Can Sprint Set Things Right for a Business Turnaround?
Leading national telecom operator, Sprint Corp.S , is currently struggling for survival in the U.S. market. The stock price has plummeted a disappointing 21% over the last six months. Troubles seem to be far from over for the company, which is currently facing cut-throat pricing competition in the domestic telecom industry. This is invariably taking a toll on its financial health.
Sprint has been witnessing annual losses since 2007. It burned a massive $2.2 billion in cash in the last reported quarter which ended on Jun 30, 2015. A couple of weeks ago, credit rating agency Moody's Investor Service downgraded Sprint's credit rating to B3 from B1, or six levels below investment-grade citing excessive pressure due to intensifying competition. The company had a net debt of over $28 billion at last quarter end.
Recently, Sprint's majority owner, Softbank Group of Japan, set up two off-balance sheet financing vehicles to finance its phone and network equipment. As a result, Sprint does not expect to raise additional capital through public debt or equity markets anytime soon.
Despite these negatives, it would not be wise to write off Sprint immediately. Management has taken several steps for a turnaround, which can bring its business back on track if implemented properly.
(1) Sprint has a strong portfolio of wireless spectrums. Although those assets are less valuable high-band in nature, the company can still effectively utilize them for network performance improvement. Management has undertaken a massive network upgrade project through which its existing macro cell sites will be upgraded to support 800 MHz, 1900 MHz and 2.5 GHz for LTE.
(2) In order to remain competitive, Sprint has been launching several low-priced data and voice plans over the last one year. This strategy helped the company stop its postpaid wireless subscriber loss and finally resulted into overall subscriber gain. In the last reported quarter, Sprint gained 310,000 postpaid subscribers. As of Jun 30, 2015, Sprint had 56.812 million wireless customers, up 6.5% year over year.
(3) Sprint slashed the price of its iPhone forever monthly plan from $22 to $1 for a period of 22 months. The newly launched iPhone 6S is integrated with a new technology that will suit Sprint's 'carrier aggregation' framework. This may ensure noticeable network improvements for the carrier and in turn help the company gain traction. Sprint hopes to regain lost ground through its aggressive pricing policy and network enhancement.
(4) In 2014, Sprint undertook a cost-cutting measure to reduce its overall costs by $1.5 billion per annum. Further, the company has the backing of a strong financier like Softbank Group of Japan which controls more than 82% of the company. Softbank is expected to fund Sprint's business turnaround strategy and its future endeavor.
What Keeps Us on the Sidelines?
Sprint has decided not to take part in the upcoming 600 MHz low-band spectrum auction to be conducted by the FCC. Management holds that it has adequate spectrums to support its current and future customers with sufficient network coverage. However, the company is suffering from a structural deficiency of limited availability of low and mid-band spectrum.
Most of the spectrums that Sprint has are high-band in nature. For that the company needs to install more expensive network equipment and radio antennas to provide quality services. Low-band spectrum is crucial for wireless operators as the signals can be transmitted over longer distances as well as through brick-and-mortar walls in cities. We believe that one of the reasons behind Sprint's decision is its weak financial condition.
Despite retarding wireless subscriber growth, U.S. telecom behemoths AT&T Inc. T and Verizon Communications Inc. VZ are far ahead of Sprint in terms of scalability, network quality and product diversification. Verizon has decided to launch 5G wireless networks in limited areas as early as 2017. To add to its woes, T-Mobile US Inc. TMUS is quickly catching up with Sprint in terms of subscriber gain by offering several low-priced plans.
The Bottom Line
As the U.S. market boasts a high 95% rate of wireless penetration, competition is likely to remain intense. This, in turn, could pressure top and bottom-line results for carriers vying for market share and Sprint is no exception. Sprint's aggressive competitive strategy and massive expenditure plan for network upgrade have their own perils. The company already has a debt-laden balance sheet and negative operating cash flow. With its deteriorating financials, are such lofty plans sustainable? Only time can tell.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.