Sprint and T-Mobile US Both Want to Grow, But Similarity Ends There
It often seems as if Sprint reports financial results that reflect a transition of some sort. And there is no question but that T-Mobile US has dramatically changed its operating performance over the last year or so.
But there is a fundamental difference in Sprint and T-Mobile US strategies, though both firms are attacking the market with a “value” approach.
Sprint’s new direction is based on long term organic growth. “ I am here to run Sprint for long-term value creation,” said CEO Marcelo Claure.
And even if T-Mobile US CEO John Legere points out that T-Mobile US has many options, T-Mobile US is a firm that almost everyone believes will be sold, relatively soon.
Often, that shorter-term approach can lead to a strategy of adding customer and revenue volume as rapidly as possible, the reasoning being that if the asset is to be sold at a multiple of revenue, then the value of the asset is higher if the revenue figure is higher.
A longer-term approach based on sustainable growth tends to value profit margin (bottom line) more than the revenue top line. Sprint wants more scale, and therefore more revenue and customer account growth.
But it also now has to be concerned with the bottom line, which is why cost reduction and efficiency moves also are underway.
The difference in strategic thinking also might explain why T-Mobile US reporting on its third quarter focused entirely on top-line growth, rather than bottom-line results.
T-Mobile US touted its “best quarter ever of branded postpaid net adds,” as T-Mobile US added 1.4 million net postpaid accounts.
Branded postpaid phone net adds more than doubled quarter-over-quarter to 1.2 million and branded prepaid net adds up more than four times quarter-over-quarter to 411,000, T-Mobile US said.
T-Mobile US has added 10 million total customers added over the last six quarters, and 2.3 million in the third quarter alone.
T-Mobile US service revenues grew 10.6 percent year-over-year to $5.7 billion, on the strength of the “best ever average billings per user of $61.59 a month, up 4.2 percent year-over-year.
Adjusted T-Mobile US EBITDA of $1.35 billion was “flat” year-over-year, but declined sequentially, T-Mobile US said.
Adjusted EBITDA of $1.35 billion was down 7.2 percent sequentially from $1.45 billion in the second quarter.
In the third quarter, T-Mobile US generated a loss of $0.12 per share, compared to estimates for a $0.02 per share profit.
At least momentarily, it appears T-Mobile US is being run for growth, even at the expense of the bottom line, while Sprint will try to grow while maintaining profit margins.
Sprint reported net operating revenue of $8.5 billion in its second quarter of 2014, representing an operating loss of $192 million, with adjusted EBITDA of nearly $1.4 billion (EBITDA is operating income/(loss) before depreciation and amortization. Adjusted EBITDA is EBITDA excluding severance, exit costs, and other special items)
Consolidated adjusted EBITDA of nearly $1.4 billion grew three percent over the prior year period.
Total Sprint net subscriber additions of 590,000 were lead by wholesale net additions of 827,000, balanced by postpaid net losses of 272,000 and prepaid net additions of 35,000.
Tablet net additions were 261,000 in the quarter, up 207,000 year-over-year but down 274,000 sequentially, as Sprint refocused sales efforts on postpaid phone accounts, Sprint CFO Joe Euteneuer said.
Sprint expects increased selling costs associated with significantly higher gross additions and upgrade volumes in the fiscal third quarter of 2014; part of Sprint’s new effort to become the price leader in the U.S. mobile market.
Sprint also warned that “the significant loss of postpaid phone customers over the last few quarters has pressured wireless service revenue, and this trend is expected to continue into the next quarter.”
As has so often seemed to be the case, Sprint is once more in a transition, with a new strategy and new leadership. So it is too early to take measure of the prospects for future success.
But new CEO Marcelo Claure pointed out gains after just a few short months of his tenure. “We have seen a notable turnaround in our postpaid phone addition trends.”
In September 2014 Sprint achieved its highest monthly postpaid phone gross adds since December of 2012, a 40 percent increase over the August run rate. In October, Sprint grew another seven percent sequentially.
September represented the first month in 2014 where Sprint achieved year-over-year growth in phone net adds, as well.
And Sprint says it also is doing better at adding customers who pose lower credit risk.
“Our top priority now is to get back to postpaid customer growth and given the trends we are seeing in the market today, we are optimistic we will be able to deliver positive postpaid net additions in Q4,” Euteneuer said.
Smartphones represented 95 percent of Sprint postpaid phone sales in the quarter and now account for over 86 percent of the Sprint postpaid phone base. About 62 percent of the Sprint platform postpaid base is on LTE devices, including 73 percent of the Sprint platform postpaid smartphone base.
Sprint announced another 2,000 cuts in staffing levels, as well as "targeting $1.5 billion of annualized cost reductions compared to 2014 spending levels."
Sprint also cut its full-year capex guidance by about $1 billion to less than $6 billion, after a similar reduction a quarter ago.
All those moves make sense if Sprint is committed to becoming a price leader. That implies a lower cost structure than it has at present.
T-Mobile US, on the other hand, says it already was the most-efficient operator among the top four, and therefore arguably has less room for cost-cutting initiatives. wan