Masayoshi Son, chairman and chief executive officer of SoftBank Group Corp., speaks during a news conference in Tokyo, Japan. (Photographer: Noriko Hayashi/Bloomberg)

SoftBank Tops Estimates as Sprint Finally Delivers Income

(Bloomberg) -- SoftBank Group Corp.’s fourth-quarter profit topped analysts’ projections, thanks to Sprint Corp.’s first annual net income in more than a decade. The U.S. wireless subsidiary is planning to merge with rival T-Mobile US Inc.

The Japanese telecommunications provider and technology investor said operating profit was 155 billion yen ($1.4 billion) in the three months ended March, more than the 137.4 billion yen average of analyst estimates compiled by Bloomberg. Revenue was 2.35 trillion yen.

The results are overshadowed by the sale of Sprint, a deal that SoftBank founder Masayoshi Son had pursued for years. T-Mobile last month agreed to acquire the smaller rival for $26.5 billion in stock, but the merger is likely to face heavy scrutiny from regulators. SoftBank is also planning an initial public offering of its domestic telecom operation, as Son has shifted his focus to SoftBank’s longer-term future and investments in overseas technology companies. Last year, he formed the Vision Fund, raising more than $90 billion from big backers including Saudi Arabia and Apple Inc.

“Investors want to hear from Son about two things most of all: what will happen to Sprint and his thoughts about the investment fund,” said Tomoaki Kawasaki, an analyst at Iwai Cosmo Securities Co. “Investors expect that the Sprint deal will improve earnings that SoftBank books on its balance sheet, but they want to hear it from Son directly.”

The Sprint sale follows years of deliberations between Deutsche Telekom AG, the German company that controls T-Mobile, and SoftBank. Son sought to acquire T-Mobile in 2014, but the deal fell apart on antitrust concerns. President Donald Trump’s administration raised prospects of a more forgiving regulatory environment, but a round of talks collapsed last year. A merger would reduce the U.S. wireless industry to three major competitors from four, and they will have to prove the deal won’t result in higher prices for consumers.

“I had make one compromise to get this deal done — let go of control of Sprint,” Son said at a briefing in Tokyo. “It’s embarrassing, considering how much I’ve talked about the need to keep control in the past. But I think some short-term shame is worth bearing, if there is a longer-term victory and a more meaningful gain to be had.”

Sprint and T-Mobile have complementary wireless spectrum that could be a strategic advantage as the companies build out a 5G network. T-Mobile controls a large portfolio of lower-band airwaves that can travel long distances and pass through walls and windows. Sprint, meanwhile, has the largest U.S. holding of higher-band, 2.5-gigahertz spectrum, which can handle more data capacity but over limited distances.

Sprint’s outgoing Chief Executive Officer Marcelo Claure has succeeded in reversing a customer exodus and cutting costs at the carrier since Son put him in charge of the turnaround. Sprint added 39,000 wireless subscribers in the fiscal fourth quarter, compared with a loss of 118,000 a year earlier. The company reported quarterly net income of $69 million last week, while analysts were projecting on average a net loss of $349 million. Claure will take the chief operating officer job at SoftBank and become CEO at SoftBank Group International. The move is expected to happen before the end of the month.

Revenue from domestic telecom operations, which include wireless, broadband and fixed-line services, was mostly flat at 3.23 trillion yen last year. Profit declined 2.6 percent to 1.18 trillion yen after the company offered discounts to lure users and increased capital outlays to improve network quality. SoftBank, which has 33 million mobile subscribers, said sales and profit will increase this fiscal year.

The Vision Fund contributed 303 billion yen to income in the year ended March, the company said. The amount mainly reflects an unrealized gain on valuation of SoftBank’s investment in Nvidia Corp. The company took a stake of just less than 5 percent in the chipmaker last year. Nvidia’s stock rose 81 percent in 2017 and another 20 percent this year to March.

Son has stepped up investments in technology companies over the past year, using cash flow from his telecom operations to take stakes in startups such as Uber Technologies Inc., China’s Didi Chuxing and India’s Flipkart Online Services Pvt. Combined investments by the Vision Fund, SoftBank and other entities totaled $29.7 billion to date. Son said he expects several IPOs a year from the fund.

Investors have given SoftBank little credit for those deals, as the company’s market capitalization was about half the value of its assets, worth at least $160 billion. SoftBank’s shares have declined about 4 percent this year, while the value of its stake in Alibaba Group Holdings Ltd. increased by 14 percent. SoftBank holds equity in Alibaba worth about 15 trillion yen, or more than 50 percent above its own market value.

“The thinking behind the Vision Fund sort of makes sense, but what not clear is how will this impact SoftBank’s earnings in the short term,” Kawasaki said. “It would be great if the company could give investors a way to track performance of all these investments. That might help narrow SoftBank’s valuation gap.”

©2018 Bloomberg L.P.