Sprint (S +0.00%) is working to complete a network upgrade that has cost billions of dollars and integrating new spectrum into its upgraded network in an effort to spark growth. Sprint needs these investments to compete with AT&T (T 1.54%) and Verizon Communications (VZ 1.78%). Even with the billions that Sprint is spending on its network, the company's future is still uncertain. Let's take a look at how Sprint is investing capital and what it could mean for future profitability.
Network Vision
Sprint announced Network Vision -- a plan to eliminate old technology and install LTE technology -- in December 2010. As the project nears completion, Sprint's network delivers faster data speeds and better signal strength than the old network, but the effort strained Sprint's balance sheet.
Facing a cash crunch, the company was forced into a series of capital raises in 2011 and 2012, rolling over debt at high interest rates. Its balance sheet remained in tatters until a 2013 deal with SoftBank. The Japanese telecom company purchased a 78% stake in Sprint for $21.6 billion, including $5 billion in new capital that went directly into Sprint's coffers. The capital infusion gave Sprint breathing room to reignite growth.
Soon after the completion of the SoftBank deal, Sprint closed on a deal to acquire the remaining 50% of Clearwire for $7 billion in total consideration. Clearwire's high-frequency spectrum assets complement Sprint's Network Vision by adding capacity to reach more customers. The acquisition gives Sprint a longer runway for growth.
The massive spending on network upgrades has left Sprint massively leveraged. It now has 16 times more long-term debt than it generated in EBITDA over the last four quarters -- a massive amount of debt even for a telecom company. By comparison, AT&T's debt-to-EBITDA ratio is 1.5 and Verizon's is 2.1. Even using Sprint's 2014 adjusted EBITDA guidance of up to $5.9 billion, the company's debt-to-EBITDA ratio is 2.5 times that of Verizon. The company is skating on thin ice.
Spark
Sprint's high debt load is more concerning in light of the expenditures planned for Spark -- a 4G LTE service that upgrades its network even further. When Spark launched in five markets in late 2013, Sprint said it planned to deploy Spark in about 100 of the country's largest cities over the next three years.
Spark is just another iteration in the continual need to provide even faster data speeds just to keep pace with the competition. The company projects $6 billion in total capital expenditures this year.
There can also be a downside to upgrades. Sprint's Network Vision upgrades caused significant disruptions to its service, leading to customer attrition. Sprint is shrinking while its largest competitors are growing. In the most recently reported quarter, Verizon added 1.52 million retail postpaid connections and AT&T added 785,000 postpaids, while Sprint lost 336,000 postpaid customers.
Customer attrition will likely shrink as Network Vision winds down, but it's anyone's guess as to how significant the comeback will be. Spark could be a significant draw -- its wireless speeds of up to 60 megabits per second are among the fastest in the nation. That speed, combined with its heavily marketed unlimited data plan, could be the key to boosting customer growth.
A shot in the dark
It's too early to tell if Spark will be Sprint's saving grace. The company is in fierce competition with AT&T, Verizon, and other wireless carriers that force Sprint to continually upgrade its network to remain competitive. This is an expensive process -- and there's no guarantee that the $6 billion Sprint is spending this year will attract new customers. Even so, those capital expenditures are necessary if Sprint wants to stay in the game. Therefore, Sprint's capital spending is likely in the best interest of long-term shareholders.
