On Mar 29, 2016, Zacks Investment Research downgraded wireless carrier Sprint Corp. S to a Zacks Rank #3 (Hold).
Sprint is on track with its network modernization and integration efforts, which should fortify its position in the wireless industry. It is planning to use microwave technology instead of the backhaul system to reduce dependency and save operating costs. This new initiative is dubbed ‘Next Generation Network’ by the company. We believe the efficient use of capital, reduction of cell sites, elimination of dual networks, backhaul efficiencies, reduced churn, lower roaming charges and energy cost savings bode well for Sprint’s long-term growth.
Moreover, Sprint aims to save costs by relocating its mobile towers from the expensive space leased from Crown Castle International Corp. CCI and American Tower Corporation AMT to lesser expensive plots on government-owned properties. Notably, land rent to deploy mobile radio towers constitutes a chunk of a telecom operator’s costs. Hence, cost savings in this regard can be a major positive for Sprint. In addition, Sprint has finalized its cost-cutting framework with an expectation to save around $1 billion. The plan involves a few operational overhauls and layoffs.
To enhance its liquidity position, Sprint signed a deal with the newly formed Mobile Leasing Solutions, LLC, which has been created by a group of equity investors including Sprint’s majority owner and parent company, Softbank Group. Roughly $1.1 billion cash infusion occurred through this sale and lease-back deal. Notably, Sprint anticipates sale of 2.5 million leased devices with a projected book value of $1.3 billion to Mobile Leasing Solutions. The lease-back deal is intended to reduce one of Sprint’s biggest expenses – the cost of buying millions of new devices. This in turn will help Sprint lower equipment costs and free up much-needed resources to focus on new growth opportunities.
However, as the U.S. boasts a high rate (95%) of wireless penetration, competition faced by Sprint from industry peers like T-Mobile US Inc. TMUS and AT&T Inc. is intense. This, in turn, puts pressure on the top and bottom-line results of carriers vying for market share, including Sprint. The pressure is evident in the company’s fiscal 2015 third quarter performance, wherein total revenue of $8,107 million was down 9.7% year over year. Also, to expand its customer base, Sprint is spending heavily on promotion and is also offering lucrative discounts. These strategies are likely to impact the company’s wireless segment EBITDA and EBITDA service margins in the coming quarter.
Meanwhile, Sprint has decided to sit out of the upcoming 600 MHz low-band airwaves auction. While this will allow cash savings, it will limit the company’s scope for network upgrades and expansion, which may hurt its operations in the long term. Most of the spectrums that Sprint has are high-band in nature. For that, the company needs to install more expensive network equipment and radio antennas to provide quality services. Low-band spectrum, on the other hand, is crucial for wireless operators as the signals can be transmitted over longer distances through brick-and-mortar walls in cities.
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