Amit Chokshi
submits:
While skeptics still remain, in recent weeks momentum has been
gaining for Sprint-Nextel ([[S]] or the "Company"). In February,
I debunked the bear case on S
. Since that time, Q1 10 earnings (see call
transcript
) demonstrated continued positive progress with the Company gearing
up for the release of the HTC EVO 4G, widely considered the best
phone available. In addition, over the past week, a few more
notable news items were released, further strengthening the bull
case for S.
One of the biggest and misinformed aspects of the Company's bear
case is that S carries a large debt load. This was thoroughly
discussed and debunked in my initial post on S. Bears note that the
Company carries roughly $21B in debt but this number is meaningless
in isolation. First, S has $4.4B in cash, reducing net debt to
roughly $17B. Second, S has about $6B in trailing EBITDA. The
Company is leveraged at under 3.0x Net Debt/EBITDA and anyone
familiar with leveraged finance would realize that this is hardly
an aggressive leverage multiple. Last, S faced little refinancing
risk, with most maturities in the next two years under $2B.
On Friday, May 21, 2010, the Company demonstrated that lenders
certainly didn't consider its debt load to be an issue, as the
Company entered into a new $2.1B unsecured revolving credit
facility. The new facility allows S considerable flexibility as the
Company can incur leverage of up to 4.5x trailing EBITDA through
March 2012 before stepping down to 4.0x in 2013. To remind readers,
S is currently leveraged under 3.0x LTM EBITDA, demonstrating the
confidence lenders have with the Company. The new facility further
supports the assertion that the Company's debt load is a non-issue.
In addition, S skeptics came to find that the Company's customer
service initiatives have been paying off against peers. On May 18,
2010, the American Customer Satisfaction Index ("ASCI") reported
that S customer satisfaction leapfrogged one of its key
competitors, AT&T (
T
). More importantly, the Company showed the largest improvement
among the four largest wireless carriers for the second year in a
row, scoring 70 on the ACSI compared to 73 for Verizon Wireless (
VZ
) and T-Mobile and 69 for AT&T.
AT&T is likely aware of its slippage in the ASCI rankings. More
importantly, the key to AT&T's resurgence in recent years - the
iPhone - is losing its cachet. The iPhone is being assaulted in
terms of its operating system as Google's (
GOOG
) Android operating system benefits from open source and provides a
phenomenal user experience. In prior years, the iPhone had the best
operating system, leaving competing smartphones in the dust.
However, Android has closed the gap entirely and could begin to be
superior to the iPhone OS once Android 2.2 is released.
In addition, new phones, particularly those from HTC, are just flat
out better than what the iPhone offers. Sprint may benefit the most
because while it's been improving its financial condition,
operating metrics, and customer service, the Company never had that
"hot" phone. Having a marquee phone is critical in attracting users
and S finally has not only a good phone, but the most anticipated
smartphone for 2010. Engadget, for example, said that the HTC EVO
4G was "one of the best smartphones ever made" while PC World notes
that "It's not just one killer feature that puts the EVO over the
top; the spec sheet reads like a wish list for anyone who's owned a
touchscreen smartphone."
It's clear that technology and mobile phone enthusiasts are primed
for the release of the HTC EVO 4G. Numerous third party reviewers
have stated that EVO 4G is the best smartphone available. AT&T
apparently believes this too, as it made a clear signal to its
subscribers that they would have to pay if they wanted to switch
carriers. Last week, AT&T announced that it would raise the
termination fees for its smartphones from $175 to $325. The timing
of this announcement, just a few weeks before the release of the
HTC EVO 4G, is unlikely a random coincidence.
The "premium" wireless carriers like AT&T have remained
pathetically stagnant in recent years, content to fleece their
customers while Sprint has made legitimate changes that have now
positioned it to capture postpaid marketshare. For example,
AT&T has a poor 3G network that can't handle the data needs of
its customers in key regions like NYC. In addition, AT&T and
Verizon Wireless charge far more for comparable plans and use
obscure marketing to mislead consumers.
For example, AT&T and Verizon Wireless offer unlimited talk
plans for $69.99/month. This is a joke considering the growth in
smartphones whereby many people utilize their phones for far more
than voice capabilities. Sprint offers a $69.99 plan that allows
for unlimited mobile to mobile voice, unlimited data, unlimited
messaging, Sprint GPS, and annual phone upgrades. If one wanted a
similar plan through Verizon Wireless, that $69.99 plan would be
nearly $130/month. But that's still not the total cost under
Verizon Wireless. This is because data usage is generally
smartphone specific and Verizon and AT&T both charge an extra
monthly fee to simply have a smartphone tied to their network. This
"smartphone fee" runs $30/month where as Sprint does not charge
this fee.
So essentially, the Company's $69.99 month on a smartphone covers
basically everything while the comparable plan for Verizon, for
example, would be $160/month. This goes back to a key point for S
bears, who point out that Verizon and AT&T have larger EBITDA
margins than S, so therefore can crush S in a pricing war. Bears
are reading this incorrectly.
This basic breakdown of plan pricing shows that Verizon and
AT&T command higher operating margins to a large extent because
they bilk their subscribers. The illusion of a "premium" network is
starting to fade in part due to Sprint's resurgence in customer
service and value. Sprint has the "it" phone for the year and
offers a very competitive pricing program, charging just
$79.99/month which would be Sprint's $69.99 Everything Data Plan
along with a $10 mandatory 4G fee.
Some have griped about the plan because the $10 fee is mandatory
and 4G has not been fully rolled out. This is somewhat of a
laughable complaint as 4G will be available in about 40 large
cities by the end of 2010 and more importantly, $79.99/month is far
lower than what comparable phone plans go for. So for roughly
$80/month, a S subscriber can use the most powerful phone on the
market on both the Company's 3G and 4G network with no significant
limitations, while for roughly double that, Verizon Wireless and
AT&T subscribers can use a 3G-only phone on, in the case of
AT&T, an overworked, poorly performing 3G network. In addition,
termination fees for Verizon Wireless and AT&T subscribers
using smartphones run over $300 while the Company charges just $200
and also offers a 30 day money back guarantee. Even if Verizon or
AT&T lowered their overall comparable pricing to $130 or $120,
why would a customer be compelled to use AT&T or Verizon
Wireless compared to the Company's overall plan, when it's clear
the "premium" networks have overcharged their customer base?
AT&T and Verizon Wireless will experience far more operating
margin compression than the Company at this point. If anything, S
is better positioned to experience margin expansion. If the HTC EVO
4G is the catalyst I believe it will be, it will drive market share
capture in postpaid. More importantly, ARPU levels for the HTC EVO
4G will be higher than the average S phone. As a result, S could
show some serious operating improvements over the course of the
next year.
In summary, while skeptics remain, Sprint is clearly well
positioned for a powerful resurgence in 2010. They have attacked
both the post and prepaid markets and could be the best positioned
company in the wireless space, potentially capturing a higher level
of postpaid marketshare than anyone expects. The sellside is still
cautious on Sprint and the media has lagged in its coverage of the
HTC EVO 4G and the Android OS, choosing to remain enamored with
coverage of what is becoming a stale iPhone. These views on Sprint
allow for enterprising investors to capitalize on an excellent
opportunity in a generally choppy 2010.
Disclosure:
Author manages a hedge fund and managed accounts long
Sprint-Nextel.
See also
EU Debt Crisis, May / June Update: Imminent Default
Threat Off, But Deterioration Continues
on seekingalpha.com