Sprint Nextel Corp.’s performance is likely to get worse before it gets better, the company told agitated investors last week.
The company’s stock plummeted to new lows after it reported a $29.5 billion loss for the fourth quarter due to a write down of the value of Nextel Communications Inc., which Sprint Corp. acquired in 2005. (Without the write down, Sprint Nextel would have reported a slight profit for the quarter.) Sprint Nextel’s stock hovered around $8 following the news and later sunk to as low as $7.24 per share last Friday. The plunge dropped Sprint Nextel’s market cap to less than $21 billion, well below the nearly $70 billion the company enjoyed following its acquisition of Nextel.
Hope for 2010?
“To be perfectly frank, the issues we face are more difficult than what I had expected to find,” President and CEO Dan
Hesse said in a conference call with analysts. “We will have a difficult 2008 as we turn this ship around, but the long term looks promising.”
Even though Hesse has only been at the helm for two months, Wall Street’s patience seems to be waning faster than ever. Standard & Poor’s placed the company’s corporate credit rating on CreditWatch, which essentially translates to a loss of investor support, and financial firms have slashed projections for the company’s stock based on its downward trend on financials. Yet many, including Cowen and Co. industry analyst Tom Watts, are holding out hope that growth will resume by 2010.
Board trouble
Meanwhile, Pali Research’s Walter Piecyk and Joseph Galone are clamoring for investors to remove up to four members from Sprint Nextel’s board whom they blame for poor oversight during the previous management team’s reign.
The financial firm called the board members out for approving the $30 billion acquisition of Nextel that was almost entirely written down last week; approving former CEO Gary Forsee’s turnaround plan early last year; appointing Forsee to executive chairman of the board; and permitting him to prematurely announce WiMAX plans. Pali Research wants investors to give Hesse some help in the form of fresh blood on the board and is asking for the removal of board members Irvine Hockaday, Linda Koch Lorimer, Gordon Bethune and Keith Bane.
Taking the blame
And Hesse isn’t dodging the mistakes that most blame for bringing the company to this point.
“Of all the metrics that govern this business, churn is by far the most important. Because of the customer experience we provided last year, churn is accelerating. As you may know, we have performed poorly in customer surveys that were taken last year. This has hurt our brand,” he said in the call. “The No. 1 goal and priority is to reduce churn. Do whatever it takes to keep those – once we have a customer on our network, they’re really valuable.”
Metrics challenged
Postpaid churn hit 2.3% during the quarter, which reflected no change from the previous quarter, the company said. Prepaid churn from Boost Mobile reached 7.5%, a significant jump from the 6.2% rate reported in the previous quarter and 6.5% in the fourth quarter of 2006.
The No. 3 carrier’s coveted postpaid customers continued to leave in droves as well. The company previously reported it had lost 683,000 subscribers in the fourth quarter and warned analysts it expects to lose another 1.2 million customers in the current quarter. Prepaid and wholesale channels are the only areas where the company is experiencing growth. Sprint Nextel ended 2007 with 53.8 million subscribers on its network, representing a net gain of 700,000 customers on the year. The growth was due to a gain of 1.9 million prepaid and wholesale customers, which offset the massive exodus on the postpaid side of the business.
Prepaid growth was scant at best. The company added 257,000 prepaid customers through the recent launch of an unlimited calling plan by its Boost Mobile affiliate in the quarter, yet lost 202,000 traditional Boost prepaid customers. Wholesale channels added 500,000 customers in the quarter.
The customer losses were especially galling since Sprint Nextel’s nationwide competitors, including larger rivals AT&T Mobility and Verizon Wireless as well as smaller rival T-Mobile USA Inc., all managed to post robust Q4 growth numbers. AT&T Mobility and Verizon Wireless both signed up more than 2 million new customers each, while T-Mobile USA managed to attract nearly 1 million new subscribers.
The smaller base of postpaid users cut into Sprint Nextel’s average revenue per user as well. Postpaid ARPU hit $58 during the quarter, which is down from $59 in the third quarter and more than $60 in the fourth quarter in 2006. Data revenues continued to grow, though, with more than $11 in data ARPU during the quarter. Prepaid ARPU was down to less than $28, from $30 in the third quarter and almost $32 in the year-ago period.
“So in conclusion, our business is not performing well right now. Because we have not provided the right customer experience, customers are leaving us. We are working aggressively to turn this around, but our financial performance will not improve overnight,” Hesse said.
WiMAX boost
Hesse clarified that the company’s top priority rests with its core business, however he hinted what he sees as an “enormous asset – nearly 100 megahertz of unutilized spectrum – and the opportunity to have a three-year head start with our Xohm (mobile WiMAX) service,” he said.
Sprint Nextel continues to talk with Clearwire Corp., which had plans to jointly build a nationwide WiMAX network with the carrier until the deal fell apart last November, he said, adding that no new agreement has been reached.
In the quarter, the company recorded an impairment charge of $29.7 billion on its Nextel business, which resulted in a $29.5 billion loss on the quarter. The carrier recorded a net income of $261 million in the year-ago period.
