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Morningstar | Sprint's Customer Losses Worsen as Competitive Intensity Further Exposes Its Weak Position

Several familiar themes were on display in Sprint’s fiscal 2018 fourth-quarter results, with accelerating customer losses set against relatively stable revenue per customer as the firm tries to balance growth and profitability. Increased competitive pressure from AT&T and the cable companies during the quarter, coupled with Sprint’s own internal issues, have made it difficult for the firm to retain and attract customers, reinforcing our view that Sprint shares are only attractive if the company can complete the T-Mobile deal. T-Mobile also struggled somewhat to attract new customers during the quarter, but a solid network and strong customer service have enabled it to impressively retain existing accounts, setting that firm up to better compete if the merger falls apart. We don’t expect to change our $5.80 fair value estimate or no-moat rating for Sprint.

Net postpaid phone customer losses totaled 189,000 during the quarter, Sprint’s worst showing in four years, despite a steady increase in the number of postpaid customers signing up under brands other than Sprint, such as Boost. In our view, Sprint has bought growth in the past via heavy promotions but subsequently disappointed customers with relatively poor network quality. Customer defections have ramped up steadily over the past two years, with monthly postpaid phone churn hitting 1.82% during the quarter, double the rate at its main rivals. Reduced promotional activity has also hurt the firm’s ability to attract new customers. We estimate its share of new postpaid phone customer decisions declined 3 percentage points year over year to the lowest level since at least 2016.

Adjusted for accounting changes, revenue per postpaid connection continues to hold roughly flat, which we view as solid given that the postpaid base is shifting gradually toward tablets, watches, and other lower-revenue devices. Similarly, wireless service revenue has held steady, again adjusted for accounting changes.

Strong cost discipline and lower marketing expenses again provided a boost to profitability. The operating margin, excluding restructuring costs and a goodwill write-down, increased 2 percentage points versus a year ago to 10%. Management expects continued efficiency gains in fiscal 2019 but cautioned that efforts to improve network coverage and customer service will offset these benefits. Sprint is still far from a level of profitability that would enable the business to be self-sustaining. Capital spending in fiscal 2018 increased to $4.3 billion from $2.8 billion the year before, causing Sprint to burn about $1.9 billion before asset sales.

Sprint has now deployed 2.5-gigahertz spectrum across 80% of its wireless sites and deployed 30,000 small cells. However, its more advanced antenna radios, capable of being upgraded to 5G, have only been deployed to around 3%-4% of cell sites. In addition, the 30,000 small cells likely include 19,000 deployed by Altice USA in the New York market. While these sites clearly help, they only benefit a subset of customers. Sprint management alluded to a potential long-term future absent T-Mobile where it becomes a more regional firm. We think this idea makes sense, given Sprint’s competitive position and potential future partners, but the firm would probably need to restructure its finances to move away from its current nationwide positioning.