Far from planning to exit US wireless carrier Sprint (NYSE:S), its majority shareholder Japan’s Softbank (TYO:9984) intends to set up two financing vehicles to help get it back on track. Speaking during a conference call on Sprint’s results for…
Far from planning to exit US wireless carrier Sprint (NYSE:S), its majority shareholder Japan’s Softbank (TYO:9984) intends to set up two financing vehicles to help get it back on track.
Speaking during a conference call on Sprint’s results for the first fiscal quarter of 2015, Masayoshi Son, founder and CEO of Softbank and chairman of Sprint, admitted that he had lost confidence in the US market when it became clear that he would be unable to achieve his consolidation plans. However, he said this has changed over the last few months as Sprint has begun to make a turnaround.
“So as a result, [Sprint CEO] Marcelo [Claure] and I and the total team of Sprint and Softbank together have a plan to have a big turnaround,” he said. “So I am excited. I don’t want to sell the company. I believe Sprint is going to be one of the very, very good companies of which I will be very proud.”
Claure said Sprint has a funding plan in place to support its turnaround and allow it to continue to invest in growing the business. This will see it set up two leasing companies to help finance device lease payments to vendors and network upgrades.
Selling mobile phones and tablets to customers is one of Sprint’s biggest uses of cash and the growing number of subscribers moving from two-year contracts to monthly plans has affected its ability to make lease payments to vendors, he explained.
“With these potential additional sources of capital, the reduction in our operating expenses and the capital-efficient densification of the network, our goal would be to not raise additional capital through the public debt or equity markets or sell spectrum in the foreseeable future,” he added.
These facilities are expected to be finalised in the coming months, he said.
Son noted that Softbank will be a minority equity investor in the lease payment company, saying the Japanese telco will “provide, together with our partner, as much as Sprint needs for the handset”.
“Similarly, we are preparing a network equipment lease facility,” he added.
Wells Fargo analyst Jennifer Fritzsche noted that it is significant that the lease payment facility would securitise net present value (NPV) of lease payments as well as residual value of the device, and reduce the drag to working capital.
Son stressed that boosting the network remains a top strategic priority, adding that all four US wireless carriers’ networks are of lower quality than those in Japan. US operators need to cure network congestion before they can talk about including video in bundled packages, in his view.
To densify its network, Claure said Sprint intends to deploy tri-band LTE on all of its existing sites, most of which currently have only one or two of its spectrum bands, In addition, it plans to add thousands of new macro sites and tens of thousands of small cells for to expand coverage.
Sprint’s Q1 2015 earnings report revealed that it had fallen behind rival T-Mobile US in terms of total connections, meaning it is now the smallest of the country’s four wireless carriers. Sprint ended the June 30 quarter with 57.7 million total customers, while T-Mobile had 58.9 million. The results did, however, reveal that Sprint’s customer retention is improving: its churn rate was its best ever at 1.56%.
Sprint reported net operating revenues of US$8.03bn for the quarter, down from US$8.8bn at the end of Q1 2014. It posted a loss of US$20m, compared with a profit of US$23m in Q1 2014. Free cash flow stood at negative $2.2bn and total debt at US$34bn.
However, Sprint said it had raised its adjusted EBITDA outlook for 2015 from US$6.5bn-US$6.9bn to US$7.2bn-US$7.6bn as a result of improved customer trends, a reduction in operating expenses and a higher mix of sales on device financing options.
“Over the past year, Sprint has made meaningful progress in our turnaround by improving our network performance and enhancing our overall value proposition, Claure stated. “Going forward, we are confident in our plan to leverage our unique spectrum assets to make our network a competitive advantage, aggressively reduce operating costs, and utilise our business relationships and assets to fund our turnaround.”
Analyst Craig Moffett of MoffettNathanson Research said the results and management shake-up, which included appointing a new CFO (former Telstra executive Tarek Robbiati) should intensify the focus on Sprint’s cash burn rate.
“Discussions around Sprint were once about how the company could use its 2.5GHz spectrum to create competitive advantage; they are now about how Sprint can fund operating losses … and how Softbank’s interventions will impact Sprint’s shareholders.”
Off-balance sheet debt held by new funding vehicles is still debt, he added, saying “you can’t manufacture equity out of incremental borrowing, regardless of whether it is on or off the balance sheet”.
