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Sprint's Latest Earnings Report Shows Just How Badly It Needs T-Mobile

By Adam Levy - Jan 28, 2020 at 9:04AM

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It can't hold onto customers, and it's underinvesting in its network as a result.

Sprint's (S) falling further behind the competition as its merger with T-Mobile (TMUS 0.84%) remains held up in court. 

The fourth-place wireless carrier lost 115,000 postpaid phone subscribers during its third quarter. While that's better than analysts were expecting, it's considerably worse than the 26,000 subscribers it lost during the same period last year and the 91,000 subscribers it lost in the prior quarter.

Notably, Sprint's postpaid phone subscriber churn rate (the percentage of customers leaving the service) climbed to 2.06% last quarter. That's the highest number the company's reported since it started releasing the metric in 2015. And while T-Mobile also noted slightly higher churn last quarter, its customers left at a rate of just 1.01%.

Without the help of T-Mobile, Sprint might not be able to survive as a wireless company and provide the competition state attorneys general are looking for in the wireless industry. CEO Michel Combes wrote in the earnings release, "I continue to believe the merger with T-Mobile is the best way to deliver the benefits of competition to American consumers."

A Sprint sign above a storefront.

Image source: Sprint.

The main reason Sprint's losing subscribers

Last quarter represents the sixth straight quarter of net postpaid phone subscriber losses for Sprint. The wireless carrier had been extremely aggressive with its promotions in 2016 and 2017; it even offered a free year of service for customers bringing their own devices to Sprint's network. But when those promotions expired, Sprint found it difficult to hold onto customers without offering additional promotions in 2018 or 2019.

Instead of promotions, Sprint is trying to improve customer loyalty by attaching additional devices like smartwatches and tablets to customers' plans. Interestingly, it saw lower overall postpaid subscriber churn on those devices than postpaid phone subscriber churn (which is atypical in the industry). That suggests customers who do use Sprint to connect their smartwatches and tablets are more loyal, but they still represent a small percentage of total subscribers.

The reason Sprint can't hold onto most subscribers without significant promotions is pretty simple: its wireless network isn't very good. The company made the argument in court that its 4G LTE wireless network is vastly inferior to the competition's, and customers seem to agree. A court filing showed Sprint's LTE network covers a much smaller footprint than those of the other three major wireless companies.

But now Sprint is stuck in a vicious cycle. Its bad network is causing customers to leave, and it can't improve its network without increasing customers and the revenue they provide.

Sprint's burning through cash as is

Wireless networks take a lot of cash to build, and Sprint has a big cash flow problem, as analysts at MoffettNathanson point out.

Free cash flow came in at just over negative $1 billion last quarter. That's actually an improvement from the third quarter last year, when it burned through $1.2 billion in cash. And through the first nine months of its fiscal year, Sprint's cash burn is roughly in line with where it was in 2018.

But one big factor propping up that free cash flow is a decreased investment in its wireless network, as analysts at MoffettNathanson point out. Capital expenses related to building out its network declined 25% last quarter to less than $1.1 billion. The decline for the first three quarters isn't as severe, but still down 12%.

So Sprint's management is neglecting the biggest factor causing it to lose customers -- its wireless network -- to avoid more debt. Net debt has increased $1.25 billion over the last nine months of the year, as Sprint burns its cash reserves. Its cash balance has fallen from nearly $7 billion at the start of its fiscal year to just $3.2 billion at the end of last quarter. Without the merger with T-Mobile, the company will need to tap the debt market once again in order to support its business.

Analysts at MoffettNathanson and New Street Research believe Sprint may need to file for Chapter 11 bankruptcy protection if the merger fails. Most analysts are pessimistic about the court's approval, and that could mean a rough road ahead for Sprint.

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