Company Overview

Sprint Corporation (NYSE: S) is a communications company that offers both wireless and wireline products and services to consumers, businesses, government subscribers, and resellers. The company provides its services through a series of wireless networks, an all-digital global wireline network, and a Tier 1 internet backbone.

The company’s service area includes all 50 states, Puerto Rico, and the U.S. Virgin Islands. Wireless and wireline services are offered under a variety of brand names including Sprint, Boost Mobile, Virgin Mobile, and Assurance Wireless.

In July 2013, Sprint was merged with SoftBank, which owns approximately 83 percent of Sprint’s outstanding common stock. The company is headquartered in Overland Park, Kansas.

Products and Services

As noted above, Sprint operates in two reportable segments: Wireless and Wireline.

Wireless

Sprint offers both postpaid and prepaid wireless plans to retail subscribers. The company also sells wireless service on a wholesale basis to other carriers (mobile virtual network operators or MVNOs) who provide it under their respective brands.

Postpaid plans generally consist of unlimited talk, text, and a monthly data allowance. Users may either (i) sign a service contract and receive a subsidized phone with a higher monthly rate, (ii) purchase a phone using installment plans and receive a lower monthly rate, or (iii) lease a phone for a specified term and receive a lower monthly rate.

Sprint’s prepaid portfolio consists of multiple brands that are designed to appeal to different demographics. Sprint prepaid is primarily a complementary offering to Sprint postpaid plans, while Boost Mobile is marketed to subscribers that require unlimited data. Virgin Mobile serves subscribers that are looking to optimize spending with high-speed data options. Assurance Wireless provides free phones and basic service to subscribers that meet the requirements of the government-sponsored Lifeline Program.

As noted above, the company’s wholesale business serves MVNOs that offer low-cost wireless service using the Sprint network infrastructure. Carriers include Ting, Republic Wireless, and FreedomPop.

Wireline

In addition to wireless, the company provides an array of wireline voice and data communication services to other communications companies and certain business subscribers. These services are delivered using a variety of protocols including multiprotocol label switching, IP managed network services, voice over internet protocol, session initiated protocol, and traditional voice services. The wireline network is also carrying an increasing amount of voice and data traffic for the wireless segment as a result of growing usage by wireless subscribers.

 

First Quarter Earnings Review

Revenue for the quarter ended June 30, 2017, increased two percent from the same period one year ago to $8.2 billion. This was driven by strong revenue from equipment, which was partially offset by lower revenue from services. However, we note that revenue fell four percent from the prior quarter.

The company posted an eighth consecutive quarter of net postpaid phone subscriber growth with 88,000, although this was lower than many analyst estimates. Average revenue per user (ARPU) fell eight percent year-over-year but was roughly flat sequentially.

Operating expenses decreased nine percent year-over-year to $7.0 billion. This was driven by the company’s cost reduction program that delivered nearly $370 million in savings year-over-year related to cost of service and sales, general, and administrative expenses. This helped to deliver the company’s highest adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in nearly 10 years of $2.9 billion, yielding an adjusted EBITDA margin of 47 percent. These cost savings also helped Sprint deliver positive net income of $206 million ($0.05 per share) for the first time in three years.

Cash from operations more than doubled year-over-year to $1.3 billion and was roughly flat sequentially. The company also reported adjusted free cash flow of $239 million, down from $466 million in the same period one year ago.

At June 30, 2017, Sprint listed $8.3 billion in cash and short-term investments, and net debt of $32.6 billion. Stockholders’ equity totaled $18.8 billion, yielding a net debt / equity ratio of 1.7.

Full-Year Earnings Guidance

Encouraged by the ongoing returns from its cost-reduction program, Sprint increased the low end of its full-year adjusted EBITDA guidance by $100 million, resulting in a range of $10.8 billion to $11.2 billion. Operating income was also increased to a range of $2.1 billion to $2.5 billion. Cash capital expenditure expectations remained unchanged at $3.5 billion to $4 billion.

Potential Transactions

Sprint CEO Marcelo Claure stated on the company’s recent earnings call that he hopes to announce an acquisition soon. He noted that the potential to create value for shareholders would be significantly greater with some sort of horizontal or vertical integration. Potential partners include Charter Communications, DISH Network, T-Mobile, or a mobile virtual network operator (MVNO). There is also the possibility of SoftBank buying out the remaining portion of Sprint that it doesn’t already own. Many of these are unlikely due to leverage constraints (Charter) or antitrust concerns (T-Mobile), but SoftBank has pursued deals aggressively in the past.

Stock Influences

• Changes in net subscriber additions;
• Changes in ARPU and profitability;
• Progress in monetizing the company’s unused spectrum; and
• M&A activity.

Risk Factors.

• The wireless industry is extremely competitive and the company is under constant pressure to add subscribers;
• The company is highly levered, and restrictive debt covenants could negatively impact the company’s ability to access additional financing;
• The company is highly susceptible to general economic conditions; and
• The company’s share price has been volatile and susceptible to speculation regarding potential transactions.

Stock Performance

As of August 11, 2017, shares of Sprint closed at $8.31, up more than three percent on the day, yielding a market capitalization of $33 billion. Over the past 12 months, the stock has gained more than 30 percent after trading as low as $5.83 in November 2016. Shares hit a high of $9.65 in January and has been relatively volatile since then.

Following are selected analyst ratings and price targets:

Analyst	Firm	Rating	Price Target	Date
Mike McCormack	Jefferies	Underperform	$5.00	8/2/2017
Matthew Niknam	Deutsche Bank	Hold	$8.00	8/7/2017
Philip Cusick	J.P. Morgan	Neutral	$8.00	8/1/2017

 

Summary

After multiple quarters of losses, Sprint posted a modest yet positive net income. Improved operating expenses helped push adjusted EBITDA higher, and net subscriber growth remained positive. However, the primary catalyst for Sprint remains a combination with a cable operator or an MVNO.

 

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