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iDEN losses take down Sprint Nextel

Sprint Nextel Corp.’s loss of postpaid iDEN customers accelerated during the fourth quarter, and investors jumped ship late last week after the company announced weak customer metrics. The carrier tried to temper fears with a flurry of other announcements promising revamped price plans, initial markets for its WiMAX network and 5,000 job cuts as it tries to turn things around.
Sprint Nextel said it would meet its financial guidance for 2006, but projected that network and business investments would likely affect its financial performance this year. However, company executives said that the carrier will be able to get its churn rate below 2 percent in 2007 and will begin to see positive numbers for its postpaid customer base-which has seen growth on the CDMA side, but which has been offset by the losses of valuable iDEN postpaid customers.
The company reported 742,000 net customer additions during the fourth quarter. That number reflected a loss of 306,000 postpaid subscribers for the period, widening from a third-quarter postpaid customer loss of 188,000 subscribers. The company said its fourth-quarter postpaid performance was due to “solid gains in CDMA subscribers, offset by a decline in the iDEN base.” The carrier cited similar issues in the third quarter.
CFO Paul Saleh told analysts in a conference call that the first quarter was expected to be the last quarter of overall postpaid losses, and then numbers would start to improve.
“There was solid demand for CDMA voice and data services in the fourth quarter, and we had a strong performance in our mobile virtual network operator channels,” said Gary Forsee, Sprint Nextel’s chairman and CEO. “As we indicated last year, issues related to the iDEN platform resulted in decreased demand for iDEN services and increased churn. We expect the widespread introduction of our first combined CDMA/iDEN phones and improvements in iDEN network performance to benefit push-to-talk subscriber trends,” he added.
Forsee said that iDEN churn was steady overall, but losses had increased in the former Nextel Partners Inc. territory. Sprint Nextel plans the national launch of its dual-mode phones this week, and said that it expects to have 4 million customers using those phones this year. However, the phones initially will utilize the carrier’s CDMA2000 1x network for data and traditional voice services; faster-speed EV-DO capable dual-mode phones won’t be available until later in the year.
Sprint Nextel said it saw the strongest growth through its wholesale business and remaining affiliates, posting 876,000 net additions.
“The reality is that Sprint’s partners are better at selling Sprint’s services than Sprint is,” said Iain Gillott, president of industry analyst firm iGR Inc. “It is one of the great ironies of this that people bitch and moan about Sprint’s network-and they’re using a Virgin Mobile phone. But that’s the power of advertising and perception.”
Perhaps mindful of that, the carrier also said last week that its advertising account is out for review. Company officials said that they’re pleased with the new “Power Up” campaign, but have been operating with two advertising companies since Sprint Corp. acquired Nextel Communications Inc. in 2005 and are concerned about gaining an edge through advertising execution.
Meanwhile, the Boost Mobile L.L.C. sub-brand gained 171,000 net new subscribers during the quarter, a relatively poor performance compared with previous quarters and likely a result of the company’s stated aim to dial back on Boost growth. The carrier cited iDEN spectrum capacity issues in areas where it is going through a rebanding process. However, Boost may get a new direction as the carrier explores using the brand to offer an unlimited local calling service via its CDMA network. The service would compete with flat-rate carriers such as Leap Wireless International Inc. and MetroPCS Communications Inc.
The company blamed credit tightening in the second half of the year for impacting customer growth in the fourth quarter, but also said the restrictions improved the credit mix of fourth-quarter acquisitions. Fourth-quarter churn showed slight sequential improvement, dropping from 2.4 percent in the third quarter to 2.3 percent during the final three months of the year.

Job cuts
The carrier also plans to cut its workforce by 5,000 positions to fewer than 60,000 employees, as it unifies various business and customer care systems. Most of those cuts will be made in the first quarter, officials said.
Gillott noted that the cuts could hurt the company’s ability to perform, since morale is already low and employees are likely to focus their attention on protecting themselves from being fired.

WiMAX winds up
The company also made a number of other announcements last week. It named Chicago and Washington, D.C. as its initial choices for the launch of its WiMAX network, on which it plans to spend about $800 million this year in start-up costs out of a total expected capital spend of about $8.5 billion. The company named a new vice president of customer care and said that it expects to spend additional money this year on handset subsidies and customer retention, as well as on dealer incentives; Forsee said that the typically strong third-party distribution channel had been weak in the second half, but began to respond to increased incentives late in the year.
Forsee also said that the company will hire a new chief operations officer during the first quarter; Forsee took over the duties of that position when Sprint Nextel fired COO Len Lauer in August. The company said at the time that it would not fill the COO position.
Sprint Nextel said that its performance has not substantially affected its projected financials for 2006, but that its “lower margin revenue mix, investment of an additional $1.1 billion in our business operations and startup costs associated with the buildout of our fourth-generation WiMAX wireless network will pressure profitability” in the near term.
However, those promises didn’t appear to reassure investors; Sprint Nextel stock received several downgrades from investment companies, and had plunged from around $19.50 before the operations announcement to about $17.50 by the end of the week. Sprint Nextel stock was trading above $25 in early 2006, dropped significantly after a poor second-quarter performance, and had been improving since the carrier announced that it would proceed with a WiMAX network late last year.
Analyst Tom Watts of Cowen & Co. L.L.C. said in a research note that he still expects Sprint Nextel to rebound, but the company’s guidance “suggests it is likely to take longer than previously expected.”
“I’m not sure there’s any good news coming here in the next couple of quarters,” Gillott said. However, he pointed out, “We’re not talking about a failing company that’s losing money. We’re talking about somebody that’s not growing as fast as their competitors. In any other industry, you’d look at it and go, ‘That’s not so bad.’ But this is wireless, so we get a little goofy.”

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