There was a time not long ago that I wouldn't touch Sprint Nextel (S) with a ten foot pole. In 2007, the company endured massive revenue decline and losses due to a variety of factors including possibly the worst telecom acquisition of all time when it agreed to purchase Nextel. Despite Sprint's previous success, things went south shortly following the 2005 Nextel move. In 2007, revenue peaked at $41B and then hit a low at $32B in 2009; representing a massive decline of over 21% in just two years.
Since those dark days, I believe the once proud telecom giant has made a series of strategic decisions backed by enough positive results to warrant serious long-term investment consideration.
Important Strategic Moves
The First Move: In 2010, Sprint rightly reassessed its Nextel blunder and announced plans to shut down Nextel's iDEN network in 2013. Earlier this May, the FCC granted approval for this endeavor. From a technical and competitive perspective this is a big deal. It means that Sprint can offer significant coverage improvements via its new Network Vision. Technically speaking, Sprint can now convert old iDEN cell sites to Network Vision sites that transmit CDMA2000 1X Advanced over the low frequency band previously occupied by iDEN cells.
By deploying CDMA 2000 and LTE on this spectrum, Sprint will gain an advantage that has been principally held by AT&T (T) and Verizon (VZ); low-band wireless service. Low-band wireless services cover larger ranges with fewer towers and provide far better indoor coverage than high-band wireless service. Since the spectrum has already been approved for use with LTE, Sprint will be able to tout a much improved coverage map at a lower relative cost by adding LTE coverage in more than 115 additional cities by the end of 2013.
The Second Move: In 2011, Sprint made several critical announcements about its aforementioned Network Vision. First, it abandoned plans to include WiMAX from its network architecture. What with its recent deal with Apple (AAPL) to offer the iPhone to its subscribers, the company made the right move in recognizing LTE, rather than WiMAX as the next wireless standard. Second, Sprint unveiled the additional flexibility of its Network Vision cells. Sprint sites can operate independently. In practice, this means that Sprint can easily plug in new radio network technologies through certain interfaces and essentially be able to add additional networks.
This allows other network operators to contract Sprint to host their networks (HSPA+, for example), over Sprint's wireless band. Finally, Sprint's Network Vision architecture supports all major frequency duplexing and time duplexing bands. From a business stance, this makes what Sprint calls "spectrum hosting" possible and Sprint itself a unique, potential, strategic partner. If a prospective network operator wants to lease its frequencies to Sprint in order use Sprint's infrastructure to host its own network, Sprint can easily allow its cells to operate as components of the network managed by that operator. Though, it was ultimately unable to reach an agreement with LightSquared, I believe the possibility to pursue mutual business in this vein remains high.
Since righting the ship in Q2 of 2010, the company has enjoyed eight straight quarters of incremental growth that I think will continue in the future.
In six of these eight quarters, Sprint added 1.1 million subscribers or more. Importantly, post paid subscriber losses have declined by a compounded annual average of 60% since 2008, which I think is telling evidence of Sprint's renewed dedication to customer service. During this time period, Sprint has taken advantage of its flexible cell sites to become the leading carrier for mobile virtual network operators. This allows the company to compete extremely competitively at the prepaid wholesale level and within the Machine to Machine communications space; the latter of which presents a $1.2 trillion industry.
When I look at the company over the last 12 months, I see even better results. The Sprint platform has gained (excluding Nextel) more total subscribers than Verizon, AT&T, Deutsche Telekom (DTEGY.PK), MetroPCS (PCS) and U.S. Cellular (USM) combined. Sprint only has about a year and a half more of Nextel run off and increased its retail postpaid contract subscriber retention rate from 27% in Q1 2011 to 46% in Q1 of 2012. Finally, consider iPhone sales. Though Sprint has predictably sold fewer iPhone's given its smaller customer base than AT&T and Verizon, a closer examination of these numbers reveal positive results. Since last October, Sprint's iPhone sales to new customers has been 40% or better and 20% of Sprint's postpaid customer base is on the iPhone; a penetration rate that has increased by 5% each quarter.
All this has helped contribute to the stock's year-to-date performance increase of 143%.
The combination of technology and business decisions implemented beginning in 2010 and corresponding revenue trends, has allowed Sprint to chip away at the AT&T and Verizon duopoly, enough so that Softbank agreed to purchase 70% of the company. For long-term investors, I believe this move makes Sprint an even more attractive target. By infusing cash, I think that Sprint will look to aggressively expand its customer base through acquisitions of its own. One potential target is Clearwire (CLWR). Sprint already owns 48%. In the deeply saturated U.S. telecom market, it would make sense for Sprint to acquire Clearwire to give the company further spectrum. I already see evidence of this mindset with the announcement of Sprint's purchase of spectrum and customers (585,000) from U.S. Cellular for $480 million.
In sum, I would urge current shareholders and prospective investors to place their trust in Dan Hesse who has done nothing but inherit an awful situation and put the company back on the right track.