A Tough Slog for Sprint

The company posted a quarterly loss Wednesday as it scrambles to curtail customer churn and beef up broadband offerings

Sprint Nextel (S) continues struggling against its competition while having problems with the customers it acquired in its merger with Nextel Communications.

The Reston (Va.) company lost $211 million (7 cents per share) during the quarter ended Mar. 31, compared to $164 million earned (5 cents) during the same period last year. Things such as spending impacted the company's profitability during the quarter. "However, we are seeing some positive tradeoffs in the form of enhanced competitiveness," CEO Gary Forsee in a statement May 2.

Ever since Sprint bought Nextel in 2004 in a $35 billion deal, the merged giant has struggled with spikes in customer defections and drops in per-user revenue. The number of Sprint Nextel customers who paid for their phone usage at the end of the month declined by 220,000 during the March quarter, bringing the total number of post-paid subscribers to 41.6 million.

The rate at which wireless post-paid customers defected amounted to 2.3%, compared to a little over 2.3% in the fourth quarter 2006 and 2.1% in the year-ago first quarter. Management announced that it is targeting a monthly churn rate below 2% across all post-paid customers by the end of 2007, according to Morningstar.

A bright point was that the company's wireless business added nearly 600,000 subscribers and ended the quarter with 53.6 million total, or 10% more compared to the same period last year. But much of the gains came from prepaid customers, who don't tend to pay as much or as regularly.

In the face of tough competition from larger rivals like Cingular (T) and Verizon Wireless (VZ), Forsee has been working on plans to invest in projects during 2007 involving long distance and broadband wireless networks. During recent months, for example, his company has launched faster mobile broadband networks in cities like Richmond, Orlando and Tennessee. The company has also been extending its wireless coverage capacity in cities like New York and Boston.

In an effort to improve its poorly performing "Power Up" ad campaign, Sprint in recent months selected Omnicom (OMC) unit Goodby, Silverstein & Partners to manage its branding and advertising efforts. The telecom also spent on other efforts such as restocking wireless handsets in some markets. Sprint's total operating expenses were $8.6 billion in the March quarter, an increase of 7% year-over-year.

Even so, sales haven't picked up much yet. Sprint's total revenue amounted to $10.1 billion during the March quarter, with wireless revenue accounting for $8.7 billion and wireline $1.6 billion. During the same period last year Sprint had $10.07 billion in sales.

But the company has been trying to weed out Nextel customers who aren't paying, among other things. "The firm's decision to tighten credit standards has contributed to its poor customer growth recently. However, the payoff from this decision should be seen over the course of 2007 in the form of lower involuntary churn," Morningstar analyst Michael Hodel, CFA said in a research note.

Investors grew more optimistic and bid up Sprint's stock by 2.7% to $20.54 per share in early trading on the New York Stock Exchange after the news on May 2. The stock price has risen from its 52-week low of $15.92 on Aug. 22.

Some are still cautious.

"We see the Street's '07 and '08 EPS estimates of 90 cents and $1.10 as too high, compared to our estimates of 82 cents for '07 and 95 cents for '08," Standard & Poor's Corp. analyst Kenneth Leon said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) "We think it will be challenging for Sprint to both grow revenues and widen margins in the competitive wireless market." Leon reiterated a sell opinion on the stock.

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