Sprint Gets To $4.35 Even As Landline Biz Goes Flatline

Landline business is on the out

Sprint primarily competes with Verizon and AT&T in the landline business. Sprint’s landline operations, which include phone, data, and internet businesses account for close to 16% of the company’s intrinsic stock value by our estimates.

Our current Sprint price estimate is $4.35, which is about 13% above the current market price.

Landline Phone and Data Revenues Decline

Sprint’s landline phone revenues have declined in the past few years due to a greater adoption of alternatives like VoIP and mobile voice communication. Moreover, as businesses have continued to migrate to IP-based platforms, Sprint’s legacy data services have suffered. Thus combined revenues from Sprint’s landline phone and data services have fallen from about $5.7 billion in 2005 to $3.2 billion in 2009 and are estimated to decline further to $2.8 billion in 2010.

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Internet Revenues Help but Slowing

This decline in revenue has been mitigated to an extent by the growth in internet revenues. The revenues from this segment grew rapidly until 2008, which helped maintain the overall landline revenues. However, the growth has slowed considerably in 2009 and is expected to be slightly negative in 2010. Part of this can be attributed to the loss of a major VoIP contract for Time Warner Cable in early 2010. Time Warner Cable plans to phase out the agreement with Sprint to handle the VoIP traffic for its digital phone service and will instead move to an in-house platform. Loss of this contract, which was worth $500 million a year, could hamper Sprint in the years ahead. ^[]

Sprint’s landline business will likely lean on its growth of internet revenues, as the decline in other segments could continue. Should our 2013 revenue forecast increase 10%, we see nearly 2% upside to Sprint’s intrinsic stock value.

You can see the complete $4.35 Trefis price estimate for Sprint’s stock here.

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Higher Data Revenues Can Push Sprint Past $5

Can do quite nicely with data plans

Growing demand for smartphones and greater availability of high quality networks have led to healthy growth in data revenues, which includes Internet and SMS, for network operators like Sprint, AT&T, and Verizon.

In recent years, Sprint has seen a significant jump in its monthly Internet and SMS revenue per mobile subscriber from around $5.80 in 2005 to around $14.00 in 2009 based on our estimates. [1] We expect the positive growth trend to continue, albeit at a slower rate, accounting for a larger user base and increased competition.

The average Trefis member forecast projects a higher mobile data average revenue per user than what we currently forecast, corresponding to an additional upside of 20% to our price estimate. We currently have a Trefis price estimate of $4.35 for Sprint’s stock, about 9% above the current market price of around $4.00.

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Smartphone Demand + Good Network Speeds = Higher Data Usage

Internet & SMS Revenue Per Sprint Mobile Subscriber refers to the average monthly amount spent by Sprint’s customers on non-voice communication, such as messaging, surfing the Internet, downloading music, playing games, and any other data-intensive activities.

With a marked improvement in both connection speeds and reliability, data usage has moved on from the traditional SMS or text messaging to higher bandwidth consumption activities like sending email and, increasingly, video clips. A TechWorld article, sourcing Cisco’s study, suggests that data usage for US subscribers with 3G (or better) phones is poised to rise from the current 32 MB a month to as high as 739 MB per month by 2013. [2]

Increasing use of smartphones like Apple’s iPhone and RIM’s BlackBerry have resulted in higher data usage. In addition to constantly improving operating systems and new handset features, customized games and social media apps for mobile phones allow users to access social media sites Twitter and Facebook from their phones. Accessing emails, posting status updates, and uploading pictures all consume significant amounts of data, generating more revenues for network operators like Sprint. According to Sprint CEO, Dan Hesse, nearly half of Sprint’s subscriber base would be using smartphones by end of 2010. [3]

Downside: Drawbacks to higher data use is the increased costs of maintaining this network and intense competition among wireless operators that could prevent them from hiking rates as quickly as in the past, resulting in slower growth in data ARPU for Sprint.

The average forecast of Trefis members for Internet & SMS Revenue Per Sprint Mobile Subscriber indicate an increase from around $17 per month in 2010 to around $23 by 2016, compared to the baseline Trefis estimate of an increase from $14.70 in 2010 to around $19 by the end of the Trefis forecast period. The member estimates imply an additional upside of 19% to the Trefis price estimate, which is around 9% higher than Sprint’s current market price.

Our complete analysis for Sprint Nextel’s stock is here.

Notes:

1. Estimated based on common data plans listed on Sprint’s website and Fee Per Subscriber as reported in the company’s SEC filings. Fee Per Subscriber includes SMS, Internet and voice communication components.

2. Europeans likely to use more mobile data than US, says Cisco

3. GigaOm Article dated October 29, 2010: Interview with Sprint CEO

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