- Sprint earnings Q2 2016 will be reported on Nov. 3 after market close.
- Sprint's turnaround is expected to continue making progress.
- The company's turnaround bid will take time to complete. Patient investors willing to ride the recovery over the long-term can buy the cheap shares.
The fourth largest telecom carrier in the US, Sprint (NYSE:S) is due to report its second quarter fiscal 2016 results on Nov 3 after market close. Sprint failed to provide any guidance for the second quarter, but only gave full-year EBITDA guidance as $7.2 billion to $7.6 billion and capital expenditure guidance as $5 billion. The consensus amongst analysts is for the company to report EPS of -$0.09 compared to EPS of $-0.19 for the year ago quarter.
Sprint has a mixed track record when it comes to beating consensus estimates, with the company beating estimates in two of the last four quarters while missing in the other two.
Quarterly Earnings Surprise History
Meanwhile, Sprint shares are up 17.6% YTD, the first time in several years the shares are looking to finish the year in the black, as investors continue to be optimistic about the company’s turnaround efforts.
The U.S. telecom industry is a highly competitive one. About 90% of American’s have some form of cellphone service or the other, with the vast majority having signed up to the four largest carriers: AT&T (NYSE:T), Verizon (NYSE:VZ), Sprint (NYSE:S) and T-Mobile US (NYSE:TMUS). Since the available pool of customers has largely been tapped out, the four players usually grow by stealing subscribers from one another. AT&T and Verizon are the giants of the space while Sprint and T-Mobile are considered the upstarts.
An interesting study done to investigate the reasons why consumers switch from one carrier to another found that people switch from smaller carriers such as Sprint and T-Mobile to AT&T and Verizon based on the perceived quality of their networks. On the other hand, consumers switch to the smaller carriers mainly based on their lower cost. The study also found that customers rarely switch carriers because of poor customer service, one of Sprint’s key weaknesses.
Sprint has for years lagged behind the big boys due to its inferior network. And while its prices are usually lower than those by the giants, they are higher than T-Mobile’s. This has led to a mass exodus of subscribers from Sprint to T-Mobile, and to a lesser extent, to the large carriers.
But new Sprint CEO Marcelo Claure has been working hard to change the way people perceive Sprint. Sprint recorded net additions of 675,000 during the last quarter, compared to a loss of 220,000 subscribers during last year’s comparable quarter. The improvement was mostly driven by lower postpaid churn. One of Sprint’s latest promotion to win new subscribers is its $1 a month iPhone 6S offer.
Through the new program, Sprint subscribers can trade in an older iPhone 6 and instead lease a 16GB iPhone 6S for just $1 per month or an iPhone 6S Plus for $5 per month. While the extreme promotional deal has understandably drawn a lot of criticism from other carriers as well as investors who see it as potentially hurting Sprint’s margins, the move could actually turn out to be pretty lucrative for Sprint.
First off, Sprint will be able to lower the net cost of every iPhone 6S sold from around $649 to only $80 or so by selling the used smartphone to third-party traders such as Brightsoft and combining that with the 21-month lease fee.
Sprint will probably recover the rest quite quickly through selling data plans. Mobile data is Sprint’s most important revenue segment and a key driver of the stock valuation. iPhone users tend to be heavy data consumers. Sprint’s new carrier aggregation technology that sends data over two or more channels for faster speeds and higher throughput would provide the icing on the cake by allowing the company to realize higher data billings.
With exciting and innovative promotions like this, Sprint has been able to reverse its long-standing subscriber loss. But a lot more needs to be done. For Sprint to make lasting gains, it will need to invest heavily to improve the quality of its network. This is likely to take several years at the very least.
Although Sprint has managed to reverse the negative trend of subscriber loss, it still has a long way to go before it can match its key rival, T-Mobile. T-Mobile net additions usually average more than 5 million subscribers a quarter while Sprint’s have yet to hit the one million mark. In a recent interview, Mr. Marcelo said that the company’s next goal is to become cash flow positive, something it has not done in years, and finally become profitable. For investors willing to wait for Sprint’s turnaround bid to bear fruit, Sprint shares look like a decent long-term investment.