EUR 850.00 For Business Accounts Only

Morningstar | Sprint’s Fiscal 3Q Not as Bad as Feared; Firm’s Position Remains Precarious

Sprint’s struggles remained on display during its fiscal third quarter, with customer losses constraining growth and renewed network investment pushing free cash flow deep into negative territory. We don’t expect to change our $5.75 fair value estimate, which reflects a blended view of Sprint as a stand-alone entity and as a part of T-Mobile. We continue to peg Sprint’s stand-alone fair value at about $3 per share, though we caution that the firm’s weak financial and competitive position leaves a lot of room for error. With T-Mobile once again handily outperforming its would-be partner during the quarter, we still view that firm as the more prudent means of playing the odds of merger approval.

Net postpaid phone customer losses, at 26,000 during the quarter, weren’t as bad as we’d feared following strong reports from both Verizon and T-Mobile. As expected, postpaid phone customer defections picked up as past promotional pricing rolled off, though not to levels seen during Sprint’s darkest days a few years ago. More troubling, the firm is struggling to attract new phone customers. We estimate its share of new postpaid phone customer decisions declined 2 percentage points versus 2017. That performance comes despite a steady increase in the number of postpaid customers signing up under brands other than Sprint, such as its Boost offering. In our view, Sprint has bought growth in the past via heavy promotions but subsequently disappointed customers with relatively poor network quality, leaving its brand reputation weak.

Sprint increased wireless network spending more than twofold year over year to $1.2 billion during the quarter, and the firm trumpeted several milestones, including continued deployment of its high-frequency spectrum and performance improvements in several major cities, like New York and Denver. We believe Sprint can deliver fantastic performance in select locations but that it will continue to struggle to provide broad coverage that matches rivals.

On the positive side, revenue per customer continues to hold up reasonably well. Adjusted for accounting changes, revenue per postpaid connection has held roughly flat for the past several quarters, which we view as solid given the postpaid base is shifting gradually toward tablets, watches, and other lower-revenue devices. Similarly, wireless service revenue has also held steady, again adjusted for accounting changes. Cost discipline and lower marketing expenses have largely offset higher network operating costs throughout fiscal 2018 and lower phone sales have limited equipment costs. Still, with the increase in network spending, free cash flow hit negative $1.5 billion, as we calculate it, during the quarter, the worst result since mid-2015.

Sprint management called out Verizon and AT&T for being particularly aggressive with promotions in late 2018 and into 2019, cautioning that wireless service revenue could begin shrinking again if the current pattern holds up. While the wireless industry remains strongly competitive, in our view, we don’t believe the two industry giants have done anything unusual recently. In fact, AT&T pointed to its lack of promotional aggressiveness to explain is soft customer growth, especially in the prepaid segment, and strong segment margins during the quarter. We view Sprint’s comments as posturing for regulators as it walks a fine line between presenting reasonable financial results while making the case for its merger with T-Mobile. Sprint also indicated that the government shutdown hasn’t altered its expected timeline for a ruling on the deal.