UPDATE: Sprint Swings To 2Q Loss, Sees Worsening 3Q
Published on: 6th August 2008
NEW YORK -(Dow Jones)- Sprint Nextel showed flickering signs of resuscitation in the second quarter but dashed any hopes of a quick recovery with a warning of further hemorrhaging to come.
Shares fell 10% to $7.66.
Unlike every other major wireless carrier, Sprint continues to lose customers and, in particular, valuable subscribers who sign long-term contracts and pay a higher monthly bill. The company has managed to cut costs and show some improvement, but it