Sprint projects steep drop in capital spending

Sprint plans to invest $3 billion in network equipment and other capital goods during fiscal 2016, which started for the company on April 1. That’s down from $4.7 billion during fiscal 2015 and $5.4 billion in 2014.
Some of the carrier’s capital is being diverted to its device leasing program, which so far is a net negative from a cash flow perspective. Capital spending for leased devices exceeded Sprint’s proceeds from sale and lease-back transactions by almost $1.2 billion during fiscal 2015.
Sprint has been cutting costs across the board, but reductions in capital spending may be the cuts that will have the most impact outside the company. Analyst Simon Leopold of Raymond James has projected the impact Sprint’s cuts will have on the carrier’s primary network suppliers, noting the carrier’s spending has already tapered off in recent months, so the incremental hit to these companies will be limited.
Leopold thinks Nokia Networks, which now owns Alcatel-Lucent, will be the most impacted among infrastructure manufacturers, and estimates Sprint will account for less than 10% of that company’s revenue this year. Ericsson was a major supplier to Sprint several years ago, but has transitioned into the role of network manager in recent years.
While the timing and extent of Sprint’s small cell build remain unclear, it does seem clear the carrier is favoring small cells over tower builds. Leopold said that could be a positive for CommScope, which sells fiber, cable and antennas to wireless carriers.
Small cell build
Sprint is in the midst of deploying the 2.5 GHz spectrum it acquired through its purchase of Clearwire. Last year, Sprint shared the outline of its plan to deploy that spectrum by attaching tens of thousands of small cells to strategic structures all over the country. Small cells can be less expensive to deploy than towers, and Sprint may be able to cut its capital expenditures even more by shifting some costs to an infrastructure partner.
Engineers, attorneys and city planners say neutral host provider Mobilitie is overseeing construction of small cell sites for Sprint across the country. A neutral host provider typically owns network infrastructure and leases it to wireless carriers, increasing revenue and profits by adding more than one carrier to a system. Mobilitie may be shouldering some of the capital cost of Sprint’s network build, but of course there is no free lunch for Sprint – the carrier will eventually have to pay for the infrastructure through an operating lease if it does not pay upfront.
Sprint’s lower capital spending projections for this year may also be a sign its Japanese parent SoftBank has decided to proceed more cautiously with the small cell build. Sprint said this week “more of the cash outlays related to network densification are expected to be incurred in fiscal year 2017.” Analyst Jennifer Fritzsche of Wells Fargo thinks the carrier’s initial timetable may have been overly aggressive.
“We believe this lower capex is more reflective of an overly optimistic rollout plan for the small cell initiative (and some zoning challenges its main vendor is running into),” Fritzsche wrote in a research note.
Zoning challenges often come up when wireless service providers want to build new structures or attach to poles in public right of way. Mobilitie is classified as a competitive local exchange carrier in all 50 U.S. states, but this classification does not grant automatic access to the right of way. The company still has to apply for permits, and city governments will retaliate when their procedures are not followed.
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