Sprint's latest quarter leaves some analysts unimpressed

sprint spokesman
Paul Marcarelli, the actor from Verizon's "Can you hear me now" ad campaign, is now a spokesperson for Sprint.

Sprint's (NYSE: S) latest quarterly earnings impressed investors, but some analysts remain skeptical of the company's prospects.

The nation's fourth-largest carrier said earlier this week that it added 173,000 net postpaid phone customers, easily topping expectations. Sprint posted a company-record postpaid phone churn of 1.39 percent, marking the sixth consecutive quarter of improved churn year-over-year. And it said for the first time in more than five years that it won more customers from each of the major operators than it lost to them.

Investors cheered the news, sending Sprint shares up 19 percent Monday.

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The struggling operator also posted a net loss of $302 million, though, significantly wider than the $20 million loss it recorded a year ago. And its subscriber growth simply isn't sufficient for the company to a sustainable profit, Walter Piecyk of BTIG Research wrote.

"It's commendable that Sprint was able to grow post-paid phone gross adds by 12 percent and pull churn down below 1.4 percent in Q2, but that performance was not enough to grow revenue, which was in-line with our estimate," Piecyk wrote on his company's site. "Management also deserves high praise for the aggressive cost cutting that has lowered the revenue bogey required to generate free cash flow. In fact, Sprint generated free cash flow this quarter (before some non-handset related working capital moves), thanks to the dramatic cut to capex. However, we believe this level of subscriber growth is not enough to generate free cash flow on an ongoing basis, even if capital spending remained at these levels."

Piecyk's thoughts echo a research note published earlier this week by MoffettNathanson. Sprint is clearly making headway, MoffettNathanson acknowledged, but its latest earnings report reveals some ongoing concerns. Sprint lost 331,000 prepaid customers during the latest quarter, far more than analysts expected. Its postpaid ARPU was down 6.8 percent year-over-year due largely to its aggressive promotions, and surprisingly low network capex once again raised concerns that its network may not be able to keep pace with those of its competitors.

"Sprint's margins, even after adjusting for the accounting distortions of its handset leasing plans, have improved (but only a little, and not remotely as much as they initially appear on an as-reported basis)," MoffettNathanson analysts wrote. "Notwithstanding that, yes, things are getting better, whether there would be anything there for equity holders, and even whether creditors would be made whole, remains unclear."

Both BTIG and MoffettNathanson set a $2 target price for Sprint shares. The stock was trading at $6.11 per share mid-day Friday.

For more:
- see this BTIG Research post

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