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Sprint Nextel posts soft quarter

Sprint Nextel Corp. reported a mixed first quarter, with gross additions and wireless revenues up compared to the same period last year. However, merger-and-integration and marketing costs pulled down the company’s earnings.

Sprint Nextel said it added 1.3 million net subscribers, with the mix again showing a high percentage of prepaid adds: 563,000 postpaid CDMA and iDEN customers, 502,000 Boost Mobile L.L.C. iDEN subscribers, and 273,000 customers added through wholesale and Sprint Nextel’s remaining CDMA affiliates. Boost remained red-hot as a customer attraction accounting for 37.5 percent of Sprint Nextel’s net customer additions during the quarter.

Sprint Nextel’s earnings took a hit from $105 million in costs related to mergers, integration and the planned spinoff of its local wireless business, along with $67 million in restructuring and asset impairment charges. The carrier also incurred a $564 million amortization charge related to Sprint Corp.’s acquisition of Nextel Communications Inc. and the purchases of five affiliates; about $75 million was related to the affiliate purchases, according to Chief Financial Officer Paul Saleh.

Sprint Nextel acquired three of its affiliates last quarter: two CDMA affiliates, Alamosa Holdings Inc. and Enterprise Communications Partnership; and Velocita Wireless L.P., which added to the national carrier’s 900 MHz spectrum portfolio. As a result of affiliate acquisitions completed in the quarter, Sprint Nextel was able to count an additional 1.6 million network users as direct customers.

The carrier’s churn rate held steady at 2.1 percent, and Sprint Nextel ended the quarter with about 48.9 million subscribers-of which about 39.1 million are direct Sprint Nextel postpaid customers.

Sprint Nextel, which continues to lead the national carriers in average revenue per user, saw ARPU declines of about 3 percent compared to the same quarter of 2005, to about $62. Boost’s ARPU dropped slightly, from $37 in the fourth quarter of 2005 to $36 during the first quarter of 2006. But the carrier continued to lead in data ARPU, which was up to about $7 of total ARPU-a jump of about 33 percent from the same period last year.

“Within ARPU, we are seeing a much larger data contribution, offset by lower overage charges and negative impacts from the PCS affiliate acquisitions” such as loss of travel revenue, said Len Lauer, Sprint Nextel’s chief operating officer.

Sprint Nextel’s wireless revenues jumped 13 percent pro forma from the prior year’s first quarter, to $8.5 billion. Overall, the company’s net operating revenues grew 9 percent pro forma to $11.5 billion.

“We had not expected a strong [first quarter],” noted Tom Watts, wireless analyst for Cowen & Co, adding that even so, “Sprint came in a little light on some metrics.”

“This was a soft quarter for Sprint Nextel, but the company reiterated guidance and as previously noted expects synergies to ramp throughout the year,” said Bear Stearns & Co. Inc. analyst Mike McCormack. “We see the Sprint Nextel pictures becoming clearer over the next few months.”

Sprint Nextel officials noted that they are on track to complete the spinoff of the company’s local wireline business, dubbed Embarq, and preparing to launch bundled communication services in seven markets in the second half of 2006 as part of the carrier’s joint venture with several cable companies.

The third-largest U.S. carrier also reported that it had closed 104 retail stores by the end of the first quarter, or about two-thirds of the 170 or so that it plans to close by the end of the year. The company expects its employee reduction of about 4,500 positions will be mostly complete by the end of the second quarter.

Sprint Nextel has acquired five of its affiliates and expects to close on the purchases of Nextel Partners Inc. and UbiquiTel Inc. in the second quarter. Four independent affiliates remain.

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