Does Sprint have strategy for long-term revenue growth

Sprint
Sprint’s restructuring initiatives bear fruit in Q3 2016, but long-term challenges remain, says Steve Vachon, research analyst at TBR.

Sprint continued to rebuild its postpaid subscriber base and improve its financial position in Q3 2016. A high note was Sprint reporting its lowest-ever postpaid phone churn (1.37 percent) amid competitive pressures from the launch of the iPhone 7 and the new T-Mobile One plan, indicating heightened customer satisfaction with Sprint’s service plans and network coverage.

Sprint also reported consolidated revenue growth (3.4 percent year-to-year) for its first quarter since 1Q14, thanks to higher equipment revenue generated through its leasing and EIP program. However, Sprint remains unable to increase wireline revenue, and wireless service revenue remains in decline due to lower ARPU stemming from the company’s aggressive pricing strategies.

Sprint has cut over $1.1 billion in operating costs so far in FY16, which has enabled the carrier to increase operating income from a loss of $2 million in Q3 2015 to positive $622 million in Q3 2016. Due to Sprint’s cost-cutting initiatives, Sprint’s operating income and adjusted EBITDA guidance for FY16 are higher than FY15 totals, and the company expects to break even in adjusted free cash flow at the end of its fiscal year.

Though Sprint is moving in a positive direction, challenges persist, such as the company’s negative net income, high prepaid subscriber losses and lower capex budget that may hinder investments necessary to support its LTE network. Sprint also remains reliant on leaseback arrangements, including a transaction announced in October where Sprint will mortgage 2.5GHz and 1.9GHz spectrum licenses for $3.5 billion, to improve liquidity and manage its heavy debt load.

Sprint capitalized on the launch of the iPhone 7 through its competitive pricing offers

The annual launch of the latest iPhone is a choice time to target new customers, as many consumers are waiting for the new device to release before switching carriers. The success of Sprint’s revamped pricing strategies was evident during the launch of the iPhone 7, as the carrier garnered five times as many postpaid phone net additions (347,000) compared to Q3 2015. Offerings including a free iPhone 7 trade-in promotion, the new Unlimited Freedom and the flagship Cut Your Bill in Half promotion contributed to Sprint’s high postpaid phone net additions in Q3 2016.

Sprint’s Unlimited Freedom programs launched in August, within the same timeframe as launch of the T-Mobile One plans. The programs share similar features, but T-Mobile One’s entry-level plan is $10 higher than Sprint’s comparable Unlimited Freedom plan, which will help Sprint better target cost-conscious customers.

T-Mobile also plans to phase out its Simple Choice tiered data programs to offer T-Mobile One exclusively, which will give Sprint the opportunity to target customers who cannot afford the entry T-Mobile One price of $70 per month.

The telecom operator’s CEO Marcelo Claure reiterated in September Sprint will eventually discontinue its Cut Your Bill in Half promotion, likely at the beginning of 2017, to consolidate its service options. Though this move will help Sprint improve ARPU, it may be detrimental, as the promotion is a key differentiator for the carrier and has been a main contributor to Sprint’s improved postpaid subscriber additions over the past two years.