Sprint Nextel Rings Up Strong Profits

The wireless services provider lost high-margin subscribers, but net income jumped nearly 33%

Sprint Nextel (S) said Feb. 28 that it lost high-margin subscribers, but profited more during the three month period ended Dec. 31. The Reston (Va.) wireless services provider continues to struggle with integrating its business with Nextel Partners while facing cut throat competition.

Sprint's net income rose to $261 million during the quarter, up 32.5% compared to the same period last year, according to a press release Feb. 28. And the company's fourth-quarter revenue rose 7% year-over-year to $10.4 billion.

In the quarter, the company said it added a total of 742,000 wireless subscribers, but lost 306,000 post-paid subscribers, mainly in the Nextel business.

Ever since Sprint acquired Nextel in 2004 in a $35 billion deal designed to help the company compete against larger rivals Cingular (T) and Verizon Wireless (VZ), the merged giant has struggled with spikes in customer defections and drops in per-user revenue. After Sprint preannounced that it lost 306,000 subscribers during the fourth quarter, investors sold the stock 11% on Jan. 9. As Sprint's share price cheapens, some have speculated that the company may end up as an acquisition target itself (see BusinessWeek.com, 1/10/07, "Sprint's Subscriber Woes Deepen").

On Feb. 28, Sprint shares rose 5.4% to $19.44 in midday trading on the New York Stock Exchange. Investors were regrouping after having dumped equities the previous day amid fears about China and the global economy.

Some analysts adjusted their forecasts on Feb. 28. Expecting Sprint to earn less on each sale in 2006 compared to 2007, Standard & Poor's Equity Research lowered its estimate on the company's earnings per share in 2007 to 82 cents from 90 cents, and kept a hold opinion on the stock. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)

CEO Gary Forsee is continuing with his uphill battle, and plans steps like investing in projects during 2007 involving long distance and broadband wireless networks. Sprint is also going to make another 5,000 job cuts this year and hopes to weed out the Nextel customers who aren't paying, among other things.

One other change: Sprint said Feb. 28 it expects to spend $8 billion during the year instead of $8.5 billion on its business improvements, after having deployed wireless networks faster than anticipated during the fourth quarter. But the company is sticking to Jan. 8 forecasts for 2007 such as revenues of $41 billion to $42 billion. The consensus estimate had been for $41.14 billion, according to the San Francisco research firm StarMine.

"It was of little surprise to us that the firm is still struggling with parts of the effort to integrate Sprint and Nextel and that management of the business, particularly on the old Nextel side, has been subpar," wrote Morningstar analyst Michael Hodel in a Jan. 9 research note. "But the extent to which management expects these issues to hurt the company was substantially greater than we'd expected." He added that he believed Sprint could turn around its performance and that "the stock is one of the most attractive in the telecom industry."

(BusinessWeek.com reporter Olga Kharif contributed to this report.)

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