Sprint Takes Lifeline Hit; Remains Optimistic on T-Mobile Deal

Sprint fell short of consensus estimates on profits and earnings Monday, and for the second quarter in a row management didn’t do a call with analysts. Sprint CEO Michel Combes said in a statement the company's optimistic its deal with T-Mobile will be completed early next year. Sprint said it took a hit because of the FCC's Lifeline probe. Meanwhile, T-Mobile missed a deadline Friday to renew its agreement with Sprint.

Either company could terminate the deal at any time, LightShed’s Walter Piecyk told investors Monday. T-Mobile parent “Deutsche Telekom should use that flexibility to renegotiate the terms of the deal, given the erosion at Sprint and the rising cost of the transaction,” Piecyk said: “We also believe a lower price paid to Sprint could actually help its case with the States rather than complicate things.” The companies didn’t comment.

Sprint acknowledged that an FCC clampdown on its Lifeline reimbursements hurt earnings. The FCC said in September it was investigating whether the provider claimed monthly subsidies for 885,000 Lifeline subscribers who weren't using the service, a violation of the program's non-usage rule (see 1909240023).

Wireless service revenue fell $453 million year over year to $5 billion. Revenue was “negatively impacted by lower Lifeline revenue as a result of estimated reimbursements to federal and state governments for subsidies claimed contrary to Sprint's usage policy and the continued amortization of prepaid contract balances as a result of adopting the new revenue standard last year,” Sprint said: “Excluding these impacts, total wireless service revenue was relatively stable sequentially and year-over-year.”

The T-Mobile deal and the Lifeline investigation are related, said New Street’s Blair Levin in a weekend report. “The FCC is currently working on an enforcement action against Sprint for the company’s accepting Lifeline funds it was not entitled to receive,” he said: “The enforcement process is secret but it could result in fines in the low billions of dollars. This, in turn, could result in some restructuring of the deal between T-Mobile and Sprint.”

“We remain excited by the opportunity to provide our customers a better network and customer experience with New T-Mobile and are encouraged by the progress we have made since the merger was announced last year,” Combes said: “We remain optimistic about the remaining regulatory steps necessary to complete the merger as we continue to work with the California PUC [Public Utilities Commission], various State Attorneys General, and all stakeholders.”

Sprint reported a Q2 loss of $274 million, after reporting a profit in the same quarter last year -- a bigger loss than the consensus estimate. It reported revenue of $7.8 billion, about $300 million below analyst estimates. Sprint lost 91,000 net postpaid phone customers but added 364,000 devices. Postpaid phone churn was 1.91 percent and prepaid was 4.94 percent, the highest rates this year. T-Mobile, in comparison, added 1.1 million branded postpaid phones, with churn of 0.89 percent (see 1910280060).

Among positives, Sprint said it continues to upgrade its towers, adding 800 MHz, 1.9 GHz and 2.5 GHz connections, with 2.5 GHz now deployed on some 85 percent of macro sites. “We now have approximately 35,000 small cells on air, which are delivering improvements in coverage, capacity and time on LTE to improve the customer experience in specific locations,” Sprint said.

Softbank’s buy of a controlling stake in Sprint in 2013 never worked as planned, MoffettNathanson’s Craig Moffett said in a note to investors. CEO Masayoshi Son thought AT&T and Verizon were “too fat” and ripe for competition, that Sprint’s 2.5 GHz spectrum would give it a competitive advantage and Sprint could quickly buy T-Mobile, he said. “It hasn’t worked the way SoftBank had hoped, Moffett said. “It was T-Mobile, not Sprint, which stole the march on Verizon and AT&T. The 2.5 GHz spectrum, with poor propagation in a spread-out America, proved much more costly to put to work in the U.S. than in Japan” and regulators turned back the original Sprint/T-Mobile deal. Over the years, “Sprint’s fundamentals have steadily deteriorated,” he said.

Moffett said Sprint acknowledges churn could be worse next quarter. “That would put churn over 2 percent, something we haven’t seen in years for any of the majors,” he said.

“The overall picture remains bleak,” New Street’s Jonathan Chaplin told investors Monday: “Sprint has upside if the deal goes through but seems headed towards distress absent a deal.” Sprint shares fell 2.4 percent Monday to close at $6.15.