Sprint’s Cost Structure Is `Bloated,’ New CFO Robbiati Says

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Sprint’s Cost Structure Is `Bloated,’ New CFO Robbiati Says

October 19, 2015 Uncategorized 0

Sprint’s Cost Structure Is `Bloated,’ New CFO Robbiati Says

Sprint Corp. Chief Financial OfficerTarek Robbiati, who joined about a month ago to help turn around the unprofitable carrier, said he will cut about 10 percent of operating costs to save $2 billion, and identified an additional $500 million of reductions in equipment spending.

Robbiati outlined some of the details of a cost-cutting planannounced last week in an interview late Wednesday. Capital expenditures at Sprint, the smallest of the top four U.S. wireless companies, are disproportionately large by industry standards, said the CFO, who didn’t specify how many jobs may be eliminated.

“Our cost structure is bloated,” Robbiati said by phone from Tokyo, where he was meeting with executives from Sprint’s controlling shareholder, SoftBank Group Corp.

The plan to save $2 billion to $2.5 billion over the next six months is the second round of cuts in about a year, highlighting the urgency for Chief Executive Officer Marcelo Claure to improve the cash-strapped company’s finances. The pressure has beenmounting over the past three weeks after Moody’s Investors Service downgraded Sprint’s junk-rated credit ratings. The carrier has since practically given away new iPhones to try to grab market share and decided to skip an important auction of airwaves that could have improved the quality of the service.

Wall Street is skeptical about Sprint’s ability to return to profit: Analysts predict losses every quarter until the end of 2018, data compiled by Bloomberg show. By trying to simultaneously cut costs, improve the network and gain subscribers, Sprint is attempting a feat no carrier has ever achieved, said Cowen & Co. analystColby Synesael.

“We’ve seen companies do one or two of these things at once but never all three. I’m not saying it’s impossible, but they are going somewhere no other company has gone before,” said Synesael, who rates the shares market perform.

Sprint has about $20 billion in operating expenses, Robbiati said he will find $2 billion to cut. The company is still looking at different areas to save money, and isn’t planning on a 10 percent cost reduction across the board, said David Tovar, a Sprint spokesman.

The $7.1 billion in capital expenditures,, which include investment in network equipment, was more than 20 percent of revenue last year, while the industry is closer to 17 percent, Robbiati said.

The stock fell 1.8 percent to $4.47 at the close in New York. Sprint’s bonds and shares, which slumped after Moody’scut its credit ratings Sept. 15, have recovered some of their losses in the past week. Still, the $1.5 billion of notes due in February 2025 are down more than 9 percent since the days before thedowngrade, while the stock has lost 6.5 percent even as SoftBank resumed buying shares.

The company is in its eighth straight year of losses and hasn’t set a target for when it will return to profitability. CEO Claure, who was hired in August 2014 by SoftBank CEOMasayoshi Son, made hisfirst round of cost savings in November last year. He’s been using low prices to lure customers, including the recent $1-a-month iPhone leasing that undercut an offer by rival T-Mobile US Inc. Last month, he said Sprint’s “will be one of the greatestturnarounds in history.”

SoftBank Committed

After abandoning plans to combine Sprint with T-Mobile early this year, SoftBank lost faith in Sprint and even exploring a possible sale of the company. SoftBank has since rekindled itscommitment to Sprint and has bought shares to increase its holding to 83 percent.

With cash reserves dropping by $2 billion last quarter, Sprint opted out of taking part in an airwave auction next year. It means Sprint won’t need to spend an estimated $9 billion in spectrum purchases, but will miss out on coveted low-frequency spectrum that can send signals through walls and deep into buildings.

Cutting spending and lowering costs makes Sprint look like its treading water, saidCraig Moffett, an analyst at MoffettNathanson LLC, who recommends selling the stock.

“It draws a picture of a company that is playing for time, and trying to conserve cash to make it until a new administration when they can try again to find a merger partner,” Moffett said. “There doesn’t seem to be a plan B any more.”

CFO Robbiati says it will be a challenge to increase revenue while reducing expenses, but difficult steps are necessary at this point if Sprint is going to have a shot at long-term success — or consider any merger.

“We understand that there first has to be an improvement in operating performance before we can even begin to explore options in M&A,” Robbiati said