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Sprint's less-is-more approach to CapEx

When it comes to spending, less can sometimes be more, leading to greater gains and bigger profits. But other times, analysts said, less is simply not enough.

Over the past year, Sprint Corp. has dramatically cut back on both its operating and capital expenditures to improve its overall financial position. According to Sprint CFO Tarek Robbiati, the company expects to achieve at least $2 billion of run rate operating expenditure reductions as its exits fiscal 2016. Sprint's fiscal year ends in March.

At the same time, capital expenditures have also fallen, with the company spending $1.42 billion on its network during the first three quarters of fiscal 2016, down from $3.96 billion in the year-earlier period.

But some industry observers believe that Sprint has cut its spending — especially when it comes to improving the company's network — too far.

"They need to dramatically increase their capital investment because their 2016 levels were insufficient to improve their competitive position," Moody's Vice President and Senior Credit Officer Mark Stodden said in an interview. Stodden believes Sprint needs to "more than double their CapEx."

New Street Research analyst Jonathan Chaplin agreed that Sprint will need to up its CapEx going forward. "The current level of spending is basically unsustainable," Chaplin said in an interview.

He noted, however, that Sprint executives seem to be aware of this issue, and the company has announced plans to increase its CapEx in the coming quarters. "Management's been clear that spending levels will go up as they start the process of densifying the network," Chaplin said.

Sprint's Robbiati said during the company's most recent earnings conference call that CapEx will accelerate over recent levels, but the company also reduced its fiscal 2017 CapEx guidance to a range of $2 billion to $2.3 billion, down from a previous forecast of $3 billion.

According to Robbiati, "Sprint is uniquely positioned to operate in a lower capital intensity as a result of our tri-band LTE network foundation and our deep spectrum position."

The tri-band refers to the three-channel carrier aggregation Sprint uses to deliver higher speeds. Carrier aggregation is an LTE-Advanced feature that bonds together different bands of spectrum to create wider channels, essentially working to create a wider lane that allows more data traffic to travel at higher rates.

Chaplin said Sprint's spectrum holdings do provide it with some cost efficiencies.

"They think they've got much more spectrum than any of the other carriers and dollars and spectrum are to some extent substitutes, and so they can spend less as a function of having more spectrum," Chaplin said.

But spectrum, he noted, will only take the company so far.

"They also believe they are just better than all the other carriers at deploying capital more efficiently," Chaplin said, explaining that Sprint parent SoftBank Group Corp. sees itself both as having more negotiating leverage with vendors because of its global scale and as being more intelligent about where and how they deploy capital.

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Chaplin's remarks come after SoftBank CEO Masayoshi Son argued during a Feb. 8 presentation that investors and analysts misunderstood the implications of Sprint's lower spending levels.

The notion that Sprint could not improve its network without significantly higher spending was "totally wrong," Son said, according to an English translation of his comments. He said that while it is easy to improve a network by spending large sums of money, what sets SoftBank apart is its ability to minimize spending while making smart, targeted improvements.

Chaplin agrees with Son in some respects but disagrees in others.

"They should in fact have lower CapEx as a function of having more spectrum," the New Street analyst said, before adding, "I wouldn't give them any credit for their belief that they are bigger or better than the guys they're competing with."

Still, SNL Kagan analysts John Fletcher and Anya Watford noted there are other reasons why it makes sense that Sprint would have lower CapEx than its competitors AT&T Inc., Verizon Communications Inc. and T-Mobile US Inc.

"Definitely Sprint has the lowest CapEx of everyone but of the big four, they have the smallest subscriber base too," Fletcher said in an interview.

Fletcher also noted that Sprint's financial situation was far worse in 2014 than any of its competitors and Sprint CEO Marcelo Claure spent the last two years trying to put the company on more solid financial footing.

"He has really improved the financials of this company. They are back into positive free cash flow as a result of CapEx being so low," Fletcher said.

Stodden agrees that Sprint's financial position is much stronger now than it was before Claure took over in August 2014.

"They had one foot in the grave and the other on a banana peel. But now, they've got a dramatically improved liquidity position, they've stabilized their subscriber base, they are working to improve profitability. So they are on the upswing, but they still have a lot of work to do," Stodden said, adding that work will require a steep ramp in CapEx.