The third-largest U.S. wireless carrier, Sprint Nextel Corp. (S), inked a deal to sell the new version of Apple Inc.’s (AAPL) iPhone from October 14.
Sprint would sell the new version — iPhone 4S — with unlimited data plan, potentially putting pressure on the two dominant players, AT&T Inc. (T) and Verizon Communications (VZ). Instead of unlimited offerings, both companies charge consumers according to the usage of data services.
We see the iPhone deal as a big win for Sprint, which is struggling to turn around its business after its disastrous merger with Nextel in 2005.Sprint’s share has been eroding persistently in the U.S. wireless market due to its inability to keep pace with its peers in providing competitive services. The sale of the iPhone has yielded lucrative returns for both AT&T and Verizon; the former marketing it since 2007 while the latter joining the fray this February.
Sprint has nevertheless revived to a certain extent from subscriber losses and gained from improving customer service. At the end of the second quarter, Sprint had roughly 52 million customers while AT&T and Verizon had 99 million and 106 million subscribers, respectively.
The addition of the iPhone will help Sprint to gain new customers while retaining the old. This will lead to increased subscriber growth, reduced churn and higher average revenue per user. The company expects to sell 6 million iPhones this year.
However, the iPhone might put a drag on Sprint’s operating margin because of high subsidy. Sprint has promised to buy about 30.5 million iPhones from Apple over the next four years and pay $500 to subsidize the product.
We currently maintain our long-term Neutral recommendation on Sprint. For the short term (1–3 months), the stock retains a Zacks #3 (Hold) Rank.
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