Sprint Must Improve Operations Before Looking at Major M&A, CFO Says
Sprint isn’t looking to merge with another carrier, and it wouldn’t do so until it achieves “the right level of operating performance,” said Chief Financial Officer Tarek Robbiati at a Citigroup conference in Las Vegas, where CES occurred. Sprint also believes it’s better to focus on deploying its “densified network” over existing spectrum than bidding on broadcast 600 MHz band spectrum in the incentive auction that won’t be available in big enough chunks and could take longer to use, he said Thursday. Earlier, other carriers (see 1601060059) and tower operators (see 1601070038) said they see potential for the auction, and Internet backbone companies said relations with ISPs improved after the FCC net neutrality order (see 1601070047).
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“We’re fixing a company that needs fixing,” Robbiati said, when asked the extent to which Sprint’s management team was engaged in the “blocking and tackling” of cutting costs versus exploring new strategic partnerships. He said such “blocking and tackling” is extremely important.
But Robbiati disputed speculation Sprint would take a new look at pursuing another carrier as the November election nears. “That is misplaced,” he said. “M&A is not something you do; it’s a right you earn to do. And for us to earn the right to do big M&A, we must improve our operating performance. ... You improve operating performance by driving costs out [of] this company. So right now it’s not in the cards, and it will not be in the cards until we have driven the right level of operating performance.”
Sprint has sought to stem customer losses and stabilize revenue since Marcelo Claure took over as CEO in 2014, said Robbiati. “The top line was suffering a great deal due to very, very significant churn of customers for a variety of reasons,” he said. “The first priority then was to really make sure that churn, which is the No. 1 enemy of any mobile operator, is defeated. And we feel we’ve made great progress in one year. Churn, particularly on the postpaid side, has dropped to an all-time low for the company, and the top line has been stabilized.” Sprint’s promotional campaign to lure customers away from rivals with an offer to save 50 percent off their rates is going well and was extended by a month, he said: “We’re pretty happy with it.”
Sprint has also focused on reducing costs since he came onboard Aug. 31, said Robbiati, calling it “extraordinary” that the company hasn’t posted a profit in a "very, very long time." He said, “Our strategic priorities for the next year -- and I would say years -- is to take cost out.” Sprint has $26 billion in annual operating expenditures and $5 billion in annual capital expenditures, he said. It has to "drive that cost base down materially, knowing that we have to generate positive free cash flow, given that there are [debt] maturities that are coming due in a year, roughly,” he said. When cash flow improves, he said, Sprint can focus on reducing debt. Asked how to improve cash flow, he said: “Cost takeout, cost takeout, cost takeout.” Such cost cutting includes headcount reductions, which are “not particularly pleasant,” he said.
Robbiati said Sprint’s network performance has improved in various ways: fewer dropped calls, now well below 1 percent and trending toward 0.5 percent, which is “best in class territory”; and in terms of fast download speeds and traffic time spent on 4G LTE systems. Much of the network improvement comes from deployment of small-cell systems and software solutions, he said.
Robbiati defended Sprint’s decision not to participate in the incentive auction. “You don’t do something without being serious," he said, when asked why Sprint hadn’t preserved its “optionality” by registering to bid in case spectrum is priced cheaply. "The reality of this auction is that if we’re faced with a choice between buying, at best, 2 x 10 MHz of spectrum that will be available in 2021, or deploying our network today with our money, we’d rather deploy our densified network today.” He said “band size truly matters” in an LTE world: “For really, really driving high speed, it’s an engineering fact you need 2 x 20 MHz of contiguous spectrum.” Once Sprint finishes deploying its “densified network” in the next two or three years, he said the auction's broadcast spectrum “is not relevant to us any more.”