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Sprint And The Severe Market Overreaction, Part II
- In my previous article, I discussed why Sprint is a bargain risk-reward value going forward.
- Due to the outstanding response, I felt I should elaborate on Sprint as a long position.
- Sound management decisions, combined with access to SoftBank's deep pockets for the 600 MHz auction in 2016 are all good signs for the beleaguered telecommunications provider.
- Sprint has become a lotto ticket, and we'll explain why.
- The company is under a mountain of debt and free cash flow generation remains elusive.
- A buyout may be the only way investors get bailed out, but that's not much of an investment case, in our view.
- Sprint (S) has seen its share of tough times over the past several years.
- It will take a while to right the ship, but leadership seems to be on the right track.
- There are hidden gains in the steeply discounted prices that Sprint has recently brought to the market, which may well produce an upswing to current forecasts.
- Sprint recently introduced a new plan to attract customers and give a boost to its declining postpaid subscriber base.
- The carrier has also been lagging rivals Verizon and AT&T in LTE coverage and quality, but claims that most of its network upgrade is complete.
- Our price estimate for Sprint is about $6.50, which is significantly ahead of the current market price.
- Sprint entered the wireless service price wars in August with one of the more aggressive cuts we've seen in telecom.
- If Sprint's plan doesn't work, lower operating margins and revenue will result.
- With Sprint's high debt and unprofitable business, 2015 will be a crucial year, one that could result in significant stock losses.
- Evercore predicts that Sprint will need to raise substantial cash to fund operations and prepare for the 2016 spectrum auction.
- Domestic wireless pricing wars created by Sprint caused the company to lower adjusted EBITDA forecasts by a dramatic amount for the current fiscal year.
- Softbank relationship might help with the capital raise, but it won't reduce any dilutive impact.
- Company has opted to offer cheap individual and family plans along with unlimited data plans.
- Also focusing to build strong network with enhanced capacity and coverage.
- Company has managed to reduce its subscriber loss.
- Jeff Hallock is departing, and the "Framily" plan he oversaw was cut.
- Marcelo Claure has cut jobs, cut prices, and changed the marketing strategy.
- Previously, I didn't think Sprint's low price plans were going to drive risk-adjusted returns for the company.
- The departure of the Chief Marketing Officer Jeff Hallock and the end of Framily has changed my position.
- I believe Sprint offers the best value in wireless, but the company did a terrible job of educating consumers. The goat will fix that.
Consistent Strategic Policies Remain Key In Determining Sprint's Long-Term Performance
- Competition in the industry has adversely affected the company’s top and bottom-line numbers in the recent past.
- Top-line numbers and ARPU are likely to remain pressurized due to competitive pricing strategy opted by S.
- Cost cut efforts will positively affect bottom-line numbers in the future.
- Sprint reported a dismal second quarter across the board.
- Q2 EPS was negative $.19, missing estimates by $.13.
- Management cut guidance on EBITDA.
- The stock price was climbing leading up to earnings and then fell sharply from over $6/share to under $5/share.
- I predicted that the new plans weren’t going to provide risk adjusted returns, but I was nowhere near this bearish.
Sprint's Network Strategy Key To Sustainable Growth
- Sprint has embarked on an aggressive price campaign that will stem subscriber losses in the short term, but is limited by tight margins.
- Cost cutting measures have had an impact on investor confidence but will be short-lived.
- The key to Sprint’s success will be a clear network strategy that sells its differentiated 2.5 GHz network.
- Sprint officially announces the commencement of layoffs.
- Investors should continue avoiding the stock.
- Cost cuts were anticipated amid the wireless pricing war and investors were warned that the race to the bottom isn't a good investment thesis.
Sprint Focuses On Cutting Costs And Growing Organically As New CEO Makes Moves
- Offers new cheap plans for family and individuals.
- The company offers the best deal for its iPhone 6 subscribers.
- Network improvements remain core focus for company.
Sprint Takes The Right Approach To Survive Tough Competition Across Its Industry
- The company has opted for competitive pricing to address competition.
