Sprint's (NYSE: S) decision to focus on more lucrative subscribers is likely going to increase its current-quarter churn, Wells Fargo Securities said, but will help the carrier's bottom line in the long term. Meanwhile, T-Mobile's (NYSE:TMUS) aggressive first-quarter promotions will be expensive but will add customers during a traditionally slow quarter, according to the analysts.
The U.S. mobile market has grown increasingly competitive over the last year due to a saturated smartphone market, and a cutthroat holiday season has spilled over into 2016. "Q1 typically is a lower decision point for gross adds," Wells Fargo Senior Analyst Jennifer M. Fritzsche wrote along with her colleagues. "We expect T-Mobile to see solid postpay gains, furthering the momentum it saw in 2015. AT&T has come back to the competitive fray in a fairly big way with the 1/11 launch of their unlimited wireless/DTV plans. Therefore the year-over-year activity and bar has been set higher in terms of the 'jump ball' for gross adds."
And while Sprint has been particularly aggressive with its "half off" promotion and other campaigns, Wells Fargo believes it is honing its focus on quality subscribers rather than growing its overall customer base. The analysts increased their expectations for Sprint's churn during the current quarter to 1.75 percent, up from 1.55 percent, but said the carrier "is heading in a very positive direction.
"Nothing about this call is 'thesis changing,'" they wrote. "In our view, Sprint remains focused on improving the top line in addition to cost cutting -- but is honing in on the quality of the growth in doing so."
The analysts added that liquidity is crucial for Sprint as it works to pay down debt and become "a self-funding entity."
Wells Fargo also predicted T-Mobile will add 960,000 net postpaid subscribers during the first quarter, raising its previous estimate of 905,000, crediting the operator's "counter-cyclical" strategy of pursuing users in the first half of the year. The analysts increased their first-quarter estimate of SG&A (Selling, General and Administrative expenses) to $2.76 billion for T-Mobile, up from $2.66 billion, "to account for the elevated marketing spend."
Wells Fargo also dramatically increased its estimates of T-Mobile's prepaid net adds during the current quarter to 440,000, up from just 78,000. "T-Mobile has clearly seen a rebirth in subs and brand strength," the analysts wrote. "We would like to see the sub growth translate into sustainable FCF (free cash flow) generation to become more constructive."
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