Capacity additions require capital investments
In the last part of this series, we learned that Sprint (S) plans to increase the pricing of its popular choice unlimited plans for voice, text, and data. Among the largest four US wireless carriers, only Sprint and T-Mobile (TMUS) offer these plans. AT&T (T) and Verizon (VZ) do not offer these plans.
Despite the popularity of these plans, Sprint is taking steps to limit the traffic originating from users of these plans to manage network capacity restraints. Higher pricing will help in damping video traffic from users of unlimited plans on the Sprint network. This should help Sprint in managing the capital investment in its network.
Sprint’s capital expenditures increasing with device leases
As you can see in the above chart, Sprint’s capital expenditure increased by ~38% year-over-year (or YoY) to reach ~$2 billion in fiscal 4Q14. Network investments in the 2.5 GHz spectrum, as well as device leasing expenditure, contributed to this YoY growth in capital investments.
Device leasing expenditure originates from leases bought by the carrier from its third-party distribution channels. It contributed to almost 20% of Sprint’s total capital expenditure for the quarter. Sprint’s device leasing expenditure has been growing significantly. It increased from ~$0.1 billion in fiscal 3Q14 to ~$0.4 billion in fiscal 4Q14.
Sprint cannot fund capital investments from operating cash flow
Sprint continues to generate negative free cash flows. The wireless carrier reported -$914 million free cash flows in fiscal 4Q14. The company is not able to produce significant cash flow from its ongoing operations to fund its capital investments.
You may take exposure on Sprint while diversifying risk by investing in the iShares Russell 1000 ETF (IWB) or the iShares Russell 1000 Value ETF (IWD). IWB held ~0.02% in Sprint as of June 30, 2015, and Sprint contributed to ~0.03% of IWD’s holdings on the same date.