- Recent deals will help strengthen its subscriber base, but will likely adversely affect top-line and ARPU growth.
- The company needs to ramp up network upgradation efforts across covered markets to enhance customer experience.
Sprint: Claure Off To A Good Start, But The Road To Recovery Is Long And Uncertain
- Incoming CEO Claure made a great impression in his first month on the job.
- Investors like the unlimited iPhone deal, in an attempt to aggressively grow the customer base.
- The smaller scale and leverage remain key disadvantages in an industry that's very competitive.
Thu, Apr. 24, 10:10 AM
- Verizon (VZ -2%) had only 539K wireless postpaid net adds in Q1 (549K total), down from 677K a year ago (720K total) and for once below AT&T's quarterly postpaid figure of 625K. Also, retail churn rose 7 bps Y/Y to 1.37%, and retail postpaid churn 6 bps to 1.07%.
- Those figures raise the question of whether Verizon's commitment to a premium pricing strategy in the face of a T-Mobile-launched price war is impacting subscriber adds.
- Nonetheless, wireless service revenue grew 7.5% Y/Y, nearly even with Q4's 8% and much better than AT&T's 2.2%. Wireless op. margin rose 210 bps to 35%, and retail postpaid ARPA 6.3% to $159.67. Verizon ended Q1 with 103.3M retail connections (97.3M postpaid).
- Wireline revenue fell 0.4%, as 4.4% and 6.4% declines in enterprise and wholesale revenue (caused in part by voice weakness) offset a 6.2% increase in consumer retail (driven by 15.5% FiOS growth). Wireline op. margin rose 10 bps to 1.5%.
- 98K and 57K FiOS Internet and TV subs were respectively added, down from 126K and 96K in Q4. Total broadband connections (FiOS or otherwise) rose 1.5% to 9M.
- Q1 free cash flow was $3.93B, below net income of $5.99B but above illustrative net income of $3.8B. Verizon is still expecting 4% 2014 revenue and EBITDA growth. Its dividend yield stands at 4.6%.
- Sprint (S -3.2%) and T-Mobile (TMUS -2%) are following Verizon lower. They fell yesterday in the wake of AT&T's report. Sprint reports on April 29
- Q1 results, PR,
Thu, Mar. 27, 11:52 AM
- SoftBank's (SFTBF) $3.17B sale of Japanese mobile ISP eAccess to Yahoo Japan is fueling speculation the Sprint (S +3.6%) parent is raising funds for a T-Mobile USA (TMUS +1.4%) bid.
- In spite of regulatory pushback, SoftBank's Masayoshi Son continues to press his case for a deal. "A duopoly is taking over our country," he declared today at an industry trade show. "if you look at [the past] five years … it is a fact that those two big companies increased [their market share] from 56% to 73%. What happens in the next five years?"
- T-Mobile's recent share gains (following years of losses) might have regulators thinking the next five years could go differently than the last five. The ripple effects of the #4 carrier's aggressive pricing might also influence their thinking.
- Son has promised he'd launch a "price war" if a Sprint/T-Mobile deal was approved, and that the merged carrier would act as a last-mile broadband rival to cable/phone duopolies - that could be easier said than done in densely-populated urban areas.
Fri, Mar. 21, 1:52 PM
- As part of the restructuring taking place at parent SoftBank's behest, Sprint (S +1.1%) is closing 55 of its worst-performing retail stores and 150 service/repair centers, and laying off 330 technical consultants.
- In January, Sprint disclosed it had begun conducting layoffs, and would record $165M in Q4 charges related to them. Since then, the carrier has announced it's cutting 1.5K customer service jobs.
- Sprint's headcount currently stands at ~40K.
Tue, Mar. 4, 2:02 PM
- With FCC/DOJ regulators strongly suggesting they'll oppose any attempt by Sprint (S +3.1%) to merge with T-Mobile USA (TMUS +3.6%), SoftBank's (SFTBF, SFTBY) Masayoshi Son "plans to appeal directly to the U.S. business community and policy makers" to convince them the deal would be good for customers, the WSJ reports.
