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T-Mobile Loves This Decision From Sprint

By Adam Levy - May 31, 2016 at 7:43PM

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Sprint lowered its guidance for CapEx spending, and T-Mobile is loving it.

You gotta spend money to make money, right? Well, Sprint (S) might have some trouble making money going forward if that saying rings true.

Management announced guidance for its capital expenditures for the rest of the year, and it came in well below analysts expectations. Sprint plans to spend just $3 billion building out its network this year.

Analysts were expecting about $4.5 billion. Sprint previously issued guidance of $15 billion in CapEx over three years, so this is well below that pace.

T-Mobile (TMUS 1.69%), whose management has never been afraid to point to its competitors' failures, said it "applauds" Sprint's decision to lower its CapEx guidance -- at least from a competitor's standpoint. CFO Braxton Carter had quite a bit to say about Sprint's decision at MoffettNathanson's recent analysts conference.

"Born of necessity"

Sprint isn't in a very financially strong position. It ended March with just $2.6 billion in cash and investments and $34 billion in debt. T-Mobile, comparatively, has $7.5 billion in cash, and $20.9 billion in debt.

That cash-strapped position led Braxton Carter to comment: "I guess it's born out of necessity. If you don't have the cash, you can't spend it."

But the struggling operator does have access to $11 billion in liquidity from its leased network assets and handsets through a financing vehicle called LeaseCo. LeaseCo is owned by Sprint's parent company, and it buys Sprint's leased equipment contracts to provide more liquidity for Sprint.

Sprint's decision to cut back on spending and focus on growing its liquid assets will make it hard to compete for customers going forward.

It lost the key to unlocking its spectrum

Sprint has more spectrum than any of the other wireless carriers in the United States. The only problem is that it's high-frequency spectrum and Sprint requires a very-dense network in order to take full advantage. Densifying the network is on Sprint's to-do list, but Mr. Carter has his doubts that Sprint will be able to pull it off.

As Carter told the audience at the MoffettNathanson conference:

Ultimately, we are a facilities-based carrier. And if you don't have the quality product to sell, how are you going to keep your customers? How are you going to continue to grow? And the worst thing you can do... is not adequately invest in your network.

Sprint's decision to lower its capital expenditures for 2016 ensures that its network quality will remain behind its competitors.

Meanwhile, Sprint is having trouble holding onto its existing customers who signed up through its "cut your bill in half" promotion. Mr. Carter admitted that the promotion did have a positive impact on Sprint's porting ratio (the number of customers one company takes from another, over the number of customers it lost) with T-Mobile, but "some of that is reversing." Ultimately, network quality is what will keep customers around -- not low prices -- and the only way to get that is by investing in the network.

T-Mobile reported a porting ratio with Sprint of 1.35. If you include MetroPCS -- T-Mobile's prepaid brand -- that climbs to somewhere between 1.6 and 1.7. T-Mobile is primarily using MetroPCS to target Sprint customers, and it appears to be working.

Sprint is currently campaigning that its network has the fastest speeds of any competitor. And that's true if you're near one of its small cells. But when customers use the network on a day-to-day basis, it becomes evident that Sprint's network doesn't match up. It's only going to fall further behind the competition with its plans to spend less on its network.

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