Sprint's Son: I welcome the unlimited war

Sprint Chairman Masayoshi Son

Shares of Sprint tumbled 9% despite a relatively solid quarterly earnings report as analysts expressed concerns regarding its network and free cash flow. But the carrier maintained that its spectrum will be a powerful weapon as the industry enters the 5G era.

The nation’s No. 4 wireless network operator added 42,000 postpaid phone net additions during the latest quarter, capping a fiscal year in which its postpaid base grew by 930,000 customers. Net operating revenue rose 5.8% to $8.54 billion, and its net loss slid to $283 million, down from $554 million during the prior year.

Sprint Chairman Masayoshi Son, who also is CEO of the carrier’s parent SoftBank, joined the post-earnings conference call this morning, raising the hopes of investors interested in hearing about the carrier’s potential merger strategy. Sprint has long been viewed as a potential M&A target, and speculation of a deal has heated up now that the FCC’s quiet period during the recent incentive auction of 600 MHz spectrum has lifted.

Son declined to offer much in the way of details regarding Sprint’s strategy, though, opting instead to focus on the introduction of a new LTE small cell designed for homes and businesses.

“We just got off the Sprint call—as reflected in the stock we would not describe the tone of the call as overly organized or focused to be honest,” Jennifer Fritzsche of Wells Fargo Securities wrote in a research note to investors. “Sprint’s Executive Chairman Masa Son offered more color on the network and the developments it has seen there than specific commentary on M&A. Hearing he was on the call yesterday, we believe the hope was more for strategic commentary vs. network performance.”

But both Son and CEO Marcelo Claure once again touted Sprint’s 2.5 GHz spectrum, which analysts say has increased in value as operators have prioritized mid- and high-band airwaves that can add capacity and increase data speed. And that spectrum is particularly prized now that all four operators have launched unlimited-data plans, Son said.

“We believe that the 2.5 spectrum, we have yet to see the best of 2.5 spectrum yet,” Son said. “When you’ve got 5G, when you have to deliver maximum capacity, and yet have good propagation characteristics that are better than millimeter wave, 2.5 is going to be hitting a sweet spot… I welcome the unlimited war because operators don’t have the spectrum. Not only that, the other carriers don’t have 2.5.”

Investors were unconvinced, however, sending the company’s stock down more than 9% by mid-day Monday.

Other key metrics from Sprint’s quarterly earnings report include:

Subscribers: Sprint lost 118,000 postpaid customers overall during the quarter, and added a mere 187,000 connections, underscoring its struggle to gain traction in the growing Internet of Things (IoT) market. But it’s worth noting that its postpaid phone customer gains came during a quarter that saw both Verizon and AT&T launch unlimited plans, joining Sprint and T-Mobile. Whether Sprint can continue that momentum now that it has killed its half-off promotion will be key.

Prepaid: The carrier added 180,000 prepaid users, marking its return to growth in that competitive market for the first time in two years. And it suggested its Virgin Mobile relaunch—which was originally slated for late last year—will occur in July in the form of a “disruptive” brand that may expand beyond a simple prepaid wireless service.

Financials: Service revenue came in at $6.12 billion, down 7% year over year, but equipment revenue was up 62% to $2.42 billion. Net operating revenue of $8.54 billion beat an estimate of $7.93 billion, according to Thomson Reuters I/B/E/S.

Summary: With the silent period over and Donald Trump’s administration likely to demonstrate a far lighter regulatory touch than the Obama White House, the looming question for Sprint is how it can strike a deal to address its financial woes and best leverage its valuable spectrum. But that also invites the question of what happens if Sprint can’t strike the right deal, as analyst Craig Moffett of MoffettNathanson wrote.

“What valuation would Sprint warrant if it were to have to go forward alone,” Moffett asked in a note to subscribers “(T)hey are spending almost nothing on their network. Their margins – adjusted for accounting distortions – are still awful. And despite hyper-aggressive pricing, they are still only barely growing their subscriber base.

“What multiple would one put on a company with little if any prospect of ever generating positive free cash flow (assuming they eventually have to spend money on their network) if they CAN’T ultimately find a merger partner?”