Can Sprint win more customers from AT&T, Verizon?

Sprint broadband
Steve Vachon, research analyst at TBR, says Sprint’s Q2 2016 results indicate improvement, but long-term prospects remain dim.

The highlight of the Sprint’s Q2 2016 earnings announced today was the net addition of 173,000 subscribers in the second quarter as against net losses of 12,000 in the prior year quarter.

Sprint has posted operating revenues of $8 billion, net loss of $302 million, operating income of $361 million and adjusted EBITDA of $2.5 billion.

“We had another quarter of solid progress in our turnaround with the highest first quarter postpaid phone net additions in nine years1, the lowest postpaid phone churn in company history, and finally being postpaid net port positive against all three national carriers after five years,” said Sprint CEO Marcelo Claure.

Sprint said that LTE Plus Network outperforms Verizon, AT&T, and T-Mobile by delivering the fastest LTE download speeds based on recent crowd-sourced data from Nielsen. Sprint’s reliability beat T-Mobile and performed within 1 percent of AT&T and Verizon.

Sprint’s LTE Plus network is now available in 237 markets in the U.S. 2.5GHz spectrum now carries more of Sprint’s LTE traffic than any other spectrum band. Sprint did not share its investment plan for the next quarter.

Steve Vachon of TBR says Sprint made incremental progress in its quest to repair its postpaid subscriber base and financial position in Q2 2016. First, Sprint’s focus on undercutting competitors contributed to the carrier outperforming AT&T and potentially Verizon in postpaid phone net additions in Q2 2016. Second, increased satisfaction with the carrier’s service offerings and network quality contributed to the carrier reporting its lowest postpaid phone churn in the company’s history. Third, Sprint was also able to report wireless revenue growth for the first time in two years due to higher equipment revenue generated from its leasing programs.

Sprint is not without concerns, however. Sprint’s success in gaining postpaid subscribers comes at the expense of its prepaid business, which hasn’t added subscribers since 1Q15. TBR attributes the carrier’s struggle in the segment to pressures from Cricket and MetroPCS as the operators have been successful in attracting value-minded postpaid basic phone customers to its smartphone plans. To remedy this issue, Sprint plans to relaunch its Virgin Mobile business in 2H16 offering a stronger value proposition. Additionally, Sprint’s service revenue remains in decline due to its reliance on aggressive pricing offers such as the Cut Your Bill in Half promotion to gain subscribers.

Sprint is also cutting capex, which declined 62.6 percent year-to-year, as part of its cost-cutting initiatives. Capex is also decreasing due to small cell deployments being delayed due to regulatory hurdles network vendor Mobilitie is facing in certain markets. Reduced capex, coupled with subscriber additions, is likely to cause Sprint’s network quality to suffer, which could cause a spike in churn down the road. Sprint will also be limited in its ability to invest in next-generation technologies such as 5G and NFV/SDN, which will give competitors an advantage in the long-term.

Sprint shifts to a new business model to ensure short-term survival

To boost cash flow in the short-term, Sprint is transitioning to a new operational structure in which devices used for leasing programs, network infrastructure, and soon spectrum, are owned by third-parties and are leased back to the carrier. This new business model contributed to Sprint raising $5.8 billion in liquidity in Q2 2016, which will help the company stay afloat this year and ensure debt payments are satisfied, including $2.3 billion in payments that are due in 2016.

TBR believes the aforementioned strategies will help Sprint stay afloat this year but unless core issues are resolved long-term, such as the carrier’s cash flow concerns and inability to generate positive net income, Sprint will either file for Chapter 11 bankruptcy and reorganize or be acquired within the next three to five years.

The SoftBank company needs more investment and customers to catch up with AT&T, T-Mobile and Verizon. When Verizon announced its $4.8 billion deal today to acquire Yahoo business, Sprint does not have any action plan to take on the three leading telecom operators. Though Sprint is owned by SoftBank and SoftBank has a strong presence in the digital space, Sprint is not trying to leverage the potential of video and content.

Baburajan K
[email protected]