Sprint’s Wireless CapEx – What Gives?

October 27, 2016

By John Celentano

Sprint reported some positive improvements in its top-line performance in its fiscal year 2Q16 earnings call on October 25.

Postpaid net additions grew by 347,000, a 54-percent increase from 62,000 added in FY2Q15. These adds bring the total postpaid subscriber base to 25.7 million, up 1 percent on a year-to-year (YtY) basis. At the same time, customer retention programs are working; postpaid churn came in at 1.37 percent, down from 1.49 percent in FY2Q15. Postpaid average revenue per user (ARPU) keeps sliding, however, to $50.54, down 2 percent from $53.99 in FY2Q15.

Price competition with the other Tier 1 carriers has taken a toll on the top line, however. The net effect is that postpaid service revenues at $4.7 billion were flat to down 1 percent from $4.9 billion a year ago.

In turn, Sprint’s ability to fund its network expansion plans is hampered as it curtails capital expenditures (capex) to conserve cash.

Certainly, the company is reiterating a strategic program to optimize and densify its network. This program involves:

leveraging its extensive spectrum holdings, particularly in 2.5 GHz, and using 1.9 GHz for mid-band LTE services;
rolling out small cells, while utilizing innovative site structures across its infrastructure;
achieving capacity gains through carrier aggregation;
and maximizing network performance, even as it closely manages its capex deployment.

It is this latter point that raises some serious concerns as to how Sprint will achieve its network expansion goals and drive new revenues.

Sprint’s quarterly wireless capital spending has been in a nosedive for the past six quarters, declining at a compounded rate of 26 percent per quarter. From a peak of $1.6 billion in FY1Q15 (calendar 2Q15), Sprint’s wireless spending dropped steadily throughout the year to $577 million in FY4Q15. Wireless capex for the year totaled $4.1 billion, down 16 percent from$4.9 billion in the prior year.

The capital spending slide continued in the current fiscal year. FY1Q16 wireless capex came in at $376 million and dropped further to $358 million in FY2Q16.

It is important to note that capital efficiency (that is, the ratio of capex-to-service revenues) for these periods hit only 6 percent. That is barely in maintenance mode. When networks are expanding, carrier capital efficiency historically is at 15 percent or more. Even with capital cost saving measures, we would expect Sprint’s wireless capital efficiency ratio to be in low double digits, just to be able to meet its plan.

The big question is how much the company will invest through the balance of its current fiscal year.

In its October 25 earnings call, Sprint offered full-year FY2016 guidance for cash capex of “less than $3 billion, excluding devices leased through indirect channels.“

If we drop out the portions for wireline network and corporate capital expenditures, we estimate that Sprint has budgeted around $2.7 billion in wireless capex for FY2016.

Through mid-year, Sprint spent $734 million or just 27 percent of the budgeted total.

If it sticks to its plan, this means that Sprint must spend the nearly $2 billion balance on its wireless network upgrade and expansion over the next two quarters.

Can Sprint do it? How will it do it?

John Celentano is a technology marketing consultant and a wireless infrastructure expert.