I reiterate my neutral rating on Sprint Corporation (NYSE:S). The stock is slowly moving forward to improve its performance and address the intense competition in the telecom sector. Although the company's Framily plan initiative, coupled with large scale advertisements, grew its top-line in the recent past, but due to the backhaul in network upgradation schemes, the company's struggle to stabilize churn and grow the subscriber base continues. On the other hand, EBITDA growth is largely attributed to its cost saving initiatives. As the company continues to invest in network upgrades, keeps on saving by improving operational performances and makes the best use of cost savings by advertising its products and packages, Sprint is likely to improve its performance in the long-term.
Struggling to Improve
Although the company's results in the recent first quarter were a bit mixed, its top-line grew modestly due to the success of Sprint's Framily plan. The company's Framily program was an innovative launch that sought to let existing customers add more members to the network. As the company enhanced the Framily offers by adding content to the mix and also offered free music trials, Sprint's revenue base grew 1% year-over-year in 1Q14. Going forward, the company is sticking to this revenue-generating opportunity and is adding increased benefits to its Framily Plan. Also, I believe that with the recent extension of its unlimited data offers for new Sprint Framily customers and the elimination of Framily plan restrictions, Sprint's revenue base will grow modestly in coming quarters.
In addition, the company witnessed a steady growth of customers due to its newly introduced rate plans under the Framily program. As the Framily program reached the 1 million customer mark in just 40 days, the company reported a modest improvement in its operating income. With its operating income of $420 million being Sprint's highest income in the last seven years, the company's EPS once again outperformed analyst estimates, as shown in the chart below.
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However, the company has still not matched the level of competition being offered by its peers in term of network quality. In its attempt to improve network quality, Sprint is upgrading its 3G and voice infrastructure through its Network Vision Plan. But the network disruptions that subscribers are facing during this upgradation process have kept the company's churn elevated and overall subscriber base pressurized.
Moreover, on the LTE front, the company is exposed to intense competition. The company is trying to catch the competition in the sector by investing in LTE coverage and network speeds under its Network Vision program. However, the company's expectation to expand its LTE coverage to 250 million POPs by mid-year remains behind its peers, AT&T (NYSE:T) and Verizon (NYSE:VZ), which have already reached 280 million and 305 million POPs, respectively, in 1Q14. I believe that as the company completes the upgradation of its Network Vision build-out program, the company will be able to report improvements in its subscriber base. As for now, I expect another tough quarter (2Q14) for the company's subscriber base.
Moreover, the aggressive pricing moves by big players in the industry like AT&T have also pressurized Sprint's subscriber base. In 1Q14, AT&T continued to add subscribers at an impressive pace with its new pricing initiatives under NEXT and More Value Share plan. In addition, T-Mobile (NASDAQ:TMUS)'s Uncarrier strategy intensified the price war in the industry. Due to intense competition in the industry, Sprint lost 364,000 prepaid subscribers in 1Q14. Also, Sprint lost 747,000 postpaid phone subscribers in 1Q14, underperforming its peers, as shown in the chart below.
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Source: Companies Quarterly Earnings Report
Recently, TMUS announced its Uncarrier 5.0 strategy, which allows customers to take the iPhone 5 for a 7-day trial. With this initiative, TMUS is going to give tough competition to Sprint, which already has a weak subscriber base. Sprint has tried to respond to TMUS' strategy, reviving its 30-day "satisfaction guarantee" program. Also, Sprint offers a unique combination of improved network experience, exclusive Framily plan and distinctive services under the program. I believe the revival of the satisfaction guarantee program is an intelligent initiative by Sprint to support its subscriber base in the intense competitive industry environment.
Cost Savings = Saving the Margins
Sprint is on track to pulling the cost out of its operations. With its focused efforts to improve operational performance, the company's customer care expenses were down $100 million year-over-year in 1Q14. Due to the cost saving initiatives, the company's 1Q14 EBITDA margin of 23.4% was the highest in almost six years. Going forward, as the company remains committed to improving its cost structure, it has the opportunity to invest savings to support its performance. I believe that as Sprint's network modernization plan is near completion, the company should use its cost savings to ramp up its marketing initiatives to convey to subscribers the level of improvements incorporated in its network.
Merger with TMUS = Potential to Grow
In the recent past, leading telecom sector giants have been focused to grow through mergers. Sprint also eyes an opportunity to grow by merging with TMUS. Although the merger is subject to regulatory approval, Sprint is highly confident about the possible merger. I believe that if the merger takes place, the combined entity will intensify competition in the industry. Moreover, the deal will give the combined company large scale access to rural markets, which the two companies lack individually due to the large scale presence of T and VZ in rural areas.
The company's struggling subscriber base and revenue growth are exposed to competition in the sector. I believe the ongoing cost-saving initiatives will allow the company to reinvest savings by advertising the packages it offers to attract subscribers. Also, the company's efforts to enhance its network quality and expand its LTE coverage will improve the company's competitive position in the industry.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.