'Something big needs to change' at Sprint, New Street analysts say

Sprint's window of opportunity to reverse its financial course is closing, according to New Street Research analysts.

Much has been made of the handset leasing company that was set up late last year by parent company SoftBank and other investors to take costs off of Sprint's balance sheet. New Street analysts said in a research note ahead of Sprint's first-quarter earnings report that "investors should ignore all of the issues around EIP and handset lease plans and the vehicles that have been set up to finance these."

Instead, investors should focus on handset ARPU, churn, and the share of industry gross adds the carrier claimed during an extremely competitive fourth quarter.

Aggressive late-year promotions such as Sprint's offer to cut bills in half for users who switch from other carriers will likely result in a quarterly ARPU gain of 69 cents, New Street said, boosting ARPU to $59. "Even this would entail a 7.5 percent decline in ARPU year over year," however, and Sprint "would have to do materially better than this to allay our repricing concerns."

And the struggling carrier will have to claim 25 percent of the industry's gross adds for three years to offset the impact of its repricing strategy, New Street analysts maintained. Its share of gross adds was 18 percent in the fourth quarter, according to New Street, and reportedly climbed to 20 percent after the half-off promotion launched. "For Sprint to be on a path to recovery, with pricing where it is, we would need to see steady progress from this level towards 25 percent."

And while Sprint's churn has improved steadily over the last year, the analysts said Sprint may suffer following the expiration of some promotions and the implementation of tighter consumer credit policies.

Given Sprint's current pricing models, "the company is not growing anywhere near fast enough to reach sustainable FCF (free cash flow) break-even in a reasonable time frame," New Street wrote. "Something big needs to change. We think it is tough to make an investment case premised on a turnaround. There is some prospect of value creation if they can get a deal done with T-Mobile; however, this is probably still 12-24 months away and there will be other bidders for TMUS."

New Street analysts said they are "leery of shorting the stock" given Sprint's valuable spectrum holdings, however. Sprint is expected to report its first-quarter earnings in early May.

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Sprint to get $1.1B in cash thanks to handset leasing vehicle

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