Sprint Corp (S) is looking to trim $2.5 billion in annual operating expenses from its income statement.
One way it hopes to achieve this goal is by firing 7% of its workforce, about 2,500 jobs that are mostly customer service employees. Management believes these cuts (along with other network saving initiatives) will put Sprint Corporation’s annual operating profits in the black.
Sprint is guiding for operating income between $100 and $300 million this year. As a result, Sprint stock owners are in full celebration mode, but are celebrating far too soon.
Not Much Is Changing
First and foremost, Sprint will probably achieve positive operating income. It had an operating loss of $1.7 billion over the previous four quarters, so if you incorporate $2.5 billion of operating cuts then chances are it will lead to operating profits.
It is kind of irrelevant, however, because Sprint has $3.3 billion in debt obligations this year; and after accounting for taxes and capital expenditures, Sprint will be nowhere near free cash flow positive.
There might be some improvement to the $5 billion plus in free cash flow losses it achieved during the last four quarters, but the bottom line is Sprint’s cash drain will continue, and its $30.5 billion in net debt will only go higher.
Sprint Already Underperforms
Nevertheless, Sprint’s debt, operating income and lack of free cash flow take a backseat in this instance, with the company’s job cuts a much bigger deal short term.
While Sprint did achieve net postpaid phone additions of 366,000 in the quarter, it trailed Verizon (VZ) by 83,000 and T-Mobile (TMUS) by a mile.
Sprint has been essentially throwing postpaid service plans at anyone who will switch to Sprint, selling 16 GB iPhones for a dollar (with plenty of fine print) and offering the lowest unlimited data plan in the industry. Despite all this, Sprint is still growing slower than its three nationwide peers. Notably, only TMUS competes with Sprint in pricing.
Therefore, Sprint has underperformed its peers despite aggressive pricing and perks. So what happens after it cuts $2.5 billion in costs?
The Fate of Sprint Stock
With that said, one area where Sprint has thrived here lately is in its churn rate for postpaid subscribers. During its fiscal third quarter, it had a postpaid churn rate of just 1.62%, down from 2.3% the year prior — its best performance in fiscal Q3.
Clearly, strong customer support has an effect on churn rates, aiding Sprint in keeping current customers during this tough competitive environment. Hence, if Sprint cuts 2,500 jobs, mostly in customer care, one must assume that it will have a negative effect on the company’s churn. It means longer wait times and a heavier workload on the employees who are not fired.
In addition to this unintended consequence, Sprint gives the likes of outspoken T-Mobile US Inc CEO John Legere more ammunition to fire at the stability and leadership at Sprint.
Less than a year ago Sprint went on a spending spree to double its retail footprint by buying bankrupt RadioShack stores and launching a Direct2You delivery service, both of which required heavy spending.
Thus, Sprint does not appear to know what it wants, or know where it is going. It’s fine to emphasize cost control, but in doing so it risks the sub gains it created during the last two quarters.
In other words, S stock owners already knew about the company’s high debt, lackluster growth, and free cash flow losses. That’s why Sprint stock has fallen 55% since Softbank’s majority ownership investment.
However, a return to subscriber losses and a rising churn would be a big shock to Sprint stock, thereby pushing it much lower. These are two very possible if not likely effects of Sprint’s recently announced job cuts, due to where those cuts are taking place.
At the end of the day, a company can not cut 7% of its workforce and expect to see no effect whatsoever, and it just so happens the effect could hit Sprint where it hurts most — S stock.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
