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Sprint Corporation (S): Churn Levels Likely To Remain Elevated In Near-Term

 September 12, 2013 02:59 PM

Sprint Corporation (NYSE:S) should experience elevated post-paid churn that may pressure near-term subscriber trends, especially in the third and fourth quarter.

The key reasons include patchy network performance as the carrier essentially rebuilds its network as part of Network Vision and churn from corporate Sprint CDMA subscribers that are no longer bundled with Nextel iDEN accounts due to the June shutdown of iDEN network.

Sprint, one of leading wireless carrier in the U.S., reported retail post-paid churn of 2.63 percent for the second quarter, compared to 1.79 percent in the corresponding quarter prior year.

The third and fourth quarter could be among the heaviest periods for site upgrades as part of Network Vision, meaning they will likely see the most disruption to network performance, a key driver of voluntary churn.

[Related -Sprint Corporation (S): Sprinting To $10?]

"To a lesser extent, Sprint's outlook for elevated post-paid churn in 2H13 reflects some former Nextel customers' disappointment with Sprint's CDMA-based push-total service (vs. their experience with iDEN), as well as competitive pressures from a resurgent T-Mobile," Deutsche Bank analyst Brett Feldman wrote in a note to clients.

In light of the near-term network performance issues, the company is holding back a bit on advertising, which is impacting gross add productivity. This is why Sprint previously provided guidance that it did not expect the typical seasonal uptick in post-paid gross additions in the third quarter of 2013.

However, the company is being mindful not to disappear from the market and may run some normal-course-of-business promos during the second half of 2013 and the first half of 2014 in order to stay visible to consumers.

[Related -Sprint Corporation (S): Flexing Spectrum Muscle Amid Network Evolution]

"Sprint is not planning any significant deviations from its current pricing strategy, which is based on unlimited-usage data plans," Feldman said.

The company believes that these plans are effective because they leverage Sprint's capacity advantage (i.e. spectrum) and reflect how consumers want to use the mobile Internet (i.e. the same way they do at home, without a meter running).

The key question is can Sprint get customers back who have migrated to other networks, mainly T-Mobile (NYSE:TMUS). Carriers look at porting on a net basis, comparing customers gained from competitors versus those lost. The numbers against Sprint came in at 1.6 in the second quarter and 2.24 for the week ended July 31. This suggests T-Mobile may be gaining roughly two customers from Sprint for every customer it loses. 

On the positive side, Sprint expects to have the fastest wireless network by 2016, with the best capabilities based on a combination of its deep spectrum portfolio, devices, content and applications.

The carrier has more bandwidth available for LTE than all of its national competitors combined. Sprint has a spectrum of 205 MHz while rival AT&T, Inc. (NYSE: T) has 105 MHz and Verizon (NYSE: VZ) has 99 MHz with 309 million POPs. With Clearwire, Sprint has more than 200 MHz of spectrum, 2 times more than AT&T's and Verizon's positions.

In addition to having the most spectrum for LTE, it has the largest holdings of high frequency spectrum. Historically, higher frequency bands, such as Sprint's 2.5 GHz licenses, have been viewed as less attractive due to their limited propagation characteristics, which made them inefficient for establishing wireless coverage.

Sprint believes that its 2.5 GHz licenses will enable it to achieve much faster network speeds than all of its peers by 2016 due to its ability to deploy the widest channels. Sprint sees the deployment of these licenses as key to achieving a network advantage in the market.

"The goal is to match the network performance of Verizon within existing Sprint markets by year-end 2015, and then pull-ahead of its competitors in 2016+ through extensive deployment of 2.5 GHz spectrum licenses," Feldman said.

With 120+ MHz of spectrum in most markets, Sprint believes it can achieve a material speed advantage versus its peers (i.e. 20-50 Mbps) by deploying it in wide channels (i.e.40 MHz at a time).



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