Wednesday, October 24, 2012

Sprint - Thoughts Ahead of the Earnings Release

Sprint is the third Tier 1 carrier set to release its earnings and performance metrics, October 25th at 9:00 AM  The company is in the midst of a turnaround cycle. For the most part, it is succeeding as evidenced by customer service, churn decline and postpaid growth (on the Sprint platform). This turnaround story is in part what drew the October 15th SoftBank $20 billion acquisition.  While the deal isn't expected to close until next year, Sprint ahead of this earnings call has moved to acquire controlling interest in Clearwire as a foundation for the 'new' Sprint's future plans. Regardless of the good news for Sprint, its meat and potatoes operations either support its continued the turnaround trend or present areas of challenge.

Net Additions:   

On a macro view, the overall net additions are in the positive range largely due to the strength of Sprint's prepaid strategy and wholesale business. The number of MVNOs using the Sprint platform has been a welcomed component in driving net additions.   On the postpaid side, there are two stories that newcomers need to focus on.  One is the iDEN side which has been bleeding subscribers for a couple of years. There's no secret that the iDEN network will cease in mid-2013, the thrust is to retain the remaining 4.4 million iDEN (as of Q2 2012) customers of which 3.1 million are postpaid. It stands to reason that the remaining iDEN subscribers are a loyal base that depend on the push to talk function and have it well integrated in its operations.  They're the candidates to migrate to the CDMA-based Direct Connect. However, Verizon Wireless and AT&T has been very aggressive in courting these customers throughout the years. In Q2, Sprint presented a 60% iDEN subscriber recapture rate, the expectation should be that percentage should increase.  iDEN losses amounted to under one million in Q2 of which over two-thirds were postpaid. Sprint has warned that these losses will pick up towards iDEN's end of life.  What will Q3 hold in total iDEN losses and most importantly, the recapture message?

It's clear that the Sprint platform (a mix of CDMA and now LTE) will continue to be positive.  The upswing in its Q2 442K postpaid net additions were largely helped by the 1.5 million iPhone gross adds which brought in switchers (40% new to Sprint).  Observers will continue to pay attention to the iPhone numbers that should manifest itself partly in churn and postpaid net adds.  With its unlimited proposition and a Sprint LTE iPhone, will 40% stay flat or increase?  

On the prepaid front, the Assurance growth engine (as well as other companies with similar offerings like Tracfone's Safelink) had been impacted with the FCC's modernizing of the Lifeline program in Q2. Will this continue to impact Q3 results? A big bet in prepaid was the introduction of the iPhone at Virgin Mobile. However Sprint did not provide the granularity of prepaid versus postpaid iPhone activations.   It'd be nice to understand the Boost and Virgin Mobile brand's contribution to the prepaid story.

Churn:   From a trend view, Sprint is definitely turning around. Though the postpaid figures incorporate the iDEN bleeding, the results have been good.  For the Sprint platform (Q2 1.69%, Q1 2.0%), it has offset iDEN figures well (Q2 2.56%, Q1 2.09%). To follow a turnaround story that incorporates the anti-churn tool (iPhone), one hopes that the Sprint platform percentage to continue to decline.  Will it break 1.5%?  

Similarly on the prepaid side, the trend looks decent but detail needs to be examined on the Sprint platform figures for Q3. As a reference gauge with Q2/Q1 numbers, Sprint platform reported 3.16%/2.92% while the iDEN side came in with 7.18%/8.73%.  Prepaid churn is tough as it's the nature of the offering but sticky products and decreased trending help the cause.

ARPU: Sprint 's approximately $61 postpaid ARPU mark follows only AT&T. With AT&T just increasing to $65.20 in Q3, The expectation for Sprint is to cross $61 given Sprint's sharp growth slope.  

Prepaid ARPU (Q2 - $26.59/ Q1 $26.82) is trending down partly as the result of possible dilution associated with lower ARPU bearing Assurance customers. Logically, as those customers increase in number, it offsets the higher-ARPU bearing Boost and Virgin Mobile Beyond Talk subscribers. However, Sprint executives have always touted the low-churn aspect of Assurance users along with low acquisition costs. Therefore, they argue, Assurance users are provide stable profit in the long term.