Despite cutting $1.1 billion in operating expenses over the past year, Sprint’s consolidated operating margin fell 260 basis points to 2.9 percent in 1Q18. Sprint’s wireline business was a significant drag on its consolidated margins, reporting negative operating income of $107 million as the segment lacks the scale to compete against larger wireline rivals such as AT&T, Verizon and CenturyLink.
If the T-Mobile and Sprint merger is successful, TBR expects T-Mobile will likely divest Sprint’s wireline business due to its limited profitability and the division not complementing the company’s core strategic objectives. Though Sprint’s postpaid subscriber net additions improved year-over year (39,000 in 1Q18 vs -118,000 in 1Q17), the company was challenged by high wholesale subscriber losses (-165,000) and falling ARPU stemming from the carrier’s aggressive pricing promotions, contributing to wireless revenue falling 4.6 percent year-to-year. Sprint’s operating margin is also negatively impacted by rising deprecation costs related to its network infrastructure and devices offered as part of its leasing program.
Though Sprint is taking the right steps to cut expenses, the company’s long-term financial position remains uncertain due to the company’s high debt load and struggle to generate adjusted free cash flow (-$240 million in 1Q18) while balancing additional capex spending. These financial difficulties illustrate why the T-Mobile merger is vital to Sprint and that its challenges will only intensify heading into the 5G era. Remaining a standalone company will require intensified investment for Sprint to compete against its rivals in the 5G market, which would likely further weaken Sprint’s financial position. If approved, the merger would serve as a lifeboat for Sprint’s financial challenges and wireless churn among Sprint’s subscriber base would decrease as customers transition to T-Mobile’s higher-quality network. Additionally, the combined company would be able to accelerate 5G deployments by leveraging T-Mobile’s 600MHz spectrum with Sprint’s vast 2.5 GHz licenses, which are expected to provide nationwide average network speeds 15 times faster than current LTE speeds by 2024.
Steve Vachon an analyst for Technology Business Research, and independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, networking equipment, wireless, portal and professional services vendors. Serving a global clientele, TBR provides timely and accurate market research and business intelligence in a format that is uniquely tailored to clients’ needs. TBR analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis.