Sprint's Euteneuer boasts of half-off pricing promotion, but analysts predict modest interest

Sprint (NYSE: S) decided to go after Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE: T) and not T-Mobile US (NYSE:TMUS) with its new half-off billing price promotion because Sprint has seen a positive response in attracting Verizon and AT&T customers with its existing shared data plans, according to Sprint CFO Joe Euteneuer.

Euteneuer, speaking at the Bank of America Merrill Lynch 2014 Leveraged Finance Conference, said 75 percent of the customers in the industry are at Verizon and AT&T and a majority of prime credit customers are on the two leading carriers.

Sprint's Family Share Pack plans, which offer double the data allotments of Verizon and AT&T's shared data plans for the same prices, have "really attracted the families who saw the value of paying the same amount but getting double the data. And so when you think about the price differential between AT&T and Verizon prices and our existing prices, we are the best value in wireless right now when you look at it from a total cost of ownership."

The Sprint CFO said that the idea of offering double the data at the same price was a simple message that has resonated with consumers. "We think this is another simple message that should resonate with those types of customers," he said. "The whole idea is to attract people back into our stores" so that sales representatives can extoll the improvements Sprint has made in its network and entice customers to "experience something that over the past 18 months that was maybe not the best experience."

Starting Dec. 5, Sprint will offer Verizon and AT&T customers unlimited voice and texting and match their data allowance for half the cost they are currently paying. Customers need to purchase a new phone for each line either via Sprint's leasing options, Sprint's Easy Pay installment billing or pay full retail price for the device. To mitigate the cost of switching, Sprint will pay up to $350 per line via a Visa prepaid card to cover the cost of customers' Early Termination Fees or installment bill balance when they switch.

Euteneuer said that because customers need to go on a leased phone or an installment billing plan, the net discount is around 20 percent under the new promotion, which runs through Jan. 15. He said that the promotion will be a "great value creator" for Sprint.

"When you look at the comparable rates, I think a lot of them are going to find out that going to some of our existing plans might even be better than cutting your bill in half," he said.

Financial analysts said the Sprint promotion will attract attention but might not be that attractive to many Verizon and AT&T customers, especially if they are on Verizon's Edge or AT&T's Next equipment installment plan and have large EIP balances to pay off for their devices. "We believe that the target demographic for the promotion is legacy contract AT&T and Verizon family plan customers, versus customers on newer discounted EIP offers," Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote in a research note. "Customers on these newer offers are likely to have EIP balances that are greater than the $350 contract buyout offer Sprint is offering, implying out of pocket spending to pay off the remaining EIP balance."

When taking into account the target demographic of the promotion, the Jefferies analysts wrote that they found "the promotion offers a $10-30 discount over the comparable Next/Edge EIP plans from AT&T/Verizon, and comparable pricing to Sprint's existing Family Share Pack plans."

Credit Suisse analyst Joseph Mastrogiovanni wrote in a research note that based on the average churn of Verizon and AT&T during the past three fourth-quarter periods, there could be more than 5 million customers up for grabs, excluding any incremental churn. Historically, he wrote, Sprint has garnered a low percentage of these subscribers, likely below 25 percent.

BTIG analyst Walter Piecyk also wrote that the Sprint promotion offers very modest savings for Verizon and AT&T customers on equipment installment plans, and that the promotion "is attractive if an AT&T or Verizon customer was in the market to get new phones for all the users on the account and they were comfortable with the current state of Sprint's network." Yet he also questioned the timing of the new promotion, which he wrote in a blog post "might have been more appealing when the iPhone [6 and 6 Plus] first launched, not the week after Black Friday. It could be that the timing of Sprint's latest promotion is an indication that its current promotions have not gained much traction."

Euteneuer, along with Yoshimitsu Goto, the managing executive officer of Sprint parent SoftBank, also addressed network and financial issues at the conference. In November, Sprint lowered its capital expenditures forecast for the year to just below $6 billion from its previous forecast of $8 billion that it made at the beginning of this year.

Although the capital outlay is lower, Euteneuer noted that Sprint hit its mid-year goal of covering 250 million POPs with 1.9 GHz LTE and now covers 260 million, with coverage expected to expand beyond that. He said Sprint will cover 100 million POPs with 2.5 GHz TD-LTE service by year end.

Euteneuer said that Sprint will continue to deploy 2.5 GHz LTE "in the right areas to continue to take advantage of the capacity and speed that 2.5 allows us." He also said that Sprint will take advantage of Wi-Fi much more aggressively, especially Wi-Fi calling.

"We believe Sprint's TD-LTE strategy is critical to the company attracting new customers as promotions like the ones announced today just don't seem compelling enough to move customers to Sprint's existing network," Piecyk added. "We also continue to be encouraged by the development of the ecosystem for this spectrum in markets around the world. As always it comes down to execution."

Euteneuer added that Sprint has enough liquidity, and is benefiting from vendor financing from Network Vision and its Spark tri-band LTE deployment. However, he said that Sprint's ultimate liquidity forecast will be based on how much the company can improve its subscriber metrics and churn.

Goto said Sprint's current debt levels are high but can be improved and that SoftBank has confidence in Sprint's finance team. He added that SoftBank is confident that Sprint can be self-financing. However, Goto said that SoftBank's board would not rule out providing financing to Sprint directly if it would improve the value of the overall SoftBank Group.

For more:
- see this webcast
- see this Seeking Alpha transcript
- see this Kansas City Business Journal article 
- see this BTIG blog post (reg. req.)

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Article updated Dec. 3 with analyst commentary.