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Sprint’s profitability should continue to decline in fiscal 3Q14

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Factors affecting Sprint’s profitability in 3Q14

In the earlier parts of this series, we learned that Sprint (S) is expected to report higher sales volumes, increased postpaid upgrades, and positive customer additions in fiscal 3Q14.

We also saw that the company resorted to price competition during the quarter to gain from the typical high sales period during the holiday season as well as the launch of Apple’s (AAPL) iPhone 6 in September 2014.

Now we’ll understand the impact of these developments on Sprint’s profitability during the quarter. We’ll also look at the company’s guidance and Wall Street’s view on Sprint’s profitability.

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Increased volumes and price promotions should negatively impact margins

Sprint (S) expects higher sales and a significant increase in postpaid upgrades during fiscal 3Q14. In addition, Sprint’s management has given guidance on 30,000 net postpaid additions during the period.

Postpaid customer additions and upgrades have upfront costs. A significant portion of the company’s postpaid customers are also on subsidy plans, which have high associated subsidy costs. Please read Why Sprint plans to eventually eliminate subsidy plans to learn more.

All these factors will put pressure on Sprint’s margins during the quarter. Additionally, Sprint’s discounts and promotions should impact margins.

Management guidance and Wall Street’s expectations for fiscal 3Q14

Sprint’s management expects adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for the calendar year 2014 to be in the range of $5.8–$5.9 billion. These figures translate to an adjusted average EBITDA of $793 million for fiscal 3Q14.

According to Wall Street analysts, Sprint’s EBITDA for the quarter should decline by ~3% year-over-year. This should be due largely to a lower revenue base in fiscal 3Q14. Additionally, the analysts expect Sprint to report a ~$926 million adjusted net loss during the quarter.

If you want to underweight your exposure to Sprint, you can invest in the Vanguard Telecommunication Services ETF (VOX). The ETF held ~46% in the other large telecoms, including AT&T (T), Verizon (VZ), and T-Mobile (TMUS), and only ~1.9% in Sprint at the end of 2014.

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