Sprint (S) to Report Q3 Earnings: What’s in the Cards?

Sprint Corporation S is scheduled to release third-quarter fiscal 2017 results on Feb 2, before market opens.

In the trailing four quarters, the company’s earnings lagged the Zacks Consensus Estimate in two and beat the estimate in the other two. The average positive surprise for the last four quarters is 131.25%

Let’s see how things are shaping up prior to this announcement.

Factors Likely to Influence Q3 Earnings

Sprint continues to fortify its position in the wireless industry with network modernization and integration efforts, attractive unlimited data plans and promotional offers in its postpaid and prepaid plans. These offerings have helped the company register an impressive number of customer additions during second-quarter fiscal 2017.

Sprint witnessed net additions of 3,78,000 wireless customers, including net gain of 1,68,000 postpaid customers. Prepaid net additions totaled 95,000, while wholesale and affiliate net additions were 1,15,000 compared with net gain of 35,000 prepaid and 65,000 wholesale and affiliate in first-quarter fiscal 2017. Sprint's focus to deliver the most attractive value proposition in wireless resulted in a net gain of 2,79,000 postpaid phone subscribers, marking the ninth consecutive quarter of net additions. In second-quarter fiscal 2017 results, the company witnessed the highest retail phone net additions in more than two years. Backed by such subscriber gain, Sprint has maintained its previous outlook for 2017. It is to be seen whether the company can maintain subscriber gain in the to-be-reported quarter.

Sprint unveiled the Sprint MultiLine solution which allows businesses to add a company-owned number to their employees' personal phones for better operations. Meanwhile, the company is planning to offer free access to online video streaming service provider, Hulu. Its basic service includes TV series, movies, original content and other programming with limited or no commercials.

The alliance with telecom service provider — Ericsson — to launch massive MIMO (multiple input, multiple output) radios bodes well for Sprint. Notably, the companies are planning to launch Massive MIMO radios across the United States by 2018. These devices are expected to raise the network capacity of Sprint by up to 10 times and will also influence Gigabit LTE services, boosting the company’s 5G networks prospects.

Of late, Sprint has been trying striving to check churn and fend off competition. Also, the company has been continuously making efforts to lure customers from rival carriers such as AT&T T and Verizon Communications VZ by offering attractive promotional plans and discounts. This has led to high cash burn and heavy losses. Notably, with more smartphone launches coming up, specifically iPhone 7, we expect the promotional offers to dent margins.

Further, Sprint has a debt-laden balance sheet and has been witnessing losses each year since 2007. As of Sep 30, 2017, Sprint had $4,802 million of cash and marketable securities compared with $2,870 million at the end of March 2017. Total debt outstanding was $34,236 million compared with $35,878 million at the end of March 2017. Additionally, in the reported quarter, free cash flow was $420 million compared with $707 million in the year-ago quarter. Such high debt levels, declining cash flows and liquidity pressure may affect the company’s cost of capital to raise funds for network expansion.

Affected by the headwinds, Sprint’s shares have lost 32.7% compared with the industry’s decline of 0.3% in the past six months.

Earnings Whispers

Our proven model does not conclusively show that Sprint is likely to beat the Zacks Consensus Estimate this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Unfortunately, that is not the case here as elaborated below.

Zacks ESP: Sprint has an Earnings ESP of -40.35%. This is because the Most Accurate estimate is at a loss of 5 cents while the Zacks Consensus Estimate is pegged at a loss of 4 cents. You can uncover the best stocks to buy or sell before they’re reported with the Earnings ESP Filter.

Zacks Rank: Sprint has a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Key Pick

CenturyLink CTL from the broader Computer and Technology sector has the right combination of elements to post an earnings beat in fourth-quarter 2017 results, slated to release on Feb 14. CenturyLink has an Earnings ESP of +14.87% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company’s sales for fourth-quarter 2017 and first-quarter 2018 are estimated to increase 32.6% and 42.9%, respectively.

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