Sprint (NYSE: S) is doing a lot of things right these days. Heck, even T-Mobile US CEO John Legere thinks so, and he's not known for sharing nice things about his competition.
But Sprint's turnaround story is still slow and painful, and there have been some setbacks along the way. One of those setbacks came on Tuesday, when the nationwide telecom reported second-quarter results. In short, the report was a disappointment, and Sprint shares fell as much as 10% on the news.
Sprint's management, of course, went into damage control mode. Reports often blast earnings and revenue results from the rooftops.
Not this one.
Instead, Sprint chose to focus on obscure metrics such as a postpaid churn improvement from the spring quarter to the summer period. Nice trick, but hardly an earth-moving business win. The headline also mentioned Sprint adding more postpaid phone customers than it lost in the second quarter, which hasn't happened since 2013. Better, but still obviously not enough to drive decent sales and earnings.
Once you find the revenue result, you'll see that net sales decreased 6% year over year to $8.0 billion. Adjusted EBITDA profits increased 50% to $12.0 billion, lifted by backing out rapidly rising depreciation and amortization charges.
To Sprint's credit, skyrocketing D&A expenses point to heavy investments in the telecom's communications networks. Sprint has indeed spent $3.0 billion on network-related capital expenses year to date, a 24% annual increase. The balance sheet's report on property, plant, and equipment assets increased 6% to $21.1 billion. So yes, Sprint is making big investments in the network that drives its entire business.
That's a good thing, but only if the network improvements also translate into faster customer growth. And that's why Sprint shares fell on Tuesday: The subscriber counts aren't following suit.
Most of Sprint's customer additions this quarter landed in the wholesale department. That's a low-margin, unbranded business. Prepaid subscribers under Sprint-owned brands such as Virgin Mobile and Boost Mobile fell by 164,000, and premium-grade postpaid phone accounts rose by 38,000. You'll see a larger number for postpaid improvement, but that includes 200,000 of Sprint's prepaid customers simply converting into postpaid contracts.
Based on these results, management focused its full-year EBITDA guidance on the lower end of the existing guidance range. The company hopes to spin out its handset leasing operations as a separate company very soon, partnering with majority owner SoftBank (OTC:SFTBF) and looking to pocket some much-needed cash when that transaction goes down.
And if we're back to looking at what's working for Sprint, the company is rolling out some interesting technology upgrades to the core network, which should support much faster data service connections down the road. For now, very few handsets can handle these new features, but you can bet Sprint will ask mobile phone vendors to include so-called carrier aggregation features in their future designs.
So, the engine in Sprint's turnaround machine sputtered and popped, but management continued to act as if everything was fine. And maybe it is in the long run, based on inner workings we outsiders just don't know about yet. I wouldn't put that kind of trickery past maverick businessmen like Sprint chairman Masayoshi Son and CEO Marcelo Claure.
But based on the public view, this engine doesn't seem to be firing on all four cylinders quite yet.