Sprint (NYSE: S) is likely going to report brutal subscriber losses in the second quarter, according to financial analysts. That will be largely the result of Sprint's 3G CDMA network upgrade, which has temporarily resulted in degraded service as the carrier works to improve coverage, call quality and network speeds. In response, the analysts said, Sprint will likely cut prices in the near term to remain competitive.
In a research note, Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote that they expect Sprint to report 879,000 handset subscriber losses in the second quarter, which they said would be "one of the worst in the company's history." Sprint plans to report results on July 30.
Sprint executives have said they expect to report higher churn in the second quarter because of the effects of Sprint finishing its Network Vision network modernization program, which executives have described as a complete "rip and replace" of old equipment. That process has degraded the quality of service as the network gets upgraded--Sprint has said the upgrade will be largely finished by mid-year.
However, Sprint believes that once it is finished with the upgrade, its churn will improve. The carrier has said that, in markets that are more than 70 percent completed, churn has returned to prior levels. And in markets that are 100 percent complete, churn is lower than it had been before the upgrade began. Sprint expects to return to subscriber growth in the third and fourth quarters of this year.
Complicating the long-term outlook for Sprint is whether the carrier will strike a deal to merge with T-Mobile US (NYSE:TMUS), as has been widely rumored. A deal is expected to be announced in August for around $32 billion, according to multiple reports, but it would face strong skepticism from U.S. regulators.
"While a deal with TMUS remains uncertain, we believe S must spend aggressively to regain its footing," they Jefferies analysts wrote. "In our view, Street estimates understate the level of investment needed, painting an overly optimistic outlook for 2015 EBITDA."
The analysts added that Sprint, even under ownership of parent SoftBank, faces a hard road ahead: "While network issues are likely to abate, leading to better churn, we believe it will take years and intense marketing to fix brand perception, pressuring gross add share for a prolonged period. Pricing changes will almost certainly have to be adopted as S remains relatively uncompetitive. Nonetheless, any pricing move will likely elicit an immediate response from competitors, putting S in an unenviable position."
The Jefferies analysts also added that "over the past couple of years, the fundamental investment thesis for Sprint shares has hinged on future operational improvements. We believe investors are growing increasingly fatigued with the network improvement story, and will begin to assign a more discounted valuation to the shares. In addition, we stress that executing yet another turnaround is increasingly difficult, and will likely take longer as scale erodes and competition intensifies."
In terms of a deal with T-Mobile, the Jefferies analysts think it could help Sprint in the long term, if it is approved. "Given the long regulatory process, and low chances of approval, we expect S to invest in a standalone turnaround plan," they added. "Though network sharing is a possible outcome, we doubt it would improve market share in the near-term. With significant subscriber losses, large cash burn, a weak spectrum portfolio, and the low likelihood of a transaction with TMUS being approved, we remain negative on S shares."
Meanwhile, New Street Research analyst Jonathan Chaplin wrote that Sprint needs to cut prices
"in order to stabilize and grow subscribers," and that average revenue per user may have to come down as much as $14, lowering EBITDA by $2.7 billion.
"Sprint is priced $7-10 above AT&T and Verizon and $10-15 above TMUS on the most popular plans, with a network that is worse than all three," Chaplin wrote in a research note. "It will take at least another year before Sprint's network is on par and longer before there is any prospect of advantage. High pricing coupled with a poor product is driving customer defections at a rate of 900K per quarter. Sprint has to cut price."
Sprint is reportedly trialing new plans in markets across the country, including shared data plans and discounted versions of its Framily and individual plans. But Chaplin wrote "we would not expect them to launch the new pricing commercially until they are confident that the network is ready." Sprint will be in a better position to drive subscriber growth following a price cut toward the end of the year, Chaplin added.
By the end of the year, Sprint expects its Spark service to cover roughly 100 million POPs. Spark is the carrier's tri-band LTE service that combines transmissions over its 800 MHz, 1900 MHz and 2.5 GHz spectrum bands. The service currently provides peak download speeds of roughly 50-60 Mbps.
Report: SoftBank, DT reach 'basic agreement' on Sprint/T-Mobile merger
Report: Sprint testing shared data plans in select markets
Sprint talks up Spark small cells, 8T8R antennas, but some analysts remain unimpressed
Sprint counters T-Mobile's iPhone test drive by reviving 30-day 'satisfaction guarantee'
Sprint details 'America's Newest Network' campaign, focuses on call quality, speeds