarters. It will also bring more visibility around its chances of meeting the iPhone commitment, which we believe has been bolstered by the carrier’s recent decision to offer a prepaid iPhone under the Virgin brand. (See also: "Sprint's Prepaid iPhone Next Month Help It Meet Apple Commitment.") The company may however continue to lose postpaid subscribers overall since we expect another quarter of postpaid iDen losses, which will have picked up pace with the shutdown of the network drawing near. (See also: "Sprint To Build LTE Over iDEN's Grave.")
Longer-term, we expect the postpaid adds on the Sprint’s core platform to outpace the losses being incurred on the iDen front. The highly lucrative contractual postpaid subscribers that the iPhone has and will continue to bring in will increase data ARPUs in the long run and bolster data revenues.
With Verizon and AT&T far ahead in the LTE race, we expect an update on Sprint’s LTE plans. Sprint was the latest of the three to launch a LTE network, and with coverage in all of 67 U.S. markets as of March the carrier trails the country’s largest wireless carrier Verizon, whose LTE network reaches more than 270 million Americans in over 490 markets across the U.S. AT&T’s lead over Sprint is not as wide, but it still offers LTE in as a many as 181 markets and plans to reach 250 million Americans by the end of 2013.
Sprint will want to catch up with rivals soon since the LTE lag could prove costly in the coming quarters. Verizon has been leveraging its LTE lead well to outperform rivals with postpaid net adds and has already converted about 23% of its postpaid subscriber base to new 4G standard. Until now, Sprint has managed to differentiate itself well from rivals by steadfastly remaining committed to unlimited plans while rivals have moved on to tiered data plans. Since the higher-speed 4G LTE network will cause subscribers to easily overshoot their tiered data plans, we see subscribers attaching more value to unlimited plans as LTE becomes mainstream. However, Sprint needs to deliver on its plans of covering a majority of the nation with LTE by year-end if it doesn’t want to fritter away that advantage.
Disclosure: No positions.