Sprint Seen Limping Through '08 on Weak Subscriber Growth
Published on: 28th Feb 2008
Note -- this news article is more than a year old.
NEW YORK (Dow Jones) For a company that emphasizes speed in its marketing, turning around lackluster subscriber growth is unlikely to happen quickly for Sprint Nextel.
Chief Executive Dan Hesse, acknowledging that things were worse than even he expected, said during a Thursday conference call that customer defections would intensify in the first half of the year. Others say Sprint's problems - the complications of running two separate networks, poor customer service and a muddled marketing message - coupled with a weak U.S. economy, maturing industry and formidable rivals may mean things don't turn around until 2009.
"It's going to take more than a year," said Ping Zhao, an analyst for CreditSights. "The subscriber growth is a problem that's not easily fixable."
The Overland Park, Kan., company's decision to again tap its revolving credit facility for $2.5 billion also suggests it expects more problems.
On Thursday, Sprint said it sees losing another 1.2 million post-paid subscribers - or customers who sign long-term contracts and pay monthly bills - in the first quarter, equal to the total loss of contract customers sustained last year. Hesse warned analysts during the conference call the trend would likely continue into the second quarter.
Hesse is focused on improving the customer experience, which he believes will be the key to turning around the exodus of customers.
But the company will be hard-pressed to do so while it maintains two separate networks; Sprint uses a standard called CDMA while its Nextel business uses iDEN and are not compatible, with a few exceptions.
"As long as they keep the networks together, the cost structure will be a problem," Zhao said. "The structure, as is, is very difficult to fix."
In essence, Sprint is operating two smaller networks rather than one large one. Those two networks compete against much larger rivals in AT&T and Verizon Wireless, jointly owned by Verizon Communications and Vodafone Group.
While Sprint can merge certain expenses such as billing, sales and back-office operations, certain redundant expenses always will exist, putting it at a competitive disadvantage to AT&T and Verizon Wireless.
Growth in the wireless industry, however, is reaching maturity, meaning there are fewer customers to grab. Already large carriers are going after niche audiences such as children and senior citizens for growth. Even if Sprint can improve its customer service and clean up its reputation, there may not be that many subscribers left to grab.
At the same time, the broader economy is weakening as consumers hold off spending. Sprint isn't the cheapest game in town - Deutsche Telekom's T-Mobile USA offers more competitively priced plans.
Acknowledging the difficulties, Hesse said he was focusing on reducing the rate of subscriber cancellations. He wants to preserve the core of Sprint's customer base of 54 million by improving and simplifying the customer experience.
"I feel a tremendous amount of pressure to improve performance as rapidly as possible," Hesse told Dow Jones Newswires after the conference call.
Still, it would take a while before things turned around, he said.
One fund manager, who follows the telecom industry and used to own a stake in Nextel, called Sprint a "value trap," saying it looked really cheap on a historical basis, but that it was poised to fall further. Sprint shares currently trade at 12.7 times 2008 earnings estimates, below its five-year average of 17.8 times.
"It seems to me people keep hoping or wishing that things will get better," the manager said. "It's like trying to turn an ocean liner."
Sprint shares fell 9.6% Thursday to close at $8.09. Earlier, they fell 13% to $7.75, their lowest level since October 2002. In recent late trading shares are down to $8.07.
The weaker expectations led Fitch to downgrade Sprint's credit rating to junk status, while Standard & Poor's put the company on CreditWatch with negative implications.
Likely weighing on sentiment was Sprint's decision to tap into its credit facility, which is often seen as a sign of desperation.
The move was done to increase financial flexibility and reduce the risk of needing to borrow money at a later time and steeper rates, Hesse said, noting the uncertainty in the credit markets.
But the company also stopped paying its dividend and didn't buy back and shares in the quarter, suggesting pessimistic expectations for the future.
"Sprint is taking steps on the financial flexibility front suggesting lean times are coming," Banc of America Securities analyst David Barden said in a note.
Some, however, are giving Hesse time and the benefit of the doubt.
"It's only a start," said Jonathan Atkin, an analyst at RBC Capital Markets. "They're not rushing into things."
Despite its problems, Sprint still owns a valuable amount of spectrum. And while shrinking, the customer base is still a large one, only behind AT&T and Verizon Wireless.
The company has its hopes pinned on Q Chat, a walkie-talkie-type service that mimics the push-to-talk function on Nextel phones. It will aggressively push the feature and other data services as voice revenue matures.
But there's only so much slack Wall Street is willing to give. Hesse will need to show a clearer strategy in the next quarter or two, as well as show some progress by 2009, Atkin said.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020; email@example.com
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