Sprint Loses Postpaid Market Share But Benefits From Network Efficiencies

Sprint ( S ) announced a mixed set of Q1 2014 results on Tuesday, losing postpaid subscribers due to heightened competition in the industry, even as margins expanded to the highest level in almost six years on effective subsidy controls and network savings. The third largest wireless carrier in the U.S. lost 231,000 net postpaid subscribers during the quarter, as compared to a net gain of 12,000 posted in the same period last year. The figure included tablet net adds of 516,000, which means that Sprint's loss of the more lucrative handset subscribers was even worse. The price war initiated by T-Mobile, and fueled by AT&T's ( T ) aggressive response in the first quarter, increased competitive pressures on Sprint at a time when the carrier has been battling service disruptions caused by its massive network upgrade.

However, the increased network efficiency brought about by the iDEN shutdown and the LTE build-out, together with a strong response for Sprint's recently launched Framily installment plans, helped Sprint's EBITDA margins increase by 450 basis points over the same period last year. The strong margin performance caused Sprint to increase its 2014 EBITDA guidance from a range of $6.5-6.7 billion to $6.7-6.9 billion. We expect the adoption of Sprint's installment plans to grow going forward, which should boost margins but pressure service ARPU as subscribers shift to the discounted plans. We have a revised $8.50 price estimate for Sprint , almost in line with the current market price.

See our complete analysis for Sprint here

Price Competition Hurts Subscriber Figures

With the wireless market becoming increasingly saturated, carriers have become aggressive with their pricing strategies in order to gain market share. The biggest threat is coming from T-Mobile at the moment, which is shaking up the industry with its 'Uncarrier' initiatives, stealing market share from rivals in the process. AT&T's aggressive response to T-Mobile last quarter, when it pushed its Next installment plans and discounted the service prices of its Mobile Share plans, has further heightened competition. This had an adverse impact on not just Sprint but also Verizon's subscriber additions. While Verizon added about 15% fewer postpaid subscribers compared to AT&T, Sprint seems to have been the most affected with a net loss of 231,000 postpaid subscribers in Q1.

Within this figure, if one were to look at the more lucrative handset customers, Sprint's net postpaid loss is even bigger at 750,000. With new phone subscribers hard to come by, the trend over the last few quarters has been that carriers are focusing more on tablets. While tablet additions are not necessarily bad, given that subscribers adding tablets to their accounts generally have a smartphone already, tablets generate lower revenue per subscriber since tablet buyers subscribe only to a data plan. An increasing base of tablets will pressure ARPU levels in the coming quarters but, at the same time, generate more revenues per account.

Expensive Spark Program Worth It

Another factor contributing to Sprint's poor showing on the subscriber front has been the service disruptions caused by its Network Vision plans. The carrier is replacing 3G and voice infrastructure, and is seeing higher than normal customer churn in regions where the build-out is less than 70% complete. Most of the Network Vision build-out is expected to reach completion by the mid-year; so the subscriber losses should continue for another quarter at least. Sprint's LTE coverage - another important consideration for subscribers and a concern over the last couple of years - is expected to reach 250 million PoPs by the end of the second quarter and become less of a disadvantage compared to rivals. There is usually a lag associated with churn figures improving after network upgrades, as a result of which the subscriber recovery should be gradual. With Sprint's Spark plans expected to pick up speed after the Network Vision rollout, we expect the carrier to become a lot more competitive towards the end of 2014 and beyond.

Sprint's Spark strategy will help it make use of Clearwire's 2.5GHz spectrum to add data capacity and potentially push 4G speeds to more than five times what is currently prevalent in the industry. However, the implementation of Spark will require significant capital expenses. Despite the fact that Network Vision is expected to be substantially completed by the mid-year, Sprint maintained its 2014 CapEx estimate at last year's elevated level of $8 billion.

While the network modernization plan is proving to be expensive, it is also helping to reduce operating expenses substantially by eliminating the duplicate fixed costs of maintaining different networks. It is allowing for better 3G/4G coverage and reducing roaming costs, as the spectrum previously used for iDEN is increasingly utilized for the CDMA/LTE network. Rolling out an LTE network is helping Sprint improve its service margins as well, since it is a much more efficient network to manage than the existing 3G networks. Sprint's wireless EBITDA margins in Q1 increased by 450 basis points over the same period last year.

Wireless margins were also helped by the increasing adoption of Sprint's newly launched Framily plans, which drove device sales through its Easy Pay installment plans. This is because the carrier was able to recognize a greater portion of the device's upfront cost as revenues when subscribers financed their devices through installment plans. The carrier reported an increase of more than 20% in device revenues in Q1, although smartphone sales remained flat year-over-year. The accounting change helped the carrier realize significant margin gains, as Easy Pay accounted for 29% of all device sales during the quarter. However, increasing penetration of Framily plans will pressure ARPU levels, since the separation of the wireless and device bill has led to lower service plan prices for subscribers.

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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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