The past week has seen quite a few developments in the telecom
sector. Sprint's (
S
) stock has risen more than 20% since the company's earnings call
last week as expectations of a iPhone-led turnaround grew stronger
following another strong quarter of postpaid net adds (excluding
iDen losses) and growing ARPU. AT&T (
T
) moved to secure more spectrum from smaller sources, having learnt
from its botched attempt to acquire T-Mobile last year. Verizon (
VZ
), meanwhile, looks likely to receive regulatory approval for
its spectrum purchase from the cable companies but questions around
their cross-marketing deals still remain.
Sprint's surge
Sprint announced a mixed set of Q1 results in its earnings
report July 25th. The company said that its revenues grew more than
6% over the same period last year and that it added a net 442,000
postpaid subscribers to its core Sprint platform (excluding Nextel
losses) banking on another quarter of healthy iPhone
sales. However, that did not stop its net losses from mounting
as it accelerated the depreciation of its outdated Nextel network
and wrote down the value of its Clearwire investment. Net
losses for the quarter came in at $1.4 billion, up from $847
million incurred a year ago.
What was however noteworthy was that despite the iPhone
subsidies and the heavy capital expenses Sprint is incurring on the
execution of its Network Vision strategy, it was able to generate
$209 million of free cash flow during the quarter. Sprint's OIBDA
margins, adjusted for non-cash items such as D&A and iDEN lease
exit costs, improved by 277 basis points sequentially and 69 basis
points over the same period last year. The company also increased
its guidance for the full year adjusted OIBDA "to a range of $4.5
billion to $4.6 billion". (see
Sprint's Earnings Show Strong iPhone-Led Turnaround
But Risks Remain
)
Improving visibility of the benefits of the iPhone as well the
Network Vision plan helped move the stock up by over 2o% post the
earnings call. However, we believe that risks surrounding its high
debt levels and burgeoning capital expenses still exist, which
could have an adverse impact on cash flows in the coming quarters.
Also, the carrier may not be able to sustain its strong Sprint
platform net adds in the future as the primary source of the same,
the iDEN subscriber losses it is sustaining, dries up by mid-2013
and the reality of a highly saturated wireless market starts
catching up with the company. (see
Sprint's Stock Surge Capped At $4 With Growth Risks
Ahead
)
Wireless Consolidation
Having learned a lesson from the T-Mobile debacle last year,
AT&T is targeting smaller acquisitions to meet its
spectrum needs. The second largest U.S. wireless carrier announced
recently that it has decided to acquire Nextwave Wireless, a small
company that owns two bands of spectrum - one in AWS band and the
other in WCS band. The total cost of the deal, which includes
assumption of debt as well as $50 million in cash payments for the
stake, is $600 million. In addition to Nextwave, the carrier has
agreed to purchase WCS spectrum licenses from Comcast (
CMCSA
) and Miami-based Horizon Wi-Com as well.
AT&T needs additional spectrum to augment 3G capacity as
well as to build out a nationwide LTE network in order to catch up
with Verizon, which is currently well ahead in the LTE
race. In such a scenario, stitching together multiple spectrum
deals can provide near-term solutions for AT&T, especially
after the FCC has made it clear that any big-scale consolidation
will be met with stiff opposition. Nextwave or Comcast or Horizon's
spectrum holdings alone may not be big enough to satiate all of
AT&T's needs but it would definitely make it easier for
AT&T to overcome regulatory hurdles. Having a wider net of
deals will help it get at least a few of them approved, if the FCC
sees AT&T exerting too much control with all of them
together.
Verizon, for its part, looks set to receive regulatory approval
for its spectrum purchase from the cable companies after the recent
spectrum swap deal with T-Mobile. The carrier has also put some of
its unused 700Mhz spectrum for sale, for which AT&T as well as
other carriers may make a bid. Overall, the consolidation looks
like a good thing to happen since it will help meet the
subscribers' soaring data demands and enable a nation-wide layout
of next-generation efficient networks such as LTE by multiple
carriers.
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