Sprint: Don't Get Sucked Into Focusing On FQ2 Subscriber Growth

| About: Sprint Corporation (S)

Summary

Sprint posted mixed preliminary FQ2 results with a focus on revenues and subscriber additions.

The wireless carrier continues to generate sizable losses and miss crucial EBITDA targets despite the growth.

The company is juicing short-term cash flows in a dangerous move by under spending on network upgrades.

The biggest concern with the turnaround play by Sprint (NYSE:S) was the desire to focus on undercutting the pricing of the big wireless carriers. Adding customers becomes easy, but making money off those customers is a different story.

The preliminary FQ2 results were rushed out probably to impress investors with the growth in revenues and subscribers while glazing over the mounting losses and EBITDA miss (via Barron's). The stock is up at multi-year highs for apparently the wrong reasons.

The Sprint platform added 740,000 net additions for FQ2. The key number is that the numbers included 347,000 postpaid phone net additions. These quarterly additions were indeed impressive in relation to the previous results.

Source: Sprint FQ1 Investor Update

These numbers sure beat the alternatives, but Sprint has investors looking at the wrong narrative. The real question is what profits the wireless carrier can achieve from adding these customers on discounted pricing plans.

In this case, the numbers aren't getting better. The net loss was down sequentially. Sprint lost $302 million last quarter and $360 million in FQ2. Don't be fooled by the numbers that include the gain from the spectrum swap.

The real story is that Sprint got the network close enough to Verizon (NYSE:VZ) and T-Mobile (NASDAQ:TMUS), cut capital spending, and is trying to juice short-term cash flow metrics probably in order to handle the massive debt loads that required the recent deal to mortgage spectrum.

Sprint only spent $470 million capital expenditures on the network during the quarter. The number is far below the depreciation charge for the network. Hence, the net loss is still huge, but the wireless carrier can generate positive free cash flows. The big question is how long the network can stay competitive while under spending.

The key investor takeaway is that Sprint now has an enterprise value of $60 billion. The company plans to reach EBITDA of up to $10 billion for the year that would typically provide a reasonable valuation multiple.

The problem though is that the wireless carrier still produces sizeable losses making the stock one to avoid outside of momentum trades as Sprint trades above key moving averages. When the stock turns south again, one won't want to own Sprint as the under spending on the network comes home to roost.

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