Given the growing market for Google’s Android-based smartphones, Sprint Nextel Corporation (S - Analyst Report) is adding another such device to its existing line of Android smartphones. The company launched ZTE Fury, an Android 2.3 Gingerbread smartphone at $19.99 after a rebate of $50.00. The USP of the phone not only lies in having an Android operating system but also in its pricing which remains pocket friendly.
All this while, Sprint primarily focused on introducing top-end devices, like including Apple’s (AAPL - Analyst Report) iPhone 4 and 4S in October last year. These devices have remained accretive for the carrier, generating solid margin gains. But their high subsidies, representing nearly 40% of the device’s cost continues to be a significant headwind going forward.
As a result, we believe that company’s interest in marketing handsets like ZTE Fury, indicates its strategy to focus on lower end market, which can eventually provide increased cost synergies. Additionally, the company continues to adhere to its regular pricing plans, which will also apply on this new addition, eventually leading to more revenue gains.
Apart from hefty post-paid contracts, the company is gradually making its presence felt in the prepaid market. Sprint’s multi-brand prepaid strategies like Boost Mobile, Assurance Wireless and Virgin Mobile are making significant contributions to the company’s subscriber growth. Sprint’s innovative offers like $50 Monthly Unlimited plan with Shrinkage, Beyond Talk plans and Broadband2Go have helped its prepaid brands to differentiate themselves in a rapidly growing market in which the demand for affordable pricing plans are rising, lifting the market positions for service providers like MetroPCS Communications , United States Cellular Corporation (USM - Analyst Report) and Leap Wireless .
In terms of network technology, the company remains competitive with the proposed deployment of 4G LTE technology in mid 2012. The LTE coverage is expected to extend to more than 250 million customers with 22,000 cell sites by 2013.
However, heavy expenses on network integration, followed by rebranding expenses of $600–$700 million and depreciation charges of $450–$550 million in the first quarter and $1.2–$1.5 billion in fiscal 2012 are some of the financial headwinds, which the company is likely to face in the near term. Further, the extended network-sharing deal with Clearwire raising Sprint’s payment commitments is expected to dilute its free cash flow over the next two years. Sprint would pay $926 million over the next two years. In addition, Sprint would also make prepayments of $350 million for LTE capacity, provided Clearwire meets certain build-out targets by June 2013. Given that Sprint currently does not have a controlling interest in Clearwire despite its economic ownership of over 50%, changes in corporate strategy could adversely affect Sprint or reduce the value of its investment.
We currently maintain our long-term Neutral recommendation on Sprint. For the short term (1–3 months), the stock retains a Zacks #3 Rank.