Modeling Sprint's iPhone Sales

| About: Sprint Corporation (S)

On Monday, I wrote an article estimating volume requirements for Sprint's $15.5 billion 4-year iPhone contract with Apple (NASDAQ:AAPL). Based on my estimations, I calculated that Sprint (NYSE:S) will need to sell 23.8 million iPhones over the length of the contract - while the company is on pace to hit 25.2 million, based on the current run-rate (adjusted for seasonality).

Conservatively, this estimate did not include any consideration for sales from Sprint's pre-paid operations, although the company recently announced that its Virgin Mobile pre-paid subsidiary will offer the iPhone on June 29 and its Boost subsidiary is rumored to follow suit (in September of this year). All-in-all, I believe that the analysis of the current run-rate trends provides reason for optimism, with respect to Sprint's Apple contract.

That said, extrapolating four-years out from a run-rate of two quarters of sales (after launch) is filled with limitations. For starters, new sales can get increasingly more difficult as iPhone penetration, within Sprint's subscriber base, increases. On the positive side, the outer quarters/years will benefit from both new customers added and existing customers buying new models, after their contracts expire or they pay-up early to upgrade to the newest model.

To help address these limitations, I did a back-of-the envelope analysis -- simplistically considering these, and other factors, for the four years of the Apple contract. The assumptions I made are as follows (which I believe are conservative, overall):

1.) The Sprint platform's post-paid subscriber base increases by 5% for the first two years (in-line with recent trends) and then remains flat for years three and four.

2.) Sprint continues to add new iPhone customers at the current rate for 4 more quarters, when iPhone penetration for Sprint's post-paid platform reaches 32% (in-line with the iPhone's recent U.S. smart-phone market share, which has been increasing, as has overall smart-phone penetration). Subsequently, iPhone customer numbers remain flat and all incremental sales will be exclusively from renewals/rollovers (i.e. no new iPhone customers for the last 2.5 years of the 4 year Apple contract).

3.) Existing customers will upgrade to a new iPhone every 18 to 20 months (many will wait the full-two years, for the contract to expire, but some will upgrade early to get the newest model or to replace lost/stolen phones).

4.) No pre-paid sales are included, although Sprint will be offering the iPhone through these channels.

Using these assumptions, I get to a total cumulative number of iPhones sold of 25.5 million (see below), versus my estimate that they will need to sell 23.8 million over the life of the contract. Again, this does not reflect pre-paid sales, which I expect to be meaningful.

Year 1: 2011 2012 2012 2012
  Q4 Q1 Q2 Q3
New customers: 1.8 1.5 1.5 1.5
Rollover/renewals: - - - -
Quarterly iPhone sales: 1.8 1.5 1.5 1.5
Total Sprint iPhone subs: 1.8 3.3 4.8 6.3
Total Sprint post-paid subs: 28.7 29.0 29.3 29.7
iPhone % of post-paid: 6% 11% 16% 21%
Cumulative iPhone sales: 1.8 3.3 4.8 6.3
Year 2: 2012 2013 2013 2013
  Q4 Q1 Q2 Q3
New customers: 1.8 1.5 - -
Rollover/renewals: - - 1.8 1.5
Quarterly iPhone sales: 1.8 1.5 1.8 1.5
Total Sprint iPhone subs: 8.1 9.6 9.6 9.6
Total Sprint post-paid subs: 30.1 30.4 30.8 31.2
iPhone % of post-paid: 27% 32% 31% 31%
Cumulative iPhone sales: 8.1 9.6 11.4 12.9
Year 3: 2013 2014 2014 2014
  Q4 Q1 Q2 Q3
New customers: - - - -
Rollover/renewals: 1.5 1.5 1.8 1.5
Quarterly iPhone sales: 1.5 1.5 1.8 1.5
Total Sprint iPhone subs: 9.6 9.6 9.6 9.6
Total Sprint post-paid: 31.2 31.2 31.2 31.2
iPhone % of post-paid: 31% 31% 31% 31%
Cumulative iPhone sales: 14.4 15.9 17.7 19.2
Year 4: 2014 2015 2015 2015
  Q4 Q1 Q2 Q3
New customers: - - - -
Rollover/renewals: 1.5 1.5 1.8 1.5
Quarterly iPhone sales: 1.5 1.5 1.8 1.5
Total Sprint iPhone subs: 9.6 9.6 9.6 9.6
Total Sprint post-paid: 31.2 31.2 31.2 31.2
iPhone % of post-paid: 31% 31% 31% 31%
Cumulative iPhone sales: 20.7 22.2 24.0 25.5
Click to enlarge

As with my run-rate estimations, this back-of-the-envelope forecast has obvious limitations and a lot of surprises could occur over the life of the four-year Apple contract (both positive and negative). That said, I believe that the assumptions are quite conservative, overall, and the conclusions provide additional reason for optimism.

Disclosure: I am long S, AAPL.