- Crucial to Son's effort: Convincing his audience Verizon and AT&T currently have a de facto U.S. mobile duopoly, one that Sprint and T-Mobile can't challenge independently.
- Likely to hurt his cause: T-Mobile is now rapidly adding postpaid subs (after losing them for years) with the help of innovative pricing schemes, and regulators reportedly fear a Sprint merger could affect T-Mobile's "maverick" status within the industry.
- Sprint and T-Mobile are both outperforming today. Son plans to make a major presentation on March 11 at the Chamber of Commerce in Washington D.C.
- More on Sprint/T-Mobile
Wed, Feb. 12, 10:20 AM
- Deutsche's Brett Feldman has upgraded Sprint (S +1.4%) to Buy following yesterday's Q4 report, albeit while leaving his PT unchanged at $9.25. He cites Sprint's spectrum advantage (presumably a reference to its high-frequency assets following the Clearwire deal), and the carrier's 2-year EBITDA growth outlook.
- However, Feldman still expects major subscriber losses in 1H14, followed by "a return to modest growth" once Sprint's Network Vision 4G initiative is finished. He's also skeptical a T-Mobile USA (TMUS +0.4%) deal will happen in light of regulatory concerns.
- But while regulators continue signaling their skepticism, SoftBank's (SFTBF) Masayoshi Son appears undeterred in his quest to merge the #3 and #4 U.S. U.S. mobile carriers. Son tells the WSJ it would be "a dream within a dream" to challenge Verizon and AT&T without the scale provided by an acquisition. "I can't settle for No. 3 or No.2. It's my personality."
- Recent WSJ and Bloomberg reports suggested Sprint/SoftBank are weighing their options in the wake of recent DOJ/FCC comments.
Tue, Feb. 11, 9:34 AM
- Sprint (S +7.2%) saw a net gain of 682K mobile platform subs in seasonally strong Q4 - 58K postpaid, 322K prepaid, 302K wholesale/affiliate. Though that figure is well below Verizon and T-Mobile's Q4 net adds, and moderately below AT&T's, it represents a turnaround from Q3's 95K net loss (includes a loss 360K postpaid subs).
- The #3 U.S. carrier is also guiding for 2014 adjusted EBITDA of $6.5B-$6.7B, up from a 2013 level of $5.4B and a 2012 level of $4.8B. Q4 adjusted EBITDA margin was 14.5%, up from the year-ago period's 10.3%.
- Mobile service revenue rose 2% Y/Y to $7.15B, equipment revenue (phone/tablet sales) rose 15% to $1.16B. SG&A spend was nearly flat at $2.44B.
- Postpaid ARPU was $64.11, down slightly from $64.24 in Q3 and $64.17 a year ago. Postpaid churn rose to 2.07% from 1.99% in Q3 and 1.98% a year ago.
- Sprint's wireline division saw revenue drop 9% to $859M. Its op. income fell to $23M from $71M.
- With parent SoftBank (SFTBF) willing to spend aggressively to improve Sprint's 4G coverage, Sprint has set a 2014 capex budget of $8B, up from a 2013 level of $7.5B and a 2012 level of $5.4B.
- Q4 results, PR
Tue, Feb. 11, 9:10 AM
Thu, Feb. 6, 11:16 AM
- After rallying yesterday on a report Sprint (S -6.1%) is close to lining up $45B in financing for a T-Mobile USA (TMUS -5.4%) bid, Sprint and T-Mobile are selling off following a Bloomberg report stating FCC/DOJ regulators have "resisted the concept" of a merger between the carriers in preliminary talks with SoftBank's (SFTBF) Masayoshi Son, and that Son and Sprint's Dan Hesse now "plan to decide in the next few weeks whether to move ahead on a bid."
- Bloomberg adds Deutsche Telekom (DTEGY) has asked Son to "gauge regulatory sentiment" towards a merger, and that Son and DT's perception of regulatory feedback will "determine their next steps."
- In addition, SoftBank and DT are reportedly at odds over the breakup fee for any deal - SoftBank wants a small one on account of regulatory risks, DT feels differently.
