Editor’s note: As Sprint continues to explore future options, Technology Business Research Steve Vachon offers some ideas after reviewing the communication giant’s latest earnings report. Weakening postpaid churn and average revenue per customer surface as Sprint competes in the unlimited data era, so is a merger with another firm the best way for the company to improve its future?
HAMPTON, N.H. – Competitive pressures continue to weigh on service revenue, but Sprint benefits from its leased device strategy, TBR believes.
The challenge Sprint faces competing in an unlimited data world was highlighted in 2Q17 as the company was the only Tier 1 carrier to report weaker year-over-year postpaid phone churn in the quarter. Though Sprint reported modest phone net additions (+88,000) in 2Q17, it came at the expense of wireless service revenue declining 6.2% year-to-year as the company remains committed to undercutting competitors to draw subscribers – to the point of launching a promotion in June offering new postpaid customers one year of free services.
Conversely, prepaid ARPU will be pressured in 2H17 as Boost Mobile and Sprint’s revamped Virgin Mobile brand price more aggressively to gain a more prevalent pricing advantage over MetroPCS and Cricket.
Strong equipment revenue growth (+39.4% year-to-year) remains a highlight for Sprint and is enabling the company to sustain total wireless revenue growth (+2.8%). Sprint’s leased device strategy is serving as a differentiator to sustain postpaid phone subscriber growth as the programs appeal to customers seeking to obtain the latest device models each year, which will help Sprint to stand out amid the expected upcoming launch of the next iPhone. Leased device programs are also benefiting Sprint’s equipment revenue and margins as a result of the company reselling returned leased handsets as refurbished devices to customers and third parties such as Brightstar.
Sprint remains under pressure to participate in industry consolidation
Sprint reported positive net income for the first quarter since 2Q14, but this was largely due to accounting changes made to the company’s device insurance programs, which contributed to wireless cost of services expenses dropping 20.9% year-to-year. Sprint’s financial position remains challenged as its balance sheet is highly leveraged and the company currently holds over $34 billion in long-term debt. Additionally, Sprint reported negative free cash flow (non-adjusted) of $253 million in 2Q17. Improving free cash flow will remain challenging as the company will need to continue to increase capex to support its unlimited data strategy long term.
Amid the more relaxed regulatory environment under the Trump administration a flurry of potential Sprint M&A scenarios have made headlines recently, including the renewal of talks of a T-Mobile merger, collaborations with Comcast and Charter, and aid from investors including Warren Buffet and Liberty Global Chairman John C. Malone.
Regardless of what transpires in coming months, TBR believes assistance from outside investment will be beneficial as Sprint’s debt load remains difficult to control and the company struggles to balance needed network investments and improve free cash flow.
Joining up with a cable operator would enable Sprint to enhance its competitiveness and value proposition as the mobility and video industries converge even more. Collaborating with a video provider will help Sprint keep in step with AT&T’s DirecTV Now wireless bundles and a potential upcoming nationwide Verizon TV streaming service, enabling the carrier to more strongly cement its subscriber base amid heightening competitive pressures.
A tie-up with T-Mobile also provides great opportunity as both companies position to offer 5G mobility services in the 2019 to 2020 time frame. Sprint’s vast 2.5GHz spectrum holdings coupled with the success of T-Mobile’s Un-carrier go-to-market strategies would create a formidable opponent for AT&T and Verizon in the 5G era.