Analysts: Sprint likely lost postpaid handset subs in Q1, but could see improving finances

Sprint (NYSE: S) likely lost postpaid handset customers in the first quarter but could report stronger financial results when it posts its quarterly earnings tomorrow, according to Wall Street analysts at Evercore ISI. In a research note, Evercore analysts Jonathan Schildkraut and Justin Ages also wrote that network quality continues to be a problem for Sprint that will need to be addressed.

Sprint's recovery and push for subscriber growth will need more time, the analysts wrote, even as the company's ongoing offer to cut the service bill in half of customers who switch from AT&T Mobility (NYSE:T) and Verizon Wireless (NYSE:VZ) gains traction. "While we believe that the 'cut your bill in half promotion' and various leasing options are playing a positive role in attracting subs (though at the cost of decreasing ARPU), we believe S will be a postpaid phone loser for the quarter," they wrote.

The analysts expect Sprint to add around 20,000 branded postpaid customers in the quarter, with "over 100% of those being tablet customers." They expect phone subscriber losses and tablet adds to drag down Sprint's average revenue per user, with an estimated postpaid ARPU of $57.49, which would be down 8 percent year-over-year.

At the same time, the analysts wrote, Sprint's finances for its fiscal fourth quarter will likely benefit from more device leasing, seasonally lower upgrade rates, lower device activations and a slightly higher adoption of equipment installment plans. Those factors should improve Sprint's wireless EBITDA margins to 20.3 percent, and wireless EBITDA service margins to 24.5 percent, they added. The analysts expect around half of Sprint's smartphone customers to have chosen leasing or EIP programs in the first quarter.

In the new fiscal year, the analysts expect Sprint "to remain focused on reinvigorating subs growth at the expense of financial results. Lastly, we note S's lack of transparency on its EIP and leasing programs add to the concern over the company's declining financial results."

Another big issue is Sprint's network quality and expansion, which the company is likely going to address, perhaps with a major addition of cell towers. The company has made strides in improving voice and texting quality, according to third-party testing firm RootMetrics, but still lags the other Tier 1 carriers in data speeds and performance.

"While S is attracting subs, we believe it will be the network quality that keeps them," the analysts wrote. "Despite S's claims on network improvements, our checks indicate S is not spending (from a tower perspective) to adequately increase network quality. We believe bigger investments are necessary, noting the issuance of an RFP (we call 'Network Vision 2') - not expected to be formalized until summer '15."

"Network quality plays a key role," BTIG analyst Walter Piecyk told Bloomberg. "I'm sure they have a network strategy that will get them to the point where they can start taking meaningful market share."

The first quarter could also be the quarter that T-Mobile US (NYSE:TMUS) outpaces Sprint in terms of total subscribers. Sprint executives from CEO Marcelo Claure on down have professed that if that happens it will not alter their turnaround strategy or focus on customers. T-Mobile, under CEO John Legere, has grown to 56.836 million total customers, up from 33 million two years ago (which includes adding around 9 million customers through a merger with MetroPCS).

"This will give Legere more bragging rights," John Butler, an analyst with Bloomberg Intelligence, told Bloomberg. "He's earned it. He brilliantly turned a no-name brand into a cool, hip brand by fostering his own anti-establishment image."

For more:
- see this Bloomberg article

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