Sprint Faces Subscriber Growth Concerns After iDEN Shutdown

| About: Sprint Corporation (S)
This article is now exclusive for PRO subscribers.

Sprint (NYSE:S) shares have run up by almost 20% since it announced its Q2 earnings last month, but questions surrounding its subscriber growth still remain. The third largest wireless carrier in the U.S. recently shut down its outdated iDEN network, which has been a big contributor to Sprint’s core CDMA platform net-adds in a saturated market. Last quarter, for example, the iDEN recaptures as well as the acquisition of subscribers from the U.S. Cellular deal helped Sprint add about 194,000 postpaid subscribers to its core CDMA platform. Excluding these non-recurring adds, Sprint would have reported a net loss of upward of 200,000 postpaid CDMA subscribers in Q2. Going forward, with the iDEN network shut down and the U.S. wireless market nearing saturation, Sprint will find it even tougher to find new subscribers given its lagging 4G LTE coverage compared to rivals Verizon (NYSE:VZ) and AT&T (NYSE:T).

Unlimited Plans Limit Future Growth

The U.S. wireless market is getting increasingly saturated with the number of wireless connections having exceeded the population in mid-2011. While Sprint has so far managed to dodge the bullet by banking on an accelerated iDEN shutdown to add new postpaid subscribers to its core CDMA platform, the going might get a lot tougher in the next few quarters. In the last two quarters combined, Sprint added a little over 200,000 postpaid CDMA subscribers despite recapturing almost thrice as many from the iDEN network. Now, without the iDEN network, it will be challenging for Sprint 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 to mitigate this impact that Sprint is aggressively pushing its unlimited plans, even going so far as to offer a lifetime unlimited guarantee on its plans recently. Sprint is also splurging on its Network Vision strategy to increase LTE coverage to about 200 million POPs by the end of the year. As a result, Sprint's wireless capital expenditures have burgeoned, increasing by about 70% year over year to over $1.7 billion last quarter.

The carrier has also used its recent infusion of cash from Softbank to buy out Clearwire and use its huge swathe of 2.5 GHz spectrum to bolster LTE capacity in densely populated areas. While the acquisition gives Sprint the spectrum depth and capacity to continue offering unlimited plans in the near term, the big focus on unlimited plans could limit its future ARPU growth potential. The carrier's smartphone penetration in postpaid is the highest among the major carriers at almost 80%, limiting the upside to its high postpaid ARPU of $64 in the longer run if it doesn't eventually make the transition to tiered data plans.

Meanwhile, the larger national carriers, Verizon and AT&T, have long stopped offering unlimited data plans and are instead focusing on increasing penetration of their shared data plans. Shared data plans give carriers more control over how much data they can afford to offer for a particular price without straining their networks. These plans are also beneficial for many users as they can use multiple devices in the same data bucket, potentially decreasing the per device costs for a family.

Further, as the demand for other connected devices rises, shared data plans will make it easier for users to manage all their device plans from a single account and further spur data demand and ARPUs. Increasing the adoption of high-speed LTE is also causing wireless data consumption to shoot up, but Sprint stands to benefit only if the unlimited plan users switch to tiered plans and buy into the upper tiers. Sprint is likely to miss out on this huge growth opportunity if its offer of unlimited data guarantee doesn't translate into enough market share gains to help offset the potential ARPU impact.

Sprint's Q3 results will be very important in this context for it will give us insights into the carrier's performance in the absence of iDEN as well as the adoption of its lifetime unlimited plans. We will also be observing Sprint's EBITDA margins to see how much of a positive impact the iDEN shutdown has had on the metric in the face of the acquisition of Clearwire's loss making business.

Disclosure: No positions.