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Sprint Eyes $2.5 Billion in Cost Reduction, Layoffs Expected

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According to a recent report in Bloomberg, leading U.S. national telecom carrier Sprint Corp.S is planning to lower its costs by $2-$2.5 billion by implementing job cuts. The process, if executed, will be the second such plan to be realized in the last 12 months. In Nov 2014, Sprint had announced a $1.5 billion cost-cutting plan which involved axing 6.5% of its workforce. Sprint had a 31,000-strong workforce as of Mar 2015.

Deteriorating Financial Position

From current standards, Sprint is severely cash strapped. The company has a debt-laden balance sheet and negative operating cash flow. It has been witnessing losses annually since 2007 while its cash level declined by a massive $2.2 billion 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 and high credit risk. The company had a net debt of over $28 billion at last quarter-end.

Moreover, the company's liquidity is expected to be severely affected after it announced an iPhone leasing plan of $1 per month. 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.

Meanwhile, Sprint has decided to sit out of the upcoming 600 MHz low-band airwaves auction. While this allows saving cash, it limits the company's scope for network upgrades and expansion, which may hurt its operations in the long term. 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.

Current Plans

Recently, T-Mobile US Inc. TMUS surpassed Sprint by way of subscriber count. As a result, Sprint now has the lowest share of customers among the big four carriers in the U.S., trailing Verizon Communications Inc. VZ , AT&T Inc. T and T-Mobile. The alarming loss of subscribers to other carriers has compelled the company to focus on network improvements and lure customers with attractive plans.

The Bottom Line

Sprint is looking to boost its earnings, going ahead and lend confidence to its stakeholders. Reducing operating costs is one of the strategies that the company has undertaken to achieve the same. Last quarter, it managed significant cost savings, thus boosting its EBITDA to $2.08 billion, beating estimates. However, a target of $2.5 billion in EBITDA is challenging. Moreover, it is yet to be seen whether this strategy can help Sprint achieve organic growth in the future.

Sprint presently carries a Zacks Rank #2 (Buy).

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AT&T INC (T): Free Stock Analysis Report

SPRINT CORP (S): Free Stock Analysis Report

VERIZON COMM (VZ): Free Stock Analysis Report

T-MOBILE US INC (TMUS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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