Analysts divided over Sprint's future after Q3 results

Financial analysts are divided over Sprint's (NYSE: S) prospects as it looks to build on its first quarter of positive postpaid phone customer additions in years and ahead of the launch of leasing companies to help it buy handsets and network gear. Some think Sprint has started to create a strong foundation for its turnaround while others are more cautious and have questions about the company's long-term fortunes.

In the third quarter, which is Sprint's fiscal second quarter, the company posted record-low Sprint platform postpaid churn of 1.54 percent, compared to 2.18 percent for the year-ago period and 1.56 percent in the second quarter. The company added 237,000 postpaid phone customers in the period, but excluding migrations of prepaid customers with good payment histories to postpaid phone net additions would have been 38,000.

"Sprint continues to face many challenges in its turnaround," Jefferies analysts Mike McCormack and Scott Goldman said in a research note. "This quarter highlighted some of the issues, with what amounted to a subscriber reclassification accounting for nearly all postpaid handset additions, continued ARPU pressures, an uncertain network build, and significant near-term expense headwinds incurred to improve the longer-term cost structure. We remain cautious on S shares."

During the quarter 199,000 prepaid customers with consistent payment history migrated to Sprint's postpaid service, with 175,000 of these migrations now included as postpaid customers under the respective Boost and Virgin brands. Excluding total migrations from prepaid, postpaid net additions would have been 354,000.

"Management credited improving network reliability and higher quality customers, but we suspect retention efforts were also featured, as ARPU continued to slide," the Jefferies analysts noted, calling the transfer of prepaid customers to postpaid service "an unusual move."

Sprint said pure average revenue per user on the Sprint platform was $54.02, down from $60.58 from a year ago. However, when adding in equipment installment plan and monthly device lease billings, average billings per user was $70.64 for the quarter, up 2 percent year-over-year from $69.02, and up 1 percent sequentially. 

Sprint CEO Marcelo Claure said yesterday on Sprint's earnings conference call that if a customer is a Boost Mobile customer, for example, and switches to the Sprint platform, they will need to choose and purchase a Sprint phone and Sprint rate plan, "and basically you're going to be paying more to Sprint than you were paying to Boost." If the customer wants to remain with Boost, in many cases Sprint is going to ask the subscriber to keep their device "and therefore we don't need to invest the money in terms of subsidizing a device again or any cost per gross add, and what we're going to do is we're going to extend you some credit terms."

"So we're going to change the relationship from a prepayment to a postpaid relationship, and again, what we've seen the early trends of this is the churn curve changes dramatically and you start spending more money because now pretty much you have the ability to use your phone more without being constrained by the limit that you had in prepaid before," Claure said, according to a Seeking Alpha transcript.

Claure told Re/code that the shift helps Sprint because the customers tend to spend more each month, and also benefits the customers as they have the ability to purchase a high-end smartphone through leasing, since many cannot afford a $600 or $700 phone upfront. "They hate that they can only get low-end handsets," Claure said of many prepaid customers. Moving to postpaid allows customers to establish credit. Claure said Sprint has a whole team looking at the carrier's prepaid unit for more opportunities to shift customers to postpaid. "Obviously, we are watching very closely," he said.

Besides that quirk, analysts and investors were looking for more information on Sprint's leasing vehicles, and came up with few details. Sprint expects to close the handset leasing vehicle in the next few weeks.

Sprint CFO Tarek Robbiati said the handset vehicle most likely will be off Sprint's balance sheet, and that Sprint will make ongoing payments to the vehicle, with Sprint "acting as the servicing agent for leases that have been sold to that facility. That's what you can expect from an accounting standpoint, and that should be visible above the EBITDA line."

"Sprint investors need much hand holding on the path to free cash flow. Unfortunately, in the absence of any specifics in the announcement regarding the leasing co. and partners, that did not come yesterday," Wells Fargo analysts Jennifer Fritzsche, Eric Luebchow and Caleb Stein said in a research note. "There also seemed to be much confusion regarding guidance -- Sprint remains a 'show me' story in our view -- but it is not broken. With better network stats, a significant improvement in churn, a cost cutting plan very much in place, and details on lease co. coming in a matter of weeks, there are still catalysts to point to."

MoffettNathanson analyst Craig Moffett said in a research note that if Sprint can successfully conclude negotiations on the handset leasing vehicle, it will trade away some economic value, since its counterparties will need to make money through the vehicle. "But they will pull forward cash that otherwise would have trickled in over a period of years," he said. "The cash flow burn associated with signing new customers (and providing them with handsets) will become a near term source of cash."

That will enable Sprint to effectively trade away equity for debt and won't make Sprint more valuable, Moffett contended, "but it can let Sprint live to fight another day." Moffett's issue with Sprint is that he thinks Sprint's $34 billion debt load is already unsustainable given the fact that the carrier is not generating positive free cash flow.

For more:
- see this Re/code article 
- see this CNET article
- see this Seeking Alpha transcript 

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