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Summary

  • Sprint reported Q214 numbers that beat estimates.
  • Some trends below the headline numbers are discouraging.
  • Expect the stock to struggle unless it merges with T-Mobile to reduce the competitive pricing environment.

The latest quarterly report from Sprint (NYSE:S) shows some improvements in the cost structure leading to improved results. Unfortunately for investors, hidden in the details are some concerning trends suggesting the company might need the rumored merger with T-Mobile US (NYSE:TMUS) to reduce the competitive pricing environment.

The pricing wars and a shift toward tablets are causing the wireless providers to take a hit on average revenue per user (ARPU). Following the earnings release, the stock fell 3% for the day despite a mixed market.

Q214 Numbers: Good News

The Q214 numbers had plenty of high points. The company provided the following highlights for the quarter:

  • Wireless service costs declined $243 million over last year due primarily to the elimination of the Nextel platform.
  • Operating income of $519 million was the highest in seven years.
  • Adjusted EBITDA of $1.83 billion grew 30% over the prior year period leading to an EBITDA margin of 24%, the highest in six years.
  • Largely completed an upgrade and replacement of 3G and voice network.
  • 4G LTE coverage expanded to 254 million people.

The earnings of $0.01 easily exceeded estimates with EPS projections of analysts sitting at a loss of $0.04 versus a large loss last year. The numbers were generally better than expected, but the big picture remains a mixed bag with lots of uncertainty. Sprint is easily exceeding margin and profit expectations though some of that is a byproduct of less costs from the bad news.

Q214 Numbers: Bad News

While some of the headline numbers presented by Sprint were solid, the below details weren't nearly as promising for the long-term prospects.

  • Wireless service revenue declined 3% sequentially.
  • Interest expense of $512 million wiped out the majority of the operating income listed above.
  • Q2 platform postpaid ARPU declined $1.45 sequentially to $62.07.
  • Platform postpaid subscribers declined 646,000 while tablets added 535,000 devices for a net decline during Q2.

Great cost control benefits were mostly wiped out by the reduction in handsets that were replaced by lower revenue tablets.

ARPU Plummeting

The biggest concern is that Sprint is trading out handsets for tablets leading to a plunging ARPU. The company called out the $2.13 year-over-year decline in ARPU due to a higher tablet mix and customers migrating to the Family plan that offers group discounts.

Source: Sprint Q214 Quarterly Update

Conclusion

Sprint is seeing some encouraging trends on the cost side that is helping the company report better than expected numbers in the short-term. Unfortunately, it has lost all momentum with phones and the CEO hinted at reduced pricing on the earnings call that could hit ARPU even more going forward. If anything a merger with T-Mobile is needed to offset the ongoing pricing wars, but the previous analysis at the start of the year suggests Sprint could face another Nextel nightmare with integrating the networks.

If anything, it appears that the third wireless provider is in between a rock and a hard place with the news that French carrier Iliad is making an offer for T-Mobile. Considering Iliad reportedly is aggressive with pricing in France, a combination would be very negative for Sprint. Even with Sprint down considerably from recent highs, it isn't attractive until the domestic wireless market becomes less competitive.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

Source: Is Sprint Dead Without T-Mobile?

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