By
Trefis
:
Sprint (
S
) plans to announce its Q2 2012 earnings on Thursday, July 26th. We
will be closely watching the company's net postpaid subscriber
additions for the quarter, as well as the postpaid churn numbers to
see if the management is continuing on its strong iPhone
performance so far. The iPhone's first couple of quarters at Sprint
was good as the smartphone helped it add a good number of new
subscribers to its core Sprint network despite an industry-wide
saturation in wireless growth. Sprint started offering the iPhone
on its network at the start of the fourth quarter last year,
becoming the third carrier in the U.S. to offer the device after
AT&T(
T
) and Verizon (
VZ
).
The carrier's strong iPhone performance, as well as an
increasing optimism about its funding requirements for the
ambitious
Network Vision Project
being met, has caused its stock price to shoot up by almost 50%
this year. Its recent rollout of LTE in the first few markets has
also bolstered the market's perception of its ability to execute on
an accelerated LTE build-out. As a result, Sprint has seen a
meteoric rise in its stock price, which is now about 10% below our
$3.75 price estimate.
See our complete analysis of Sprint here
Sprint needs to maintain strong iPhone sales
Sprint has been incurring heavy annual postpaid subscriber
losses for a long time now, and its decision to carry the iPhone
came as a solution to that problem. However, since Sprint was a tad
late in jumping on the iPhone bandwagon, it had to make a huge
upfront commitment of nearly $15.5 billion for the iPhone over a
four-year period. This was a massive bet considering that the
company has a highly leveraged balance sheet, with about $26
billion in debt on its books compared to a market capitalization of
only around $10 billion.
This, in addition to its high capital requirement for the
Network Vision project, caused its stock to take a beating last
year. However, the wager seems to have paid off so far with the
carrier having reported two strong quarters of postpaid net adds on
its core Sprint network. Sprint added a net 263,000 subscribers to
the Sprint platform last quarter, below the previous quarter's
539,000 but a tad more than net adds posted in Q1 2011. This came
even as an increasingly saturated wireless market caused behemoths
Verizon and AT&T to add fewer postpaid subscribers last
quarter. The iPhone's importance to Sprint can also be judged from
the fact that it is bringing a lot of new customers to Sprint.
(almost 42% of total iPhone sales, as of Q1 2012, were to
subscribers new to Sprint).
During the earnings call, we will therefore be keeping a close
watch on the company's iPhone additions to see if it has been able
to keep up with the encouraging statistics from the last two
quarters. It will also bring more visibility around its chances of
meeting the iPhone commitment, which we believe has been bolstered
by the carrier's recent decision to offer a
prepaid iPhone
under the Virgin brand. The company may however continue to lose
postpaid subscribers overall since we expect another quarter of
postpaid iDen losses, which may have picked up pace after the
company announced during the quarter that it will be
phasing out iDen
by mid-2013.
Longer-term, we expect the postpaid adds on the Sprint's core
platform to outpace the losses being incurred on the iDen front.
The highly lucrative contractual postpaid subscribers that the
iPhone has and will continue to bring in will increase data ARPUs
in the long run and bolster data revenues.
LTE update
With Verizon and AT&T far ahead in the LTE race, we will be
expecting an update on Sprint's LTE plans. Verizon's LTE network
covers about 230 million Americans currently and AT&T's about
80 million. Verizon plans to cover another 30 million and AT&T
another 70 million by the year-end. Sprint, on the other hand, has
only just launched its LTE network and has it live in all of 15
markets in the U.S. While that is a small number compared to
Verizon's 337 and AT&T's 47, we expect Sprint's accelerated LTE
deployment schedule to help it catch up with the two before the end
of 2013.
This is a good thing for Sprint since LTE adoption has been
sluggish so far. Verizon, despite its huge lead over the rest, has
managed to convert only about 12% of its postpaid subscriber base
to LTE. We expect LTE adoption to pick up after the launch of the
iPhone 5, which we expect to sport LTE, and strengthen in 2013. So,
longer-term, Sprint may not miss out by a lot so long as it
continues to deliver on its current roll-out plans.
We also expect to see Sprint's unlimited plans being as valuable
to subscribers this year as they were earlier, if not more. While
competitors AT&T and Verizon stopped offering unlimited plans
to new subscribers last year and have recently moved on to tiered
data share plans, Sprint has steadfastly remained committed to the
same, even for LTE.
Since the higher-speed 4G LTE network will cause subscribers to
easily overshoot their tiered data plans, we see subscribers
attaching more value to unlimited plans as LTE becomes mainstream.
This should help Sprint rope in enough iPhone buyers going forward
despite its near-term LTE disadvantage.
Disclosure
: No positions
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