We believe that if investors want exposure to a telecom company that offers great turnaround potential, they should buy Sprint Nextel (S) instead of Research In Motion (RIMM). Both companies were pioneers in the mobile communications industry, RIMM introduced the BlackBerry in 1999 and was the dominant smartphone vendor in the 2000s. Sprint built the US's first all-digital, fiber optic telecommunications network and the first national digital PCS mobile communications network from the ground up. Both companies have seen shocking revenue declines and losses and value-destroying acquisitions. But here is why we believe that Sprint offers a better opportunity for investors than Research In Motion:
Magnitude of Revenue Decline: Sprint's revenue peaked in 2007 at $41B and this was because it acquired two of its former wholesale affiliates in 2007 and one of its former affiliates in 2006. Sprint's revenue troughed in 2009 at $32.26B and this represented a decline of 21.4%. Sprint's revenue had incremental growth from 2010-2011 and we are estimating that Sprint will generate $37B in 2012. We forecasted Sprint continues to generate healthy revenue growth from 2012 to 2016 due to these factors:
- Sprint's Premium Data charge of $10/month is less than its national competitors AT&T (T) and Verizon (VZ). While AT&T and Verizon are taking steps to eliminate unlimited data for existing customers after taking away unlimited data for new clients, Sprint remains the only carrier that offers unlimited data to its postpaid contract clients.
- Sprint now sells Apple's (AAPL) hot-selling iPhone. Sprint's Virgin Mobile USA subsidiary and Verizon are the only carriers that sell the iPhone without a contract.
- On its first day available for sale at Virgin Mobile, the company limited iPhone sales to two per person.
- Sprint has improved its customer service rankings and competes with Verizon for top rankings in wireless telecom customer service
RIMM's annual revenue peaked in FY 2011 at $19.9B and has been declining since. The severity of RIMM's revenue decline can be seen in its quarter-on-quarter revenue declines which started in the second quarter of FY 2012 and reached a new low of 43% revenue decline in Q1 2013 versus Q1 2012. We don't see Research In Motion being able to stop this declining revenue trend this year.
Key Business Drivers: Sprint's CDMA platform registered seven straight quarters of 225K new postpaid customers. It even picked up more prepaid and postpaid customers than AT&T in Q1 2012. Sprint Nextel has gained at least ~1.1M new subscribers during the last 6 quarters and has improved its Nextel iDEN retention rate from 27% in Q1 2011 to 39% in Q4 2011 and 46% in Q1 2012.
RIMM's key business performance indicators have shown that RIMM is rapidly regressing as a company. RIMM's smartphone device volumes peaked in FY 2011 and declined by 6% in FY 2012. Service Revenue gains were offset by Hardware revenue declines. We see good news, bad news and ugly news out of RIMM. The good news is BlackBerry began selling its Playbook tablet computer last year. The bad news is that Apple's iPad outshone the Playbook and outsold it (32.4M iPads versus 1.3M Playbooks). The ugly news is that RIMM's quarterly volumes for its BlackBerry smartphone devices have sunk like a stone since Q3 2012, suffering two straight linked-quarter shipment declines and a 41% decline versus Q1 2012 for good measure.
Cash Flows: Despite ramping up capital expenditures in 2011 and 2012 as part of its Network Vision transformation, Sprint had a small free cash flow deficit of (-$37M) in 2011 and positive free cash flow of $10M in Q1 2012. RIMM actually had positive free cash flow of $169M in Q1 2013 but a free cash flow deficit of $433M in FY 2012. RIMM's operating cash flow in Q1 2013 collapsed by 31% versus Q1 2012. I guess it's a good thing RIMM has more cash and liquid assets per share and as a proportion of its balance sheet than Sprint since RIMM looks like it will need it more. We also expect Sprint's free cash flows to increase after 2013 once it completes the Network Vision project and shuts down the Nextel iDEN network.
Macroeconomic environments: RIMM has more global diversity than Sprint. RIMM has access to fast growing markets in Asia, Latin America and Africa, as well as slow-growing markets in Europe and North America. By contrast, Sprint generates all of its revenues from the US, which we believe will perform better than Europe and offers greater potential than consensus economic estimates in 2013 and beyond. We also believe that the US market has potential to turn around its sluggish growth and better compete with Emerging Markets in Asia and LatAm.
Based on these observations, we recommend investors who are long RIMM to sell their position, conservative investors avoid RIMM and aggressive investors short RIMM. We see Sprint has made further progress in its turnaround journey than RIMM. Aggressive investors may want to finance a long position in Sprint by entering into a short position with RIMM. We can see how even while Sprint was in the midst of a multi-year, multi-step transition process, it was still able to outperform RIMM by a wide margin since the end of 2008. We can see that both companies are gambling on a revolutionary smartphone. Sprint is gambling its company's future on selling the Apple iPhone and RIMM is hoping to restore its growth and profitability with the BlackBerry 10. We are surprised that BlackBerry's Playbook tablets are not available for sale at any of the carrier websites. BlackBerry's competitor Apple has its iPad with AT&T, Verizon and many more retailers than the Playbook. Even Sprint has joined the tablet market by offering 3 tablets and one laptop for sale at its website. So far we find much greater momentum for Sprint and its Apple iPhone partnership than Research in Motion and its BlackBerry smartphone product suite. Maybe RIMM should callback Microsoft (MSFT) and see if it can still participate in that Windows phone partnership. Sprint Nextel may never be Apple, but at least it's not Research In Motion. Shareholders of RIMM and Nokia (NOK) should hope and pray that Microsoft is the Sean and Leigh Anne Tuohy of the smartphone industry and that Windows Phone will blindside Apple's iPhone.
Additional disclosure: Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this report. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.