As noted above, Sprint announced major management changes on their conference call, but they also announced their FQ1 2015 results. Here’s what the analysts had to say:
Jonathan Chaplin of New Street Research: Results were good. Postpaid phone adds were close to breakeven; ARPU was more or less in-line; churn improved; and EBITDA beat estimates (although half the beat was from a higher leasing take rate). FY2015 EBITDA guidance was raised. The company announced the establishment of a leasing company which we assume will be a vehicle to raise debt off balance sheet. In addition, they stated they have no intention to sell spectrum. The improvement in operating trends is encouraging; however, they are not enough on their own to make the equity compelling. To put things in perspective, we estimate the company generated just $2.7 billion in Cash EBITDA over the last 12 months (stripping out the financing and capitalization of postpaid device sales). Cash EBITDA would have to triple to justify a $5 standalone valuation at an industry multiple of 7x. The churn trend this quarter is encouraging, but it is not enough. Sprint needs to do something transformative. On the other hand, Sprint’s equity would be wildly compelling if they received full value for their spectrum assets. A sale of 20MHz could plug most of their $14 billion funding hole, and significantly alleviate their capital structure problem. Furthermore, if the rest of the unused spectrum is valued at the price we think they could receive for spectrum they sell, the equity could triple. In a press release issued this morning mgmt. said they have no intention to sell spectrum. It is tough to see the way forward for the equity absent a sale, but we are all ears. The declaration that they won’t sell spectrum should be good for DISH today.
Kevin Smithen at Macquarie Securities: The creation of an off-balance sheet lease finance arm backed by SoftBank addresses two of our four key issues on Sprint: SoftBank’s commitment and liquidity. With positive phone net adds expected in FQ2 and a $700 million increase in the midpoint of FY15 EBITDA guidance, and no debt or equity raises or spectrum firesales expected by the company in the ‘foreseeable future,’ we think value investors can buy the stock now with the potential for a double or more on their investment. We expect a very sharp improvement in FCF next quarter as cash capex and A/R balance comes down, and we believe the leasing company will provide immediate liquidity to Sprint by assuming its EIP receivables. The hiring of a leasing specialist as CFO makes a lot of sense, in our view, given today’s announcement. We reiterate our OP-rating and believe that Sprint and Frontier should both be core positions for value investors.
Jennifer Fritzsche of Wells Fargo: Chairman Masa Son reiterated his confidence in Sprint’s turnaround after admitting his plan to consolidate in the U.S. did not happen. Son specifically said he does not want to sell the company, and is committed to turning it around along with CEO Marcelo Claure. Sprint intends to establish a leasing company with Softbank and others as minority owner to securitize its leasing receivables. He expressed much confidence this would get done near term. Note it is significant in that it would securitize Net Present Value (NPV) of lease payments as well as residual value of the device, and reduce the drag to working capital. Claure also indicated S is preparing a network equipment leasing facility. Network improvement remains top strategic priority at Sprint, as Son consistently referred to U.S. mobile network quality (for all Big 4 carriers) as poor and “very congested.” Sprint expects to deploy tri-band LTE on all existing sites (most have only one or two of its spectrum bands), add thousands of macro sites to expand coverage, and deploy tens of thousands of small cells for densification purposes. Sprint expects FY2015 to burn the most cash in FY2015 and looks for wireless business to stabilize in that time. The company looks for further opex reduction in 2016 equal or greater than what was taken out in 2015 (+$1.5 billion estimated). Noted capex is expected to be less than $15 billion over the next two years, including FY2015. Sprint is not interested in raising debt or equity through public or private markets, and does not intend on selling spectrum to raise capital.
Amir Rozwadowski of Barclays: Our first take on Sprint’s F1Q results is that the carrier is making steady progress in improving its market position evidenced by better subscriber traction. However, while margins continue to improve (likely in part due to better penetration of leasing plans) its rate of cash burn is likely to keep current concerns on its longer-term sustainability in place. While the raised EBITDA guidance is encouraging, we believe investors will likely look for additional color on the key drivers of the improved outlook specifically when better profitability might translate into sustainable cash generation down the road. Last night Sprint announced a new CFO and changes to its network technology team ahead of today’s earnings results.
Jonathan Schildkraut of Evercore ISI: Sprint released 1QFY15 results, beating expectations on postpaid net adds and reported EBITDA. On the subscriber front, Sprint platform postpaid net adds of 310K were ahead of ours/cons. of 175K on the back of better than expected phone losses (12K, the fifth consecutive quarter of sequential improvement). Prepaid adds were weaker than expected (which may be explained by S drawing potential prepaid customers onto its postpaid plans) with 366K S platform net losses, down sequentially from 546K adds. In terms of EBITDA, consolidated EBITDA of $2.08B beat our above consensus estimate of $1.90B (cons. at $1.80B) on the back of better EBITDA margins of 25.9% (+489bps Q/Q, +515bps Y/Y). We believe reported EBITDA and EBITDA margins benefited from a substantially higher uptake of leasing (51% vs. our 42%) and device financing programs (64% vs. our 58%). In addition, we believe S’s EBITDA guidance increase to $7.2-7.6B from $6.5-6.9B was driven by accounting benefits (we were already at $7.1B – and the leasing benefit is much higher than we expected). Finally, S announced a new facility to monetize its leasing handset receivable and the expectation to establish a facility for network leasing – which will further remove the costs of these items from S’s reported results. And, while it is encouraging to hear that S will not return to the public markets for incremental financing – the aggressive changes to financing and the resulting implications on reported results may take a while to appropriately decipher. Lower visibility into the moving parts implies higher risk, in our view.
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