Morningstar | Sprint's 1Q Results in Line, but New CEO Making Positive Impact With Focus on Profitability. See Updated Analyst Note from 01 Aug 2018
Sprint reported first fiscal-quarter results that were roughly in line with our expectations, and we expect to maintain our $6.40 fair value estimate and no-moat rating. Although the stock trades below our fair value estimate, which is based on a 50% probability of a deal with T-Mobile US closing, we would prefer a larger margin of safety before investing because of the risk of a deal not occurring. Reported revenue declined 0.4% year over year, spot on with our full-year projection. Sprint added 87,000 postpaid phone customers in the quarter, its 12th consecutive improvement. However, it was less than Verizon and AT&T gained.New CEO Michel Combes has already started to have an impact. We were pleased to see him discuss the importance of balancing growth and profitability. This is similar to what he said when he was CEO at Altice. There the focus had been on cutting costs at the expense of revenue growth; he slowed cost-cutting and increased spending on marketing and retention to improve revenue growth, but he was let go before it had a chance to make a significant change. At Sprint, we expect a little more patience from the controlling shareholder and the changes to be almost the inverse, with less focus on promotions and subscriber gains and greater focus on cost-cutting and profitability. The early results are positive, as the firm generated its highest quarterly EBITDA in 11 years at $3.3 billion, though that was partially due to changes in accounting standards. We think the increased focus on profitability should help the entire industry, as Sprint has often been the most aggressive in pricing promotions despite this not leading to many new subscribers. Unlike Verizon and AT&T, which saw substantial improvements in free cash flow from the changes in the new tax law, Sprint did not and is barely generating any free cash flow.
Sprint is a holding company. Through its subsidiaries, the company is a communications company providing wireless and wireline communications products and services to consumers, businesses, government subscribers, and resellers. The company has two segments: Wireless, which provides wireless services on a postpaid and prepaid payment basis to retail subscribers and also on a wholesale basis, including the sale of wireless services that utilize the company's network but are sold under the wholesaler's brand; and Wireline, which provides a suite of wireline communication services to other communications companies and targeted business customers, as well as voice, data and internet protocol communication services.
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