Key Takeaways From Sprint's 2nd Quarter Earnings

Sprint's losses narrow and subscriber base improves amid its turnaround

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Nov 08, 2015
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Sprint (S, Financial) recently released its second quarter 2015 results and reported lower-than-expected earnings due to heavy promotional price cuts. The fourth-largest U.S. wireless carrier did bleed a lot of cash, but the move attracted customers. The company is in the middle of a "transformational journey", in the words of Sprint CEO Marcelo Claure, to emerge as a stronger wireless player amid rising competition. Sprint said it now expects fiscal 2015 adjusted EBITDA at the lower end of its previous forecast of $7.2 billion to $7.6 billion. Here’s a look at the company’s latest quarterly performance.

A snapshot of the quarter numbers

Sprint’s net operating revenue dropped 6% to $7.98 billion during the quarter. The company reported a loss of $585 million, which translates to 15 cents a share in contrast to analysts’ expectations of 8 cents in loss per share on revenue of $8.12 billion. Though the key numbers missed estimates, Sprint’s net loss narrowed from $765 million, or 19 cents a share registered in the year-ago quarter.

Owning to the dimmer than expected earnings, Sprint said that its adjusted earnings for the year will come at around the low end of its fiscal outlook. The company’s stock continued to decline following the earnings announcement of the second quarter results.

Subscribers lured by the appealing iPhone plan

Marcelo Claure took over as the CEO of Sprint in August 2014, promising to take bold actions in order to regain the customers it lost over the years owing to the slow cellular coverage and Nextel shutdown. In the next few months, Claure refurbished the company’s plans and made them more customer friendly. Apart from this, he pitched in the model of leasing a smartphone, which since has been emulated by other wireless players. As part of customer service, he even got customer service representatives to deliver the smartphones to the customer. The turnaround plan is yet to be reflected in Sprint’s financials. As Claure said, "If this is a marathon, we are one-third there."

These steps are actually helping the company win back its customers. However, the Kansas-based carrier couldn’t manage to grow enough to fend off T-Mobile (TMUS, Financial), which surpassed Sprint to become the third-largest national carrier in the U.S. this summer.

Nevertheless, the company hit a key milestone in the latest quarter by recording the addition of 237,000 postpaid smartphone subscribers. This is the first time in over two years that Sprint’s postpaid segment saw growth in subscriber base. However, it should be noted, these customers comprise 199,000 of Sprint’s existing prepaid customers who got convinced to convert to postpaid from Virgin Mobile and Boost Mobile. This reduces the net new postpaid phone customer addition to around 38,000. Though the growth was primarily driven by conversion of pre-paid users to postpaid subscribers, this arrangement is also quite profitable for Sprint.

Claure’s $1 a month iPhone 6 leasing plan was a big draw for customers. Overall, Sprint added a total of 1.1 million net customers in the quarter ending Sept. 30.This is a positive sign that subscribers have started to gain more confidence about Sprint's network service. Also, the low prices are a good bargain for customers. Postpaid customers are more lucrative to a wireless carrier as they sign a contract and pay the regular monthly bills in advance.

Going aggressive

"Slashing prices has helped them stop the bleeding of subscribers ... but it has accelerated the bleeding of cash," said MoffettNathanson analyst Craig Moffett.

Sprint may continue to burn cash in the near term as it’s launching unbelievably low-cost plans to lure customers to overtake T-Mobile. However, Sprint is also looking for other ways to lower costs. According to The Wall Street Journal, Sprint’s owner Softbank declared that it would cut jobs to facilitate the $2 billion cost cutting program. Softbank’s CEO Masayoshi Son said, "I think $2 billion is a minimum target, and we should go even deeper. We need to do this, including reduction of personnel."

Sprint is targeting its cost base to improve and strengthen its financials. As part of the analysis, the company’s looking into cutting labor cost by downsizing the workforce. It’s also assessing the millions it spends in service cost on its rivals for roaming facilities. This should come down sizably once the company’s network is built. These steps should help the company drive down costs and improve margins.

Increasing the customer base while shedding costs is going to be a challenging task for Sprint. The company has been putting in efforts together with SoftBank to build a carrier that’s able to finance its upfront device purchase cost to sustain the phone leasing plans.

Sprint will continue to be in the turnaround mode in the next year too, with the prime focus to trim costs and expand customer base. It’s going to be an uphill task to create a balance between cost and customer. If Sprint is able to manage this, rewards will be tremendous.

Disclosure: I have no positions in any stocks mentioned in this article.