Sprint Bleeds Postpaid Subscribers But Margins Improve As iDEN Shutdown Nears

| About: Sprint Corporation (S)

Sprint (NYSE:S) announced a mixed set of Q1 2013 results in its earnings report April 24th, reversing the spate of recent losses with an operating profit in a quarter that saw flat revenues and deep postpaid subscriber losses. While most of the 560,000 net retail postpaid losses were on account of the impending shutdown of the iDEN network, the core CDMA platform didn’t do too well either.

Despite recapturing almost half of its iDEN departures, Sprint added only about 12,000 net postpaid subscribers to its core CDMA platform last quarter, deeply under-performing rivals Verizon (NYSE:VZ) and AT&T (NYSE:T). The transition away from iDEN however helped Sprint deliver its best adjusted OBITDA margins in four years as the company derived cost savings from its Network Vision plans. The iPhone also continued to repay Sprint’s faith by helping it post its best ever CDMA platform postpaid ARPU of $64, or growth of 2% over the year-ago quarter.

Improving OIBDA margins helped Sprint generate almost $1 billion in cash from operations, all of which and more was used up in funding its Network Vision Plans and accelerating its LTE deployment. Sprint’s capital expenditures increased more than 75% over the same period last year to about $1.4 billion, and the high rate of spending is likely to continue for the next few quarters. The cash burn is however likely to be a non-issue in the coming years as the carrier is likely to complete most of its network modernization by the end of the year. With Sprint’s fortunes turning the corner, it recently received a competing buyout bid from DISH Network (NASDAQ:DISH), and the likelihood of Softbank coming up with a counter offer has driven its stock price up by close to 30% this year.

Our revised $7 price estimate for Sprint is close to the market price.

Saturated Wireless Market and LTE Lag to Blame

The U.S. wireless market is getting increasingly saturated with the number of wireless connections having exceeded the population in mid-2011. While Sprint’s dismal CDMA platform postpaid net adds is symptomatic of this industry-wide phenomenon, it is also a stark reminder of the situation it may find itself in in a few months when the legacy iDEN network is completely shut down. In the March quarter, Sprint recaptured almost 264,000 subscribers from the postpaid iDEN platform but still ended up with only 12,000 net postpaid adds on the core Sprint platform. Without the iDEN network, which has seen a steady supply of subscribers for its core CDMA platform, Sprint may struggle to find new subscribers. To be completely fair, even Verizon and AT&T are likely to have benefited from the iDEN migration in the past several quarters, so the issue won’t be Sprint’s alone. However, the fact that Sprint’s LTE coverage far lags the wireless leaders, Verizon and AT&T, could hamper its wireless growth in the coming quarters.

It is in this light that the importance of the iPhone comes to light. The carrier seems to have done a fine job with the iPhone, using it effectively to bring aboard high quality postpaid subscribers from rival platforms. Although iPhone sales of 1.5 million last quarter were flat y-o-y, almost 43% of these sales went to new Sprint customers. The increasing number of iPhone postpaid subscribers helped push Sprint’s overall postpaid ARPUs up by about 2% y-o-y to about $64. Driven by increasing smartphone penetration, we expect Sprint’s postpaid ARPUs to continue to grow in the coming quarters, but at slower rates than last year.

High CapEx Justified in the Long Run

In order to support the surging data demand and to position itself competitively against rivals, Sprint is aggressively investing in network upgrades and LTE deployment as part of its Network Vision initiative. However, while Network Vision is proving to be expensive, a successful implementation of the strategy will reduce operating expenses substantially by eliminating duplicate fixed costs of maintaining different networks. It will also allow for better 3G/4G coverage and reduce roaming costs as the spectrum previously used for iDEN would be utilized for the CDMA/LTE network. (see Sprint To Build LTE Over iDEN’s Grave) Rolling out an LTE network will help it improve its service gross margins as well, since it is a much more efficient network to manage than the existing 3G networks.

As LTE adoption rates rise and the iPhone brings in highly lucrative postpaid subscribers, Sprint will also see its data ARPU levels rise in concert. Sprint’s unlimited LTE plans will help it maintain its niche and differentiate itself from rivals’ tiered data plans. Unlimited plans will likely be more valuable for LTE than they were for 3G since LTE is a higher-speed technology and will cause subscribers to easily overshoot their monthly quota for tiered plans. (see Sprint Promotes Unlimited Plans As Verizon, AT&T Move To Shared-Data Plans)

Disclosure: No positions.

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