- FCC and DOJ officials have already suggested they're skeptical about backing a merger between the #3 and #4 U.S. mobile carriers. While Sprint might argue the carriers need to merge to effectively compete against Verizon/AT&T, T-Mobile's recent share gains bring that claim into question.
- More on Sprint/T-Mobile
Wed, Feb. 5, 2:20 PM
- Sources tell dealReporter Sprint (S +6.5%) is close to obtaining $45B in financing for a T-Mobile USA (TMUS +3.9%) bid. Both Sprint and T-Mobile shares have spiked higher in response.
- The WSJ previously reported Sprint has received proposals from at least two banks for a bid that would value T-Mobile's equity at $31B. In addition to the financing needed to acquire Deutsche Telekom's (DTEGY) 67% T-Mobile equity stake, Sprint and parent SoftBank (SFTBF) will need funds to cover (and potentially refinance) T-Mobile's $20B debt load.
- The report comes as DOJ/FCC officials continue taking a skeptical view of a deal that stands to reduce the number of nationwide U.S. carriers to three.
Mon, Feb. 3, 12:02 PM
- Following a Q4 in which it saw disappointing net subscriber adds and intensifying competition from T-Mobile (TMUS -1%), AT&T (T -3.4%) has launched aggressively-priced plans for families looking to share 10GB/month of data between accounts while receiving unlimited talk/text.
- A family with just two smartphones still has to pay $130/month, but each additional smartphone costs only $15/month. One important catch: Like AT&T's recent shared data plan discount and a $200 credit provided in its T-Mobile promotion, the family plans require users forgo traditional smartphone subsidies. AT&T's efforts to pare subsidy expenses are a major reason its wireless op. margin rose 690 bps Y/Y in Q4.
- AT&T is underperforming on a bad day for equities, as are Verizon (VZ -3.4%) and Sprint (S -4.3%). While AT&T, Sprint, and (especially) T-Mobile have launched major discounts and promotions in recent months, Verizon has maintained its premium pricing strategy, betting its coverage and service quality will allow it to continue delivering industry-leading subscriber adds and margins. But fears are growing Big Red increasingly has no choice but to return fire.
- AT&T's latest move comes days after the carrier announced a $100 credit for each new line opened by a new or existing subscriber.
Mon, Jan. 27, 1:48 PM
- During a Bloomberg TV interview, outspoken T-Mobile USA (TMUS -0.1%) CEO John Legere provided fresh hints his firm is open to merging with Sprint (S +6.5%).
- Legere: "We all need better scale and capability ... The question starts to be: How do you take the maverick and supercharge it? We either need more spectrum and capability and a lot more investment, or we need consolidation."
- Sprint and parent SoftBank (SFTBF, SFTBY) have been widely reported to be lining up financing to acquire Deutsche Telekom's (DTEGF, DTEGY) 67% T-Mobile USA stake. But regulators might object to a tie-up, particularly given T-Mobile's efforts to shake up the U.S. mobile industry via aggressive/novel pricing schemes.
- Separately, Sprint announces it has expanded its 4G LTE network to cover 40 more markets, including Milwaukee and Salt Lake City. Sprint, which is trying to neutralize Verizon and AT&T's LTE coverage leads, now offers LTE in 340 markets.
Fri, Jan. 24, 12:46 PM
- Sprint (S -3.2%) discloses it recently began implementing job cuts, and plans to record $165M in related Q4 charges. "Additional material charges" are expected in future quarters.
- News of the cuts comes amid concerns Sprint, which is scrambling to build out its 4G LTE network and neutralize Verizon/AT&T coverage leads, continues to lose share to rivals. Verizon and T-Mobile's recent numbers have amplified those fears.
- Separately, Sprint announces it has no plans to bring back the Nextel brand. TechCrunch reported last month the carrier is looking to reintroduce the Nextel brand to underpin its business services.
- Sprint's Q4 results are due on Feb. 11.
Thu, Jan. 16, 5:20 PM
- The WSJ reports Sprint (S) has "received proposals from at least two banks" for financing a T-Mobile USA (TMUS) bid, and envisions valuing T-Mobile's equity at $31B (compares favorably to a current market cap of $26B).
- Financing, of course, is only one of several challenges Sprint would face in merging with T-Mobile. The company and parent SoftBank (SFTBF) would have to negotiate a deal for Deutsche Telekom's (DTEGY, DTEGF) 67% T-Mobile stake. They would also have to win the blessing of FCC/DOJ regulators who seem to prefer having four nationwide carriers around, and appear to be pleased with T-Mobile's aggressive pricing.
- There's also the matter of Dish (DISH -2.2%), which reportedly won't stand idly if Sprint bids for T-Mobile, and could have much less trouble winning the blessing of regulators.
- In addition to acquiring Deutsche's T-Mobile stake, Sprint may need to backstop a possible refinancing of ~$20B worth of T-Mobile deal.
- S +2.8% AH. TMUS +2.3%.
Thu, Jan. 9, 2:42 PM
- AT&T (T -1.9%), Verizon (VZ -2%), and Sprint (S -4.4%) are each selling off after T-Mobile USA (TMUS -1.1%) announced a credit program for defecting mobile subscribers - up to $300 in credit for trading in a phone, buying an approved T-Mobile phone, and signing up for a postpaid plan, and up to $350 to pay off termination fees - that was even more aggressive than expected. Sprint is also being pressured by a Deutsche downgrade to Hold.
- FBR's David Nixon likely speaks for many on the Street when he expresses concerns AT&T, Verizon, and Sprint "will be forced to react to the move." Fears that T-Mobile's efforts will pressure industry margins and increase churn have already been running high. AT&T announced a smaller promotion (up to $450 in credit) last week.
- Nixon also says CES feedback points to "surprising confidence from T-Mobile US that a merger with Sprint could be approved if argued on the right basis." T-Mobile CEO John Legere didn't rule out a future acquisition by Sprint yesterday, though he did suggest T-Mobile's brand would be maintained post-acquisition. Legere also took quite a few shots at his rivals.
- Meanwhile SoftBank (SFTBF, SFTBY) CEO Masayoshi Son isn't mincing words regarding Sprint's challenges. In a Nikkei column, Son blasts Sprint's marketing efforts (all of the company's ad agencies have been fired), and says the carrier "has gotten used to being a loser."
Fri, Jan. 3, 9:32 AM
- Sprint (S -4.1%) has been cut to Sell by Stifel. Cowen and Macquarie downgraded shares yesterday in response to the carrier's big December run-up.
- Infosys (INFY +2.7%) has been upgraded to Overweight by HSBC; FQ3 results are due on Jan. 10.
- Finisar (FNSR +3.3%) has been upgraded to Strong Buy by Raymond James.
- Maxim (MXIM +1.5%) has been upgraded to Outperform by BMO.
- AppliedMicro (AMCC -2.9%) has been cut to Market Perform by BMO.
- Sierra Wireless (SWIR -2.1%) has been cut to Equal Weight by Stephens.
Thu, Jan. 2, 9:42 AM
- Sprint (S -3%) has been cut to Market Perform by Cowen, and to Neutral by Macquarie, following a major run-up fueled in part by T-Mobile M&A hopes.
- T-Mobile (TMUS -1.5%), meanwhile, has been pulled from Goldman's Conviction Buy list. Its shares have taken off in response to reports Sprint and Dish are mulling bids.
- Xilinx (XLNX +1.1%) has been upgraded to Buy by Goldman, and rival Altera (ALTR -1.8%) has cut to Neutral.
- UniPixel (UNXL -4.4%) has been cut to Market Perform by Cowen following the departure of its CEO and COO.
- Intersil (ISIL -4.9%) has been cut to Underweight by Evercore.
- NXP (NXPI -4.3%) and ON Semi (ONNN -4.7%) have been cut to Neutral by Goldman, and fellow chipmaker Analog Devices (ADI -2.5%) has been cut to Sell. ADI has also been cut to Market Perform by Wells Fargo.
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