- Sprint had a stellar quarter, but what is the reality of their future?
- Both AT&T and Verizon have alternate lines of business. Sprint and T Mobile do not.
- How long can Sprint live on its wireless business before they need a new revenue stream?
Sprint (NYSE:S) surprised a lot of people - and possibly even itself - during the most recent quarterly earnings report that came out on July 25. The company blew past so many metrics that its first quarter was indeed a record-setting one in its history, and stock price surged to near two-year high levels. But Sprint still operates in one of the most capital-intensive and highly competitive industries in the world. They had one good quarter, but what does the future hold?
Let’s take a closer look at where Sprint is vis-a-vis the market landscape. After being the third biggest player in the U.S. wireless market, Sprint lost its position to T-Mobile, which came from behind to overtake it in 2015. When you stay in the red for so long, it’s never going to be too long before a profitable and more agile competitor takes your place. It’s surprising that T-Mobile took so long to do that despite the fact that Sprint has been well behind the curve on subscriber additions.
Although their subscriber base has been in the positive zone, it is one of the lowest in the industry. Moreover, their churn rate is one of the highest. In a high-penetration market, every customer lost is one that is extremely difficult to regain.
The Reality of Max Penetration
Strategy Analytics, a leading research and analytics company that tracks the wireless industry, says that 100 million wireless connections will be added through 2020, with the market reaching 128% penetration rate.
So what will happen after that? Wireless carriers will be forced to look for external revenue streams that can augment their current ones, fight to hold on to their customers while do their best to steal customers from others.
The Way Out
The big two - Verizon and AT&T - know that this day is coming, and they are already hard at work to find alternate revenue streams. AT&T is doubling up its effort to build their GigaPower Network that will allow it to provide high speed fiber-to-the-premises (FTTP) internet connections to households, and Verizon is already a big player in the content market - and now with Yahoo being added to its ranks, it looks more like a conglomerate than a wireless company.
If this continues, T-Mobile and Sprint will be left with the job of finding new sources of revenue streams. If they don’t move now, it could be too late. Personally, I think they’ve already crossed that point of no return.
The problem with Sprint - despite them adding a record 173,000 subscribers during the recent quarter and getting postpaid churn down to 1.39% (the lowest level in the company’s history) - is that the company is still making losses. They have been unprofitable for many years, and Softbank’s backing is the only thing that’s allowing the company to stay alive in the highly competitive industry.
AT&T and Verizon spent $20 billion and $27.7 billion in capital expenditures, while T-Mobile and Sprint spent $6.6 and $7 billion last year, respectively. With Sprint’s cash flow being negative for the last few years, it’s not easy to keep re-investing at the pace you would like to. With cost savings measures yielding fruit, Sprint might be expecting to return to being cash flow positive in the next two years if they keep up their subscription growth rate.
But the real problem is, how long is the runway? If in the next four years, the U.S. wireless market is going to go way over the 100% penetration level, which means most of the potential customers are already in, and companies are trying to sell additional subscriptions to the same customer, then it will be extremely hard for all companies to show sustainable growth in subscriber net adds - an extremely tricky place to be when you are the third and fourth player with no reliable alternate sources of revenue.
Sprint has done a tremendous job this quarter, no doubt. They balanced their need to cut costs, offer deep discounts to lure customers and provide attractive services to keep the churn low. They might even become profitable in the next four years, but the question remains - what does the long term hold for Sprint?
It’s tough to recommend a stock that’s fighting admirably against all odds in a market that is closing in on it faster than the speed at which the company is recovering.