Sprint Q3 2015 earnings were announced on the 26th of January and results came in much better than expected. Although a significant loss was expected, Sprint (NYSE:S) surprised to the upside with respect to its bottom line, reporting an EPS of -$0.21 compared to estimates of -$0.27. After heavy losses in 2013 and 2014, Sprint's turnaround seems to be gaining momentum. The carrier reported more than 360,000 postpaid phone customer additions but what really moved the Sprint stock price forward was the huge increase in YoY profits and forward guidance for fiscal year 2015 which was substantially higher than what had already been forecasted.

Flickr

Sprint is now guiding Ebitda in the range of $7.7 and $8 billion this year which is almost $1 billion more than originally guided. Sprint stock soared as a result, spiking well past $3 a share but the question remains whether the reported spike in profits in Q3 can be maintained or was it a temporary phenomenon? As the company is still making a loss, we have to report its financials in Ebitda terms (Earnings before interest, tax, depreciation and amortization) which came in at $1.9 billion for its fiscal third quarter ($860 billion higher than Q3 2014). The company's recent move to lease phones, heavy cost cutting plans, and lower churn rates are all definitely helping Ebitda but there is still significant risk to the downside such as the following.

Many investors are attracted to Sprint because of its seemingly very low valuation. With a present market cap of $11.87 billion, you are looking at a company whose sales are around 2.5 times its market cap which looks extremely cheap on the surface. However, sales dropped by $880 million (almost 10%) last quarter primarily due to the "50% off marketing campaign" the company is doing at present. Personally I don't see anything damaging with the revenue drop as postpaid customers are normally far more loyal than prepaid so any measure that can increase the company's postpaid customer base has to be good in the long term. We saw this with the churn rate which dropped to 1.62 meaning 30% less customers left Sprint during the quarter. Therefore expect the marketing campaign to continue beyond the end of February which is the scheduled end date.

All these things look good on the surface so where is the risk ? One word - debt. The company's balance sheet shows $30.43 billion of debt and the problem is that a lot of this debt is coming due in the next few years. $2.3 billion comes due this year along with another $2.3 billion in 2017 and then $3 billion in 2018 and this doesn't include the present revolver that the company has rolled out to 2018. This is a lot of debt for a company that is continuing to hemorrhage cash. Nevertheless the cash position on the balance sheet rose to $2.22 billion which, despite being almost $1.5 billion lower than Q3-2014, was still $140 million up on its second quarter in fiscal 2015 (see chart)

What does this mean for investors? Well, liquidity appears to be fine for now but Sprint will need significant funding in the near term (2017 onwards) to service the debt it has on its books. A new source of financing from its network equipment is presently being explored as a means of plugging the near term hole but one would feel that Softbank Sprint (NYSE:S) FTBF (Sprint's backer holding a 81% stake) will need to infuse more cash for Sprint to keep growing meaningfully.

Why? Because all I can see ahead is elevated capex spend as Sprint continues rolling out its network. Nevertheless, despite the ongoing capex cost (which undoubtedly needs extra funding), the company wants to change course by moving its existing equipment off rented cell towers and onto smaller poles along urban right of ways which would give Sprint more network points. In theory, this sounds great as Sprint would be creating its own infrastructure and over time I would assume network running costs would come down, but I see risk here.

Firstly, you have the tower leases which are usually multi-year meaning termination costs have to enter the equation here. Secondly, the task of physically removing the present equipment off these towers plus the commissioning of new equipment will be a big expense in the short term. Is the company's balance sheet strong enough if the unexpected problems arise? Finally, this has been tried before. In the past companies have consistently tried to use public right of way for the installation of their equipment and regulators for the most part have tripped them up.

To sum up, Sprint' Q3 2015 earnings looked great on the surface but when you delve deeper, inherent risks exist. Firstly, you have the debt that is coming due which will make elevated capex spend difficult in the near term. What would happen if bond yields sky-rocketed and Sprint couldn't sell its debt? Furthermore, its plan of moving its equipment onto poles is laden with risk as the company will come up against governing municipalities and regulators. Caution is warranted at this stage.