Sprint (S) CEO Marcelo Claure has made a lot of changes since his tenure began. Sprint’s overall network performance rating has soared under Claure, and the company recently announced its first quarter in two years of postpaid smartphone customer growth.
However, the 800-pound gorilla still remains, which is $5 billion in free cash flow loss over the last four quarters and nearly $32 billion in net long-term debt.
Despite what Claure might think or say, those two issues aren’t going anywhere without some serious sacrifices elsewhere, and it’s these sacrifices to become profitable and address these problems that would be bad news for Sprint stock.
Claure Making Changes for 2016
In a recent interview with the Wall Street Journal, Claure explained that he took on the challenge at Sprint because he found it hard to understand why a company with $35B in revenue can’t be profitable.
Claure’s logic makes sense, and for the most part he is right. The problem is if Claure wants Sprint to be profitable, he might as well consider the progress that Sprint has made over the last year as wasted time and worthless.
Specifically, if we remove one-time, unusual expenses of $2.2 billion in the fourth quarter of last year, Sprint’s operating margin for the last 12 months is slightly positive. However, the reason its free cash flow loss exceeds $5 billion is because of capital expenditures, a necessary component for wireless companies, which make investments due to the strain on networks that continue to rise with mobile data consumption.
Nevertheless, Sprint unveiled a plan to cut $2.5 billion of expenses from next year’s operating costs — about 10% of its total spending. That will be enough to drive operating income higher, but with $5 billion in capital expenditures, Sprint’s net debt of nearly $32 billion will still rise. Not to mention, Sprint has $3.6 billion worth of debt that matures next year. So all things considered, Sprint’s operating cuts won’t really have that much of an impact to its balance sheet.
The Unintended Consequences of Becoming Profitable
That said, Claure’s logic makes sense. There should be no reason that a company with as much revenue as Sprint — and as large — can’t be profitable. However, the problem with becoming profitable for Sprint is that every move has an unintended consequence. That’s not good for Sprint stock price.
For example, Sprint pulled out all the stops, laid down all its cards during Q3 to achieve net subscriber growth. It leased iPhones for a dollar, sold unlimited data plans for just $60 a month, and upped its headcount with Direct2You deliveries and by acquiring RadioShack’s bankrupt stores. Yet still, despite all these things, Sprint’s 1.1 million new customers adds were fewer than any of its competing three nationwide wireless carriers. This all but proves that if Sprint wants to grow larger, it has to spend ferociously.
By cutting $2.5 billion in costs, customer service may worsen and in-store wait times will be longer. These things threaten Sprint’s newfound customer growth.
In addition, Sprint recently hiked its unlimited data plan prices from $60 to $70, which also risks angering customers.
Lastly, Sprint may cut capital expenditure costs, but with AT&T (T) and Verizon (VZ) already spending more than double what Sprint spends on wireless improvements, Sprint runs the risk of falling way behind in overall performance if the cuts go too deep.
Bottom Line
Claure is right that Sprint can be profitable, but in order to do so it will cost the company, and likely hurt Sprint stock price.
The company would have to sacrifice customer service, hike prices and fall further behind the likes of AT&T and Verizon in network performance. These are consequences to being profitable that Claure apparently does not realize, and for Sprint stock holders, the biggest fear should be that Claure is about to find out the hard way, by implementing these changes to become profitable.
The bottom line is that Sprint stock owners could be in for a long and volatile year.
As of this writing, Brian Nichols owned shares of T stock.
