Sprint (NYSE:S) recently delivered strong profits in the first quarter in spite of soft sales. Best of all, the telecom added 675,000 net new subscribers in the quarter, a marked improvement from losing 220,000 customers in the year-ago quarter.
But the numbers never tell the whole story. As usual, Sprint's management held a conference call with analysts to discuss the quarter in greater detail. Sprint CEO Marcelo Claure was joined by Chairman Masayoshi Son on this call -- a rarity indeed. Here are five of the most interesting points he made on that call.
What Son's SoftBank brings to the table
As you may know, Japan has the best network in the world," Son said. "To me, every time I come to the States, I say this network in this country is not something that you should be proud of. It is actually very bad. It's not just Sprint, even Verizon (NYSE:VZ), AT&T, T-Mobile, all network is pretty bad. And I want to say, U.S.-invented Internet, U.S.-invented telephony, but network is not something that you should be proud of. So I would say the network that we created in Japan is much, much more superior. That's a fact: coverage, speed and all the integration."
He added, "However, within Japan, SoftBank spent almost half in CapEx compared to our competitor, but the result of our network coverage, the speed is number one. So what we are good at is spending less in CapEx, and create a number one network."
Son is unhappy with the speed, reliability, feature set, and costs or wireless communications in America. So far, Sprint is part of the problem and not a solution.
But Son also comes with the bravado and expertise you'll win from creating a leading wireless network in Japan -- perhaps the most competitive mobility market in the world. And he did it on a shoestring budget, setting the stage for another rags-to-riches story in Sprint's turnaround plans.
"I am now very, very confident that Sprint will be able to create equal or better, in my view, it will be a lot better network very soon with much lower CapEx," Son added. And he has earned the right to make such preposterous statements.
Sprint's next wave of network improvements
On that note, Sprint is about to roll out infrastructure hardware making use of unused spectrum licenses from Clearwire. According to Claure:
This plan includes significantly densifying our network by increasing the number of sites across all the spectrum bands to expand our multi-layer network strategy. This will include thousands of new macro sites to expand coverage and optimize our core network foundation, leveraging our existing vendors. In addition, we're expanding the 800 megahertz and 2.5 gigahertz deployment to the majority of our existing sites, making nearly all our existing sites Tri-band LTE. Furthermore, we plan to deploy tens of thousands of small cells in the next three years to increase the coverage and capacity of the network, leveraging all the spectrum band with the potential to create a number over time.
Claure promises to take an "extremely surgical" approach to these improvements, using Big Data analysis and network diagnostics to find the best locations for additional LTE radio coverage. SoftBank's experience with exactly this type of hyper-efficient network builds will come into play, and Sprint will lean on support from its existing infrastructure partners.
That's music to my ears as an American Tower (NYSE:AMT) shareholder. Surgical or not, Sprint's network improvement plan will call for plenty of leased capacity in wireless towers owned by third-party specialists. American Tower is one of several current Sprint partners that stand to benefit from this large-scale improvement plan -- even if Claure and Son take a thrifty view of the whole enterprise.
I am the inventor of instrument-based payment for the handset. We experienced this handset instrument-based payment, already almost eight years ago. So we sell handset, not upfront, we sell in 24 months. But we have to pay to the vendors in next 30 days and so on. The capital requirement becomes huge, and it piles up, several billion dollars. So cash flow became an issue. Then we came up with a solution of securitization of the handset accounts receivables. Sprint is now doing a similar thing, by selling handset in lease with Marcelo's leadership, and also some instrument-based payment.
For those unaware, Sprint introduced a handset lease plan last year. At first only available for a select handful of high-end smartphones, Sprint quickly expanded the program to any handset you'd care to mention. In the second quarter, 51% of the company's postpaid phone sales were financed as two-year leases. Not bad for a program that literally didn't exist four quarters earlier.
The leasing plan shaved 38% off Sprint's cost of goods sold expenses in the second quarter, compared to the year-ago period. But those costs didn't go away -- they simply moved to the cash flow statement instead. Sprint's capital expenses doubled over the same period, partly due to the high up-front cash costs of the leasing program.
More leasing detail
"As you know, most of the high-end devices that we have carry a very high-end residual value," said Claure. "Being able to monetize that at the beginning as we sell the phones is going to create a very important effect, which means our cash is going to be neutral as we sell handsets. One of our biggest uses of cash has been basically leasing devices. So we believe that we have found a very good solution. And as we said in my remarks, based on this, our intent is not to issue any other additional public debt or equity or sell any spectrum in the near future."
It's a strategy borrowed directly from SoftBank, where Son defused the high cash cost of handset leases with some nifty financial engineering. Much like mortgage lenders packaging their loans into bond sales, SoftBank married its handset expenses to financial instruments such as bond sales and asset-backed loans. Now Sprint is starting to follow suit, preparing a loan facility to be secured against the asset value from thousands of smartphones. At the same time, the company is preparing a similar securitization approach toward financing its network infrastructure builds.
Whether you're a banker or a wireless expert, I'd suggest keeping a close eye on these unique financing options. Sprint is breaking new ground here.
LTE-based video services
One analyst pointed out that the rest of the American wireless industry is looking at digital video services. In particular, Verizon has been cooking up a broadcast-style video service since 2014 and hopes to launch a game-changer product before the end of 2015. How does Sprint plan to compete with that kind of value-added bundle?
In short, Son isn't terribly concerned about Verizon's video plans:
I say that in the US, all of the four network carriers, mobile carriers network is congested, all of them, very badly. It's so bad that you don't want to even talk about the details. So in that situation, how would the customer benefit for video bundle? Video bundle, especially through the mobile network, is going to choke the network. The network congestion becomes even worse. So I think before you talk about video bundle, especially through the mobile network, all of the four carriers in the state has to cure the issue of congestion. That is more fundamental to the basic service of the network itself.
Claure also chimed in on that question. Noting that similar services had been tried many times on wireless networks around the world, and the track records of these video products "have not been stellar."
So don't expect Sprint to launch a comprehensive video service anytime soon. The company, the state of American wireless networks, and the business idea itself are woefully unprepared to create a viable video service today. On that note, Claure and Son would probably not be surprised to see Verizon's video service fail.