Sprint Corp (S) On the Right Track But Will Require Time and Cash
Sprint Corp (NYSE:S) isn’t sitting comfortably in the U.S. phone services market. The reason is that the company still has a lot of ground to cover against larger rivals AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ). Sprint is also not safe from assaults from its smaller rival T-Mobile US Inc (NYSE:TMUS), which is fighting hard to dethrone it as the U.S. No. 3 carrier.
There is no doubt that Sprint is fighting back on various fronts. However, the one question that begs for a deeper answer is whether the company stands a chance in the war it is fighting.
What is clear at this juncture is that Sprint has already identified areas that need immediate attention and is working to address them. For that reason, the company’s efforts are on the right track, except that it will need a lot of patience and cash to see the fruits of its labor.
As to whether Sprint investors will be willing to wait for the promised benefits it is up for debate. However, a closer analysis of the efforts Sprint is making to turn around its fortunes could just serve as reason enough to make investors wait a little longer.
Here is a look at some of the steps being taken by Sprint to bolster its position in the U.S. phone carrier market and their potential impact.
Sprint Corp (NYSE:S) is expanding the coverage of its high-speed 2.5 GHz network. With network infrastructure modernization, Sprint hopes to deliver best-in-class network speeds to boost its competitive edge. So far, the company has expanded its superfast LTE network connection, that runs on the 2.5 GHz spectrum, to 16 new markets. As such, Sprint’s LTE 2.5 GHz now captures 62 markets and covers 100 million people.
Sprint also continues to drive its Spark initiative with the rollout of LTE almost 50% complete. The company expects to complete the full rollout of LTE by the end of 2015.
With the network upgrade, Sprint will be able to lower subscriber churn, remove dual networks and cut energy costs. The combination of these gains is expected to save the company anywhere from $10 to $11 billion in the period between 2011 and 2017.
Already the company expects its consolidated adjusted EBITDA to rise in the range of 5% to 7% in fiscal year 2015 from fiscal year 2014.Sprint expects nearly half of its profit margin expansion to come from network upgrade efforts, with the rest coming from core operations.
International Value Roaming plan
Sprint has figured out a strategy that is aimed to lead to multiple benefits. The company has launched what it called an International Value Roaming plan, a way through which the company ensures that subscribers remain connected no matter where they are traveling. Through the International Value Roaming plan, Sprint hopes to lure more subscribers with lower calling and data costs, a move that is also expected to reduce its subscriber churn rate.
Initially, International Value Roaming is available in some 15 countries, including Japan. The other regains captured in the plan are Europe and Latin America.
Through International Value Roaming, Sprint customers enjoy data connection speeds of up to 2G to enable them to surf the Internet while traveling abroad. International Value Roaming connections do not come at an extra cost for Sprint subscribers. The plan also includes unlimited texting and lower voice rates of just $0.20 per minute, as long as a subscriber is in any of the countries currently covered under the International Value Roaming initiative.
Existing and new Sprint subscribers can activate International Value Roaming at no extra cost.
In addition to International Value Roaming, Sprint also offers Wi-Fi calling as another competitive service to retain its existing user base and lure more subscribers from rival networks with lower rates.
More store locations
Sprint Corp (NYSE:S) has cut a deal to open and operate mini-shops inside some 1,750 RadioShack Corporation (OTCMKTS:RSHCQ) stores. The move is likely to enable Sprint to boost its brand recognition and spur its turnaround as it will have more store locations to serve customers.
Sprint’s mini-shops will take up one-third of space in every RadioShack store. RadioShack and Sprint will co-brand the stores with the Sprint brand featuring the most in the storefronts and other advertising materials.
Eliminating postpaid churn
Sprint is trying to improve its competitive edge by addressing issues that range from perception to price plans. Network modernization and simpler pricing plans have been able to lead to post paid gains. For example, the company has been able to reduce post paid subscriber losses even though there remains a lot to be done on that front. In the first quarter 2015, Sprint managed to register churn improvement, although it still lost 200,000 postpaid subscribers in the quarter, along with $1 billion in free cash flow.
Fundraising for network modernization
Sprint Corp (NYSE:S) has secured $300 million in credit funding from an existing financier in Canada. The company also inked a $1.8 billion financing deal with some three 2.5 GHz network equipment vendors to back its network upgrade.
Both the financing from the Canadian backer and the deal with the equipment vendors are expected to boost LTE 2.5 GHz network modernization.
Areas of concern
Soft position in unlimited front
Currently, Sprint’s network is not able to sustain unlimited data usage. For that reason, just about a quarter of the company’s subscriber base is on unlimited plans and the demand for unlimited data usage has been rising. The networking modernization efforts should happen more rapidly to ensure that the company can drive more competitive edge on the unlimited plans front.
Cash position concern
Sprint needs a lot of cash to drive its network modernization and other campaign efforts. The company finished the first quarter with cash in hand of $4.2 billion and borrowing capacity of $3.3 billion.
Given Sprint’s $5 billion capex guidance for fiscal year 2015, and other working capital needs, the company’s cash position isn’t flexible enough.
Sprint may need to raise additional equity to shore up its cash position and fund its aggressive turnaround strategy.
Pressure on margins
To expand its customer base and retain existing subscribers, Sprint is spending heavily on programs that range from lucrative discounts and promotions. These efforts erode cash and cause a dent profit margins.
March quarter highlights
For the March 2015 quarter (Sprint’s fourth quarter 2014), Sprint suffered a net loss of $224 million, or $0.06 a share. The loss widened from $151, or $0.04 a share, a year earlier. Revenue for the quarter was $8.3 billion.
Sprint Corp (NYSE:S)’s weak quarterly financial results are a reflection of competition growing intense in the U.S. wireless space. The U.S. wireless market is already saturated with 95% wireless penetration. For players looking to gain more market share, the intense competition environment will likely put pressure on the top and bottom line numbers.
However, Sprint’s network modernization and new competitive products, such as the International Value Roaming plan, should bolster its position in the long-term.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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