- Net additions, operating earnings stability and free cash flow will be the metrics to watch during the 1Q16 call.
- Churn rates are among the highest in the industry, and adversely affects net additions.
- The company expects to break even on free cash flow in Q1, and investors will expect to see some quarter over quarter gains in this metric.
Sprint Corp. (NYSE:S), the fourth largest wireless carrier in United States (after losing their third position to T-Mobile last year), will be reporting its first quarter earnings results on July 25, 2016 ahead of market open. Much of the focus during the earnings call is likely to be on the company’s efforts to cut costs, stabilize operating earnings and their cash flow.
Why Subscriber Additions are Crucial
Sprint being a network carrier, subscriber addition is the one metric that needs to be watched closely; as long as this metric grows, the company will keep moving to higher ground. But unfortunately for Sprint, despite their best efforts to turn their fortunes around, they have been coming up short in this area, thanks to the competition and the intense balance sheet pressure the company is facing.
In the 4th Quarter ended March 31, 2015, Sprint added 447,000 subscribers - well short of analysts’ estimates of 518,000. Though the company seems to be adding more users to its base and doing well overall, their growth rate is way below what the market leaders are able to achieve. Over the last four quarters, Sprint had 2.7 million net additions, while their closest rival - T-Mobile - had 8.3 million for the same period. And just in the fourth quarter alone, T-Mobile had 2.1 million net additions, thus increasing the gap with Sprint even further. The problem for Sprint is that they have one of the highest churn rates in the industry, and the Q4 figure was at 3.36% - nearly three times as much as top performer Verizon Wireless.
As you can clearly see from the table above, Sprint is way below the curve in one of the most important success metrics for this industry, and the numbers they report Q1 2016 earnings call will be crucial to the performance of their stock.
Free Cash Flow and Operating Income
The Kansas-based company expects adjusted free cash flow to be near break even this year instead of the -$1.4 billion they reported last year. Adjusted free cash flow came in at positive $603 million during 4Q15 compared to negative $914 million in the year-ago quarter. 2015 was the first time in nine years that they had reported positive operating income, which came in at $310 million.
The stock has rallied nicely since the start of this year, nearly doubling from the start of 2016 until now, thanks in part to a better-than-expected forecast for full year operating income.
“Sprint, majority-owned by Japan's SoftBank, said it expected operating income for the year ending March 2017 to be $1 billion to $1.5 billion, a big rise from the $310 million in operating income it posted for the year ended March 31.”
So all eyes during the first quarter release will be focused on seeing the improvement in operating income and free cash flow, and the effects of their cost-cutting measures.
Consensus EPS estimate is -0.08, and it might be a difficult task for the company to beat the market expectation. But if they do, then the stock has a chance to continue its upward momentum.
The biggest advantage Sprint has is their 2.5 Gig spectrum, which will allow the company to move high volume data at higher speeds. They do have more capacity than other carriers, but their liquidity position and the fact that the company has been bleeding money for so many years does work against them.
Cost-cutting in Focus (From 4Q earnings call)
“Altogether, there are several hundred initiatives underway that we are confident can deliver the $2 billion or more of run rate savings as we exit fiscal year 2016, building on the momentum that we have exiting fiscal year 2015 with 50% of the 2016 run rate savings already realized.”
In the final analysis, these are the metrics - net adds, FCF and operating income - that will decide the fate of Sprint stock over the next week and beyond.
On the one side, this does look like a declining business that's losing more than it's gaining. On the other, there are spectrum advantages that can create synergies with T Mobile's own unique needs. Although I don't think a merger is on the cards this fiscal because Sprint seems to be gradually recovering their operating margins, it's not completely off the table. Subscriber additions - or lack thereof - is probably the biggest point of concern at this time.
If Sprint can meet its estimates on operating income and break-even free cash flow, there's a chance that the rally could continue.