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Wall Street unconvinced by Softbank’s optimism about Sprint

Sprint’s owner, Softbank of Japan, is standing by its troubled US child, with founder Masayoshi Son saying that Sprint’s radical capex cuts helped boost its parent’s operating margins by 8.8% in its just-finished fiscal year.

“Cost cutting is going smoothly at Sprint,” said Son during an analyst call. “We’ll see a V-shaped recovery.”

However, his comments did not reassure some analysts. For one thing, Softbank’s operating profit may have improved, but it missed analyst expectations, and the Japanese firm did not offer guidance for the current fiscal year, saying there were too many uncertainties.

For another, Sprint is still heavily dependent on loans from its parent and elsewhere to continue its 4G build-out and its densification program, which is nevertheless likely to be constrained by its deep capex reductions of up to one-third this year – even with Sprint’s promises to adopt a very efficient and flexible approach to site costs, with a heavy focus on small cells.

Sprint has secured $11bn in “total committed liquidity”, mainly via Softbank’s creation of financing vehicles involving Sprint’s network assets and leased handsets, plus a new $2bn bridge loan from Mizuho Bank. Sprint owes $10bn that will come due by the end of 2020 and must make $2.3bn in debt payments this year, while a sluggish junk bond market will make it harder for the carrier to refinance its debt during 2016.

So analysts are still asking difficult questions. Walter Piecyk of BTIG Research flagged up the capex reduction – Sprint now says it will spend about $3bn this year, whereas Wall Street had expected $4.5bn. Sprint had previously issued a capex guidance of $15bn over three years. Piecyk wrote in a client note: “We think Sprint’s aggressive cut to capital investment and continuing lack of evidence on any activity to improve its network raise red flags about the company’s strategy. This low level of capital investment was last seen in 2008/2009 during the financial crisis.”

He added: “While it’s true that small cell investment is largely expensed rather than capitalized, we have observed virtually no evidence of Sprint’s network activity over the past year. Tower company SBA noted that Sprint canceled plans to place 2.5 GHz radios on existing towers.” And the seasoned Sprint watcher has his doubts about Sprint CEO Marcelo Claure’s claim that the bulk of the major network investments were over with the completion of Sprint’s Network Vision network modernization program – itself the subject of many delays and uncertainties. That has now been succeeded by the Next Generation Network program, which is designed to focus on densifying the macro network which was built out under Vision, and on adopting cost effective approaches to sites and backhaul.

But Piecyk said the claimed improvements to the network were not showing through in user experience – which would be serious for a carrier which has been dogged by poor network quality and subsequent churn for years, and which has only just started to reverse the flight of its subscribers.

Piecyk wrote: “We have been using a Sprint phone and an AT&T phone for the past few months and find Sprint to be both less reliable and slower than AT&T – and not by the small amount often reflected in the Root Metric scores wireless operators like to tweet about.”

And he is concerned about the bureaucracy that can slow the acquisition of sites for small cells, and Sprint’s reliance on wireless infrastructure partner Mobilitie for its densification roll-out. “As far as we can tell, Sprint’s network strategy is reliant on one company, Mobilitie,” Piecyk continued. “Yet, we continue to hear reports about Mobilitie’s failed attempts (under various aliases) to use rights of ways to locate small cells. We are therefore not surprised that Claure is still talking about zoning and permitting for small cells. This may have worked in Japan (or even for Google in its early deployments of Google Fiber), but we are skeptical that Mobilitie can execute in the United States.”

Mobilitie CEO Gary Jabara disagreed with this assessment and said small cells were “a massive migration away from traditional vendors, traditional technologies, traditional solutions. It’s so much more reasonably priced from a capex experience.”

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