Sprint (NYSE: S) lost its spot as the No. 3 carrier in the U.S. market to T-Mobile US (NYSE:TMUS) in terms of total subscribers during the second quarter. However, Sprint also noted it is continuing to make progress on its turnaround and said it added postpaid phone customers in May and June and recorded its best-ever Sprint platform postpaid churn. Sprint also said it is raising its fiscal year 2015 adjusted EBITDA outlook from $6.5 to $6.9 billion to $7.2 to $7.6 billion.
Sprint ended the quarter with 57.668 million total customers compared to T-Mobile's 58.908 million. Sprint executives, including CEO Marcelo Claure, have sought to downplay the importance of the rankings and have said Sprint is focused on improving its network and the customer experience.
Sprint Chairman and SoftBank CEO Masayoshi Son made a rare appearance on the company's earnings conference call, perhaps to buck up the company's confidence and to reassure investors of his commitment to Sprint. "I am extremely excited about the turnaround of Sprint," he said. Son acknowledged that he lost confidence in the U.S. market after regulators last year signaled their opposition to a merger between Sprint and T-Mobile, but said that he has been "totally refocused" the last few months to help Claure and his team on the turnaround. He said he does not want to sell Sprint and believes in Sprint's turnaround efforts.
The company's quarterly results for its fiscal first quarter (and the calendar second quarter) come just after it announced a major shakeup of its executive ranks. The carrier said CFO Joe Euteneuer will be leaving the company and will be replaced by Tarek Robbiati, a former executive at Telstra and Orange. The carrier also brought in a new executive, Günther Ottendorfer, to be COO of technology. Additionally, Sprint promoted John Saw to be CTO, replacing Stephen Bye, who left the company late last month. For more on those changes, see this story.
Sprint executives also detailed the carrier's planned network densification, a project it has dubbed "Next Generation Network," during its earnings conference call. Sprint did not provide many details of the project ahead of the call but said it will involve "significant densification of the network including additional macro cell sites, deployment of tens of thousands of small cells, and further expansion of the 2.5 GHz spectrum across the company's existing sites."
Sprint disclosed during the call that it has been working with parent company SoftBank and other unnamed partners to set up a leasing company that will finance its devices leased by customers on attractive terms. The structure of the company is expected to be finalized in the next few months, and SoftBank is expected to be a minority equity investor in the leasing company. Sprint expects to establish a similar leasing company to finance the purchase of network gear for its network densification program.
With additional expected expense reductions, and what it says is capital-efficient deployment of the network, and funding from the proposed leasing company, Sprint said it currently does not expect to raise additional capital through the public debt or equity markets in the foreseeable future, nor does it currently expect to sell any of its spectrum.
Claure said on the call that Sprint is on track to cut $1.5 billion in expenses in fiscal 2015. Sprint also expects 2015 to be the year when its pattern of burning through its cash peaks, and both Claure and Euteneuer said they knew how important it is to achieve positive free cash flow. Sprint also expects additional "aggressive" expense reductions in 2016.
Macquarie Capital analyst Kevin Smithen said in a research note that "the creation of an off-balance sheet lease finance arm backed by SoftBank addresses two of our four key issues on Sprint: SoftBank's commitment and liquidity."
Smithen added: "With positive phone net adds expected in FQ2 and a $700m increase in the midpoint of FY15 EBITDA guidance, and no debt or equity raises or spectrum firesales expected by the company in the 'foreseeable future', we think value investors can buy the stock now with the potential for a double or more on their investment." Smithen also thinks the handset leasing company "will provide immediate liquidity to Sprint by assuming its [equipment installment plan] receivables."
MoffettNathanson analyst Craig Moffett was more pessimistic and said in a research note that "discussions around Sprint were once about how the company could use its 2.5 GHz spectrum to create competitive advantage; they are about how Sprint can fund their operating losses -- they said this morning they won't sell spectrum -- and how SoftBank's interventions will impact Sprint's shareholders. Off balance sheet debt through new funding vehicles is still, well, debt. You can't manufacture equity out of incremental borrowing, regardless of whether it is on or off the balance sheet."
Here is a breakdown of Sprint's key quarterly metrics:
Subscribers: Sprint reported total net customer additions of 675,000 subscribers, compared to net losses of 220,000 in the year-ago quarter. The year-over-year improvement was mostly driven by fewer postpaid phone customer losses. Sprint added 310,000 postpaid net customers in the quarter, compared to net losses of 181,000 in the year-ago period. That was higher than some financial analysts had expected; for example, analysts at Wells Fargo had anticipated that Sprint would only add 220,000 postpaid customers.
Although Sprint lost 12,000 postpaid phone customers in the quarter, that in itself is a major improvement for the carrier. Sprint said that for the first time in nearly two years it recorded monthly postpaid phone net additions in both May and June. The company said this marked the fifth consecutive quarter of sequential improvement, and the 12,000 postpaid phone customer losses compared to 620,000 in the year-ago quarter. The 608,000 year-over-year improvement was driven by lower churn and a 13 percent increase in gross additions, including a 47 percent increase in gross additions with prime credit quality, Sprint said.
For comparison, T-Mobile added 760,000 postpaid phone customers in the second quarter, Verizon Wireless (NYSE: VZ) added 321,000 and AT&T Mobility (NYSE:T) lost 322,000.
Sprint also said it lost 366,000 prepaid customers, compared to net losses of 542,000 in the year-ago quarter. The year-over-year improvement was mostly due to fewer customer losses in the Assurance brand, Sprint said.
The carrier said that wholesale net additions of 731,000 were up compared to 503,000 in the prior-year quarter, which it said was mostly driven by connected devices.
ARPU: The carrier reported Sprint platform postpaid average revenue per user of $55.48, down from $62.07 in the year-ago period and $56.94 in the first quarter. However, that does not take into account monthly billings Sprint receives from customers leasing phones or on equipment installment plans. Sprint said postpaid average billings per user was $61.67 for the quarter, down 3 percent from $63.59 a year ago and flat sequentially. The year-over-year decline was primarily related to a higher mix of tablets, which have a lower monthly recurring charge than phones, and a shift to lower priced rate plans offered in conjunction with device financing options, partially offset by higher installment billings and lease revenues associated with device financing.
Financials: Sprint reported net operating revenues of $8 billion for the quarter, down 9 percent from a year ago, driven by lower wireless and wireline service revenues and also lower equipment revenues. Wireless service revenues clocked in at $6.6 billion for the quarter and were down 8 percent year-over-year due to a lower postpaid phone customer base and cheaper rate plans offered in conjunction with device financing options. Wireless equipment revenues of $990 million for the quarter declined $116 million year-over-year. The year-over-year decline was mostly related to a shift from installment billing sales, which recognize more revenue at the point of sale, to leasing sales, which recognize revenues over time.
Sprint posted a net loss of $20 million, compared to a net income of $23 million in the year-ago period, primarily due to higher interest expenses.
Consolidated adjusted EBITDA of $2.1 billion grew 14 percent year-over-year, as expense reductions more than offset the decline in operating revenues.
Churn: Sprint said postpaid churn was 1.56 percent in the quarter, a record low, compared to 2.05 percent for the year-ago period and 1.84 percent for the first quarter. Sprint said the 49 basis point year-over-year improvement was driven by improved quality of recently acquired customers and network performance improvements. The sequential improvement was driven by seasonality and continuing benefits from network performance improvements, the carrier said.
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