Shares of Sprint (NYSE: S) have rebounded after the carrier made a series of convoluted financial moves to improve its financial position and stave off bankruptcy, and the carrier is positioned to become a "deconstructed wireless operator," according to MoffettNathanson analysts, focusing exclusively on providing wireless services.
But that model isn't likely to improve Sprint's prospects over the next few years, the firm said.
Sprint pocketed $1.1 billion in cash in November from a handset leasing company that was established by parent SoftBank and other investors to take the financing of leased devices off Sprint's balance sheet and provide more liquidity. That deal was followed in April by the creation of a similar tower lease-back arrangement that raised roughly $2.2 billion and a second handset-leasing mechanism that raised $1.1 billion.
And the beleaguered operator said last month that it is working on a financial arrangement through which it will sell the rights to some of its spectrum licenses to an unnamed entity, then lease those rights back to Sprint. That deal would appear to be an effort to leverage its valuable 2.5 GHz spectrum licenses.
Analysts generally agree that those arrangements have helped Sprint regain its financial footing – for the time being, at least – and they could lead to the emergence of a business model the U.S. hasn't seen before, MoffettNathanson said.
"These steps are about more than just liquidity, however," MoffettNathanson analysts wrote this morning in a research note. "Taken together, they point to an entirely new model in the U.S. of a deconstructed wireless operator, where handsets are leased to customers by third parties, network assets and spectrum are owned by outsiders, and Sprint itself is left to focus only on its core value-added business. Sprint is reinventing itself as a next-gen, pure-play service provider."
Such models have emerged in some overseas markets. India's Bharti Airtel began pursuing a similar model in 2004, MoffettNathanson wrote, outsourcing billions of dollars in contracts for functions including hardware, software, IT and network operations. The moves didn't appear to have helped Bharti's finances in any meaningful way, though, and the carrier began taking some of those functions back in-house in 2014.
Meanwhile, Sprint has come under fire for cutting its infrastructure spending, alarming analysts who fear the carrier's network may not keep pace with those of its competitors. Sprint last month lowered its capex guidance for the rest of the year to roughly $3 billion, far below analysts' estimates in the range of $4.5 billion.
Even if Sprint doesn't have to pump substantially more money into its network to "catch up" to its rivals, it isn't likely to generate positive FCF (free cash flow) over the next few years. In fact, MoffettNathanson predicted Sprint will continue to lose around $3 billion per year in "core" cash from its services business.
"In short, there are no magic bullets," according to MoffettNathanson. "Ultimately, what matters is free cash flow. If one eliminates handsets from the model entirely… one is left with this: Sprint's ex-handset service margins are not high enough to support both interest and capex."
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