Sprint (NYSE:S) is expected to announce its Q1 2014 results on April 29th. The third largest wireless carrier in the U.S. is facing intense competition for new subscribers, with rival T-Mobile (NYSE:TMUS) stepping up its "uncarrier" promotions and AT&T (NYSE:T) responding aggressively with pricing discounts of its own last quarter. Sprint has also been lagging rivals Verizon (NYSE:VZ) and AT&T in LTE coverage, which is proving key to retaining and adding new subscribers in a saturated market. Last quarter, the carrier added only 58,000 postpaid subscribers - a sharp decline from the 400,000 added the previous year and much below T-Mobile's 869,000 for the quarter. However, growing smartphone penetration and LTE usage should continue to help Sprint increase its data ARPU levels going forward. Like Verizon and AT&T, we expect Sprint to continue to see its margins improve on decreasing subsidy costs, helped along by the cost savings that the carrier is realizing from the shutdown of its iDEN network and ongoing Network Vision initiatives.
The carrier has seen its shares go through a very volatile period of late on the back of rumors that it is lining up a potential acquisition bid for T-Mobile. While such a deal could help Sprint compete better with Verizon and AT&T, it faces regulatory issues as well as significant risks associated with integrating two huge complex networks (see Sprint's Potential Bid For T-Mobile Could Make For A Risky Merger). Sprint's shares rallied almost 60% on the rumors in the last two months of 2013 but have since shed most of those gains this year. Our $8 price estimate for Sprint is about in line with the current market price.
Competitive Pressure From AT&T, T-Mobile
T-Mobile's aggressive posturing last year, when it launched the iPhone on its network for the first time and introduced no-contract plans, saw the carrier perform impressively against its rivals. Last quarter, T-Mobile added 869,000 net postpaid subscribers, compared to a loss of 515,000 in the prior year quarter. While T-Mobile's subscriber gains have come at the expense of most rivals, Sprint seems to have been the most affected due to its lagging LTE coverage and Network Vision upgrades causing service disruptions in many markets. Last quarter, T-Mobile announced porting ratios which showed that it gained 3 subscribers for every 1 lost to Sprint - the most among the top three carriers. Sprint still managed to hold on to its market share last year due to the subscribers it added from deals with US Cellular and Clearwire. With AT&T entering the price war in earnest last quarter, Sprint's subscriber concerns are likely to have exacerbated. It will be interesting to see the response that Sprint's Family plans, which were launched as an answer to rivals' no-contract plans, have seen in the marketplace.
While subscriber defections are likely to be a concern in the near term due to Network Vision-related issues, Sprint expects these upgrades to be substantially complete by mid-year. Its LTE coverage - also a concern over the last couple of years - is expected to reach 250 million PoPs by then and become less of a disadvantage as compared to rivals. With Sprint's Spark plans expected to pick up speed after the Network Vision rollout, we expect the carrier to become a lot more competitive toward the end of 2014 and beyond.
Expensive Spark Program Worth It
Sprint's Spark strategy will help it make use of Clearwire's 2.5GHz spectrum to add data capacity and potentially push 4G speeds to more than five times what is currently prevalent in the industry. By catching up in LTE coverage and potentially leading the industry in data capacity and speeds, Sprint will finally have a compelling advantage over rivals to differentiate on service rather than pricing. This is important for the long-term ARPU growth of the company, which is currently limited by its over-reliance on unlimited plans. With data demand surging, offering subscribers access to unlimited data could prevent Sprint from capitalizing on the future growth in data usage as LTE speeds become ubiquitous. By differentiating on data speed and capacity, Sprint could come up with innovative speed-based tiers at premium pricing to mitigate the long-term impact of its unlimited data plans. However, Sprint's Spark rollout will be slow, with only 100 million PoPs (or about a third of the U.S. population) expected to be under coverage by the end of the year.
However, the implementation of Spark will require significant capital expenses. Despite the fact that Network Vision is expected to be substantially completed by mid-2014, Sprint maintained its CapEx estimate at last year's elevated level of $8 billion.
While the network modernization plan is proving to be expensive, it is also helping reduce operating expenses substantially by eliminating the duplicate fixed costs of maintaining different networks. It is allowing for better 3G/4G coverage and reducing roaming costs as the spectrum previously used for iDEN is increasingly utilized for the CDMA/LTE network. Rolling out an LTE network is helping Sprint improve its service gross margins as well, since it is a much more efficient network to manage than existing 3G networks. Sprint's wireless EBITDA margins in 2013 increased by 2 percentage points over the previous year. Also, going forward, we expect Sprint's long-term capital expenses to decline substantially to their historical averages as TD-LTE deployment is completed and Sprint realizes the benefits of the higher data capacity of Clearwire's spectrum.
Disclosure: No positions.