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An Update on Softbank, a little Sprint, with a dash of Alibaba

Since the Alibaba IPO is right around the corner; I figured this is a good time to give an update on my Softbank research. If you have not read my previous research see HERE.
One of the major reasons behind my initial bull thesis was that Masa Son was going to buy T-Mobile and merge it with Sprint, which of course, did not happen. Talks fell apart last month and Softbank walked away just before the drop dead date, in order to not pay any fees to T-Mobile. Since then, the French telecom Iliad made an offer for T-Mobile which was 17.5% less than what Softbank had offered. Deutsche Telekom AG, the majority owner of T-Mobile, declined Iliad’s offer. Now, Iliad is stuck trying to raise money, and everything is back where it started.
Without T-Mobile, it is hard to imagine Sprint competing against Verizon or AT&T. During Softbank’s last quarter conference call, there were several questions regarding what happened to the merger, and Son basically dodged anything related to T-Mobile. Since walking away from the merger, Son has replaced CEO Dan Hesse with Marcelo Claure, CEO of Brightstar Corp. Brightstar, which is the world’s #1 wireless distributor, had 57% of the company purchased by Softbank in October 2013, and sold the rest of the company to them last month.
In this post we will focus on Softbank’s business without T-Mobile and its future prospects to see if it is still worth holding post Alibaba. Since my initial post HERE, Softbank’s stock was down at one point around 20% and has only now recovered to even. As I am typically a long term investor, this does not matter to me so much as it was only a short term fluctuation.
With Sprint now reporting under Softbank’s operations, we are getting a better feel of how the business is fairing. Net Sales for this past quarter totaled just fewer than 2 trillion yen, which was a 126% increase from last quarter. This is due to the consolidation of Sprint, Brightstar Corp, Supercell, and Willcom, Inc. Sprint and Willcom will have normalized earnings as of next quarter with Supercell the quarter after that and Brightstar about a year away.
With all of these consolidations, the rest of the line items were a mess. Operating Income is down 15%, EBIT is down 44%, and Net Income is down 59%. These metrics were actually compared against a consolidation re-measurement of GungHo and Alibaba, and subtracting these out, would have resulted in an Operating Income of 35% instead.
It should be noted that almost every aspect of Softbank’s main telecom unit in Japan improved. COGS and SG&A decreased, Operating Income, EBIT, and Net Income increased in that division, which is a good sign as that is the backbone of the company.
Softbank also took a loss of 63 billion yen according to its Alibaba stake due to its “Convertible Preference Shares” but will reverse and add back once the IPO occurs for next quarter. Softbank will receive 91,243,243 shares of Alibaba during the offering.
Even though the results look ugly, most of the decreases YOY are related to re-valuations of Alibaba and business consolidations.
When breaking down into the business segments, we can see the strength in its Mobile division. In the mobile division without Sprint, Net Sales increased 34% and Operating Income increased 14.9%. The division had a decrease in Average Revenue per User and devices shipped but this is typically a slower quarter for telecoms and also to expiration of promotions from last year. This division, ex Sprint, accounted for 80% of the company’s income. Now it accounts for about 45% with Sprint, as Sprint is just about the same size as the Mobile division.
Total subscribers grew for Softbank but fell for YMobile and Sprint. Total subscriber growth for the whole company grew by less than 1% over last quarter. Sprint now accounts for 54% of total subscribers in the combined business and had a decrease of about 0.6% from last quarter. This is the lowest subscriber count in two years for Sprint except for Q1 2013. See total subscriber trends HERE.
Since Sprint’s earnings have not been under Softbank for over a year, I took the liberty to look up Sprint’s filings as well.
Sprint’s revenues fell 1% year over year, but COGS and SG&A have both decreased, therefore allowing an operating profit of $519 million, which minus interest, gives us $8 million of Net Income. This is a vast improvement from a loss of $874 million in Operating Income and $1.6 billion loss in Net Income last year. This is the second quarter in a row of positive earnings for Sprint which is a great sign. It shows the amount of cost cutting that Son has done since taking over last year. Currently, Sprint has 31.7 billion in debt putting its Debt to Equity at 1.25, which is slightly lower than last year.
Softbank also has a higher amount of debt due to the spending spree lately. Its current Debt to Equity is about 5.1 which has risen steadily over the last couple of years. This is not an issue for the business however as Softbank is taking advantage of cheap rates, with its latest bond issue only at 1.45%. Interest Coverage decreased from 14x last year to just 4x this year. However this number should go back up after earnings normalize in the business.
Next we will move onto Alibaba. Recall earlier I stated that Softbank had to record a 63 billion yen loss due to an increased valuation of Alibaba’s shares. This valuation had its US value increase from $25.00 per share last year to $56 dollars a share this year. So not only will this reverse, but with an anticipated IPO value of $170 billion, Softbank will get a revaluation of a 103 billion yen from the convertible shares and an estimated $5.9 billion due its 34% stake, which converts to 637 billion yen, for a total adjustment of 740 billion yen adjustment for next quarter. Assuming this is all accretive to Softbank’s Shareholder’s Equity, the Alibaba IPO alone will increase the company’s book value by 25.8%.
What’s Next After Alibaba?
The biggest driving factor going forward will be Sprint as it is essentially half of Softbank’s business. During the conference call, Son mentioned that they have made great improvements towards call connectivity and data quality which is now competitive to ATT&T and Verizon.
Brightstar is going to be the driving force within Sprint and Softbank as the company can drive synergies as it now owns its own distributor network. This will help negotiate with OEMs and drive down prices for the consumer.
Marcelo Claure seems to be aggressive in his changes at Sprint and is publicly stating his intentions for the company. You can read about his laundry list of proposed changes HERE.
The price war has already started. It is definitely less effective without T-Mobile, but Sprint is trying it’s best to take advantage of high plan costs at ATT&T and Verizon. See HERE. Sprint needs to win back customers and we need to see an increase in subscriber growth.
The next big event for Sprint is the FCC spectrum auction which is scheduled to happen in the middle of 2015. This is going to get ugly as Sprint will have to fight tooth and nail to get a piece of this and outbid ATT&T and Verizon for the spot. If Sprint can outbid ATT&T and Verizon, it is off to the races as it is very likely Softbank will give Sprint the money to start building towers for extended coverage.
Below Are the Coverage Maps for All Carriers:
With T-Mobile now without an acquirer, it still leaves the door open for Softbank to give them a second bid for another merger. However unlikely, it still could happen.
Once all the business consolidations have normalized, and Alibaba is in the rear view, Net Income for the entire business should start appreciating significantly. If you back out all of the consolidation costs this quarter, Net Income would have been up over 90% YOY for Softbank. I think further synergies will be realized between Yahoo Japan, Softbank, Sprint, and Brightstar. It is my opinion that COGS and SG&A will continue to fall due to these synergies, which will improve profitability.
In conclusion, I am going to continue to hold my Softbank position to wait and see what happens with Sprint. If after next year, Sprint did not get a piece of the FCC spectrum nor went after T-Mobile again, I may sell. Even still, who knows, Softbank Japan continues to outperform and Alibaba could skyrocket. Regardless, there are too many irons in the fire to sell now.
Softbank’s Most Recent Quarterly Earnings Slides
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DEVICE INFO BELOW:
PHONE MODEL: Moto E 2014 XT1021. ROOT STATUS: Rooted, bootloader unlocked. ROM: Stock 4.4.4 (with nano Gapps+SuperSU).
Hello all.
Little introduction: I downgraded from 5.1 to 4.4.4 with fastboot (with bootloader already unlocked since a long while ago). In the proccess, I accidentally used the commands "fastboot erase all" and "fastboot -w". Repeteadly (yes, I am a dumbass). After that, I successfully flashed Stock/SuperSU/Nano Gapps. I rebooted my phone...
Main problem: So everything is fine now, excepting that I'm missing any "phone" utility, as I can't send/receive SMS, nor calls, and I neither can use WhatsApp (as I can't register it), or even activate mobile data. In addition, I can't see the default "Carrier SIM" application that came with my phone originally (that tiny app that lets you enter into your SIM and view/acquire some basic, old SMS-based services). Basically, my phone is good as an MP4 now.
With the little research I did all along the Internet, I understand I have deleted vital system files with those commands, especially the EFS folder, containing absolutely important system files and data. Still, I know that there SHALL be a way to recover my phone. So:
  • How can I begin to troubleshoot this problem?
  • What ideas can be applied for solving this problem?
Useful information:
  • I have NO BACKUP of my original EFS folder (nor nv_data.bin files, etc.).
  • I have my SIM number (It's on the back of the battery).
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  • I can connect myself to the Internet using Wi-Fi networks.
  • I'm absolutely sure the flashed ROM was the correct (It's a "STOCK" ROM).
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Greetings, Viciecal
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