Wireless Carriers: Sprint and T-Mobile

by: Sramana Mitra August 12, 2008 | about stocks: DT / S    

Sramana Mitra

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On August 6, Sprint Nextel Corp. (NYSE: S) reported second quarter results that beat analyst estimates. The new CEO, Dan Hesse, has put in place a turnaround plan for improving customer experience, building the Sprint brand, and increasing profitability. The plan is already showing results: the churn rate decreased to 2% from 2.45% last quarter.

However, this is little progress compared with AT&T (T) and Verizon (VZ), who are bringing down their churn rates to about 1% and adding more than a million customers every quarter. Compared to 1.09 million subscribers last quarter, Sprint lost 901,000 customers this quarter, including 776,000 postpaid and 250,000 prepaid customers. The total customer base now stands at 51.9 million, versus 54 million last year. Sprint also managed to hold on to its high-paying customers and despite the drop in customers, its ARPU was stable at $56, same as last quarter but down 7% y-o-y. Helping in these small achievements is the new $129 Samsung Instinct, an iPhone rival touchscreen smartphone that was released on June 20 and saw record sales.

Revenue was $9.1 billion, down 11% y-o-y and 3% q-o-q. Net loss was $344 million or diluted loss of $0.12 per share, compared to net income of $19 million last year. Adjusted EPS was $0.06 per share versus analyst estimates of $0.03 per share.

Total debt was $23 billion, offset by cash and marketable securities of $3.5 billion.
Cost reduction efforts include a stringent spending review process and minimization of external labor costs. Sprint has streamlined its distribution channels by more than 25% since the start of 2008.

By segment, wireless service revenue was $7.0 billion, down 11% y-o-y mainly due to lower ARPU and fewer subscribers. Wireline revenue was $1.6 billion, down slightly sequentially and y-o-y as legacy voice and data declines exceeded Internet revenue growth. Internet revenue grew 42% y-o-y due to strong demand for Global MPLS services from Enterprise customers and the increasing base of cable subscribers using VoIP services.

As for Q3, Sprint expects to report higher customer losses due to seasonality. It canceled plans of raising money within one day of the results announcement, and its shares bounced. It is currently trading around $9 with market cap of about $25 billion.

Chart for Sprint Nextel Corp. (<a href='http://seekingalpha.com/symbol/s' title='More opinion and analysis of S'>S</a>)

Unlike Sprint, T-Mobile USA added customers: 668,000 in Q2, down from 981,000 additions last quarter and 857,000 last year. However, thanks to the SunCom acquisition completed in Q1, total customer base grew to 31.5 million from 26.9 million last year. The decline in additions is mainly due to higher churn following the expiration of two-year contracts introduced in April 2006. ARPU was $51, down from $52 last year. Things might look up for T-Mobile with the BlackBerry Bold being released on the network later this month. It is also planning to launch a mobile phone application store similar to the Apple iPhone App store.

T-Mobile’s parent company Deutsche Telekom AG (NYSE:DT) reported its Q2 results on August 7. T-Mobile USA had revenue of $5.47 billion, up 14.4% y-o-y. Net income was $452 million, up from $350 million last year but down from $462 million last quarter. Deutsche Telekom AG reported revenue of €15.13 billion ($23.39 billion), down 3% y-o-y. Net profit declined 35% to €394 million euros ($608.2 million).

DT is trading around $17 after hitting a 52-week low of $15.53 on June 19. Its market cap is around $75 billion.

Chart for Deutsche Telekom AG (<a href='http://seekingalpha.com/symbol/dt' title='More opinion and analysis of DT'>DT</a>)

Disclosure: None

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This article has 2 comments:

  •  
    Aug 12 08:24 AM
    I am hoping Sprint internal changes will improve the bottom line soon!
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  •  
    Aug 13 08:25 AM
    IMHO: S results are relative, relative to their own performance and relative to their competition which is where I believe the focus should be. They compare their churn rate against their own measurement as opposed to an industry wide comparison. They are 100 basis points higher than the 2 leaders T/VZ. Hesse is right about churn being the single most important metric regarding company performance since a 2% churn rate translates into an 11% decline in sales. However, even if he gets the churn rate down to 1%, which I doubt he can accomplish without a severe drop in ARPU or an increase in phone subsidies, that would still translate into a ~5% drop in sales. The have already mined the high-end of the ARPU curve and will eventually deplete the number of customers who can afford $99/month. At their current sales run rate and their debt to EBITDA ratio climbing, they may be close to violating their debt covenants which would not bode well for the equity holders.

    Their revenue is declining at >11% y-o-y. Wireline is not a big contributor to gross margins and only comprises ~15% of gross sales revenue.

    Qwest leaving for VZ, Embarq leaving for unnamed carrier, Federal government GSA contracts lost, problems with the MVNO, a churn rate that when bi-annualized (assumes 2 year contracts) translates into a 24% defection rate. In order to grow the business they must run faster than 24% adds just to stay even. I don't see that happening.

    Again, IMHO, I might look at the bonds but certainly not the stock. I believe that the bonds have more upside than the stock should DH turn this ship around.

    One more thing: Leverage works both ways. Nxtl took advantage of high leverage when they were profitable and the stock popped as a result; but, leverage can also magnify and amplify losses. Just something to keep in mind. The time to buy highly leveraged, high beta stocks is in the beginning of an economic recovery. We are nowhere near that point yet. Just my humble opinion.
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