After Sprint (NYSE: S) revealed that it burned through $914 million in cash in the first quarter, some analysts and investors questioned the company's long-term liquidity and its ability to turnaround its business. However, Sprint executives maintain that the company will continue to invest to acquire customers and improve its network, and it has enough money to do both.
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Sprint CEO Marcelo Claure and CFO Joe Euteneuer addressed those concerns during the company's earnings conference call and in subsequent interviews. Sprint ended the quarter with a total liquidity position of $7.5 billion including cash, cash equivalents and short-term investments of $4.2 billion, as well as $2.8 billion of undrawn borrowing capacity under a revolving bank credit facility and around $500 million of undrawn capacity under a service receivables financing agreement.
After the first quarter ended, Sprint changed the service receivables facility and increased its size from $1.3 billion to $3.3 billion by including equipment receivables. Additionally, the carrier has $1.4 billion available under its network vendor financing deals that can be used to buy 2.5 GHz LTE network equipment.
In an interview with FierceWireless, Euteneuer noted that wireless device distributor Brightstar, which like Sprint is majority-owned by SoftBank and used to be run by Claure, is purchasing devices from some OEMs directly for Sprint, and then selling them to retailers. That keeps those device purchases on Brightstar's books and improves Sprint's working capital. While Sprint will lose equipment revenue as part of the deal, it also will cut expenses. The process is just starting with a handful of handset vendors, Euteneuer said.
"They are great distributors. They know how to keep stores shelves stocked," he said of Brightstar. "We're trying to leverage their expertise."
During the company's earnings call, Claure said that the company is finalizing plans for a massive densification of its network using the company's 2.5 GHz spectrum. Called the "Sprint Next Generation Network," the plan calls for a balance of small cells and macrocells in an effort to provide a more consistently reliable experience across the entire network.
Sprint is forecasting that it will spend $5 billion on capital expenditures this fiscal year, and that figure was lower than some analyst had expected. "While we understand the key question would be how to pay for this, the lower capex outlook feeds the bear thesis that the company has an asset which it is not spending on and is not giving a plan for tangible network improvement," Wells Fargo analyst Jennifer Fritzsche wrote in a research note. "This lack of aggressive spend will make it increasingly difficult to narrow the gap between it and other carriers (namely VZ), in our view."
"We're spending what is necessary," Claure told CNBC. He also added on the earnings call that SoftBank CEO Masayoshi Son is behind Sprint's plan to densify its network.
"We feel very good about the future of our network," Claure said on the call, according to a Seeking Alpha transcript of his remarks. "Masa and SoftBank are 100 percent behind the concept of densifying the network and as you've seen from our results, our network just keeps on getting better every day." [click to tweet]
During the first quarter Sprint added 1.2 million total customers, including 211,000 postpaid customers (though Sprint lost 201,000 postpaid phone customers). The carrier's postpaid churn fell sharply to 1.84 percent, down from 2.11 percent in the year-ago period and 2.3 percent in the fourth quarter.
Claure said he was not concerned about Sprint's finances and might access the bond or equity markets, or look to sell some of its excess 2.5 GHz spectrum. "If we continue to grow or grow faster than anticipated, there's always the debt market, equity market and the spectrum market," he told Reuters. "Lastly there's a pretty big shareholder (SoftBank) that is doing well financially...I'm not concerned."
TBR analysts Eric Costa and Steve Vachon noted in a research note that "Sprint is embarking on initiatives that will improve subscriber growth but come with high expenses." Those include its expansion into 1,435 RadioShack stores, though Claure said that will not be as costly as opening company-owned retail stores. Sprint is still offering to pay off all of the required costs for new customers to switch to the carrier, including Early Termination Fees and outstanding payments on device financing plans. The carrier also is launching its "Direct 2 You" program where it sends Sprint-trained employees to set up customers' smartphones when they upgrade.
"TBR anticipates the service will help attract a niche market of consumers but will not compensate for the costs and potential liabilities associated with offering the service," the analysts wrote.
"In our industry, in order for you to grow, you've got to invest money," Claure told CNBC. "It costs you money to attract new customers, but we have a very clear plan in terms of when does the company generate free cash flow. And we have a very clear plan in terms of how we're executing on all fronts."
Some analysts are not convinced. "Sprint is to be lauded for the improvement in subscriber trends…but we fear it may come to naught," MoffettNathason analyst Craig Moffett wrote in a research note. "At the current rate of cash burn, the company will run out of cash in a year." And that is before Sprint potentially pays for spectrum in the incentive auction of 600 MHz broadcast TV spectrum.
He added: "Something's got to give. Sprint will need additional capital. But to what end? Simply funding a cash burn so that it can be sustained is, well, crazy. There has to be a reason to expect improvement. That would require rising, not falling, ARPU, or, alternatively, dramatically better subscriber growth trends. Which in turn would require a much stronger network, and higher capital spending…and a faster cash burn."
For more:
- see this WSJ article (sub. req.)
- see this Reuters article
- see this CNBC video
- see this Seeking Alpha transcript
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