VoIP Will Boost Sprint’s Landline Profit Margins

| About: Sprint Corporation (S)

Sprint (NYSE:S), which competes with Verizon (NYSE:VZ) and AT&T (NYSE:T) in the landline business, has experienced improvements in its landline profit margins due to a shift mix to more IP-based communication services like VoIP. While Sprint’s overall landline (voice, data, VoIP) business revenues continue to decline, the improvement in margins has made its landline business more valuable than our earlier estimate. We have updated our Trefis price estimate for Sprint’s stock from $4.13 to $4.31, in part to reflect higher landline profit margins.

Sprint’s landline business comprises mainly traditional voice lines, data and IP-based services like internet and VoIP. We now estimate that Sprint’s landline business constitutes about 14% of the company’s stock.

Expected Increase in Mix of IP-based Services

Unlike traditional voice and data revenues which have declined, Sprint witnessed a 7% increase in its IP-based services revenue in 2009. Sprint’s IP-based services, including offerings like VoIP, now constitute 42% of its landline revenues, up from 25% in 2008. We expect IP-based revenues to flatten and even decline towards the end of our forecast period. However, due the declining revenues in the traditional voice and data business, the IP-based mix will continue to increase.

You can modify our forecast below to see how Sprint’s stock could be impacted if Internet Protocol Revenues were to continue growing.

Higher Landline Margins Expected

IP-based services have higher margins than Sprint’s other landline services. The increasing IP revenues have resulted in a 1% increase in overall landline gross margins to 35% in 2009. Although landline margins will continue to trend downward, we expect them to fall less than our previous forecast. We now expect landline gross profit margins to decline to about 34% by the end of Trefis' forecast period. You can modify our forecast below to see how Sprint’s stock would be impacted if margins were to decline more than we forecast.

Author's disclosure: no positions.