Struggling Sprint Lowers Profit Forecast of Parent Company Softbank

by Matt Klassen on November 6, 2014

Softbank’s billionaire CEO Masayoshi Son may be rethinking his decision to wade into the American mobile market, as the lacklustre performance of the Japanese company’s American subsidiary Sprint is likely to result in Softbank’s first annual profit decline in almost a decade.

According to Softbank’s forecasts, the company will post an operating profit for the year ending in March of approximately 900 billion yen (or $7.9 billion), a drop from the 1.09 trillion yen posted a year previous. While Softbank’s other investments seem to be performing nicely, the company has attributed this decline to its overestimation of Sprint’s cash flow, customer retention, and growth.

Connected to this gloomy forecast, Sprint recently announced it would be slashing its workforce as well, cutting 2000 jobs, or 6.5% of its workforce, in an attempt to reduce expenses, as America’s third largest wireless company continued to haemorrhage subscribers for the 11th straight quarter. The job cuts and other cost saving measures are expected to save the company $400 million a year.

There’s no question that Softbank’s entry in the American wireless market was a huge gamble, particularly when most other foreign telecom companies (like Vodafone and Deustche Telekom) were looking to divest their interests in a saturated market with limited growth opportunities. In fact, one might almost see Softbank CEO Masayoshi Son’s plans for Sprint as somewhat arrogant, Son’s over-confidence in his ability to take a flagging telecom firm and change it into a competitive and productive asset.

As mentioned, Sprint continued to lose subscribers this quarter, watching 272,000 mobile customers walk through the door; a heavy hit that coupled with the company’s efforts to lure customers through price reductions took a significant toll on Sprint’s own earnings forecasts.

“Sprint’s result was poor, so it affected Softbank’s performance,” said Satoru Kikuchi, an analyst at SMBC Nikko Securities Inc. inTokyo. “Sprint is restructuring while also being aggressive in obtaining new subscribers. This will continue for a while.”

While analysts are still taking a wait and see approach with Sprint, affording Softbank some time to get Sprint’s house in order before predicting any long term forecasts, it’s clear this will be a difficult row to hoe for Son, as clearly he underestimated both Sprint’s growth potential and its sway in the market. Of course such a position is nothing new for Sprint itself, as the company has long found itself in an unenviable place in the market, too small to compete with the likes of AT&T and Verizon, yet too big to make it in the lower prepaid market alone.

It’ll be interesting to see what Softbank does here, as job cuts and restructuring will only take you so far in cost cutting. What the Japanese company needs is a solid strategy tailored for the American market, something akin to T-Mobile’s UnCarrier promotions, something that will actually result in subscribers returning to the company; now whether or not the Japanese firm knows enough about the American wireless market to make that happen, well that remains to be seen.

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Written by: Matt Klassen. www.digitcom.ca. Follow TheTelecomBlog.com by: RSS, Twitter, Facebook, or YouTube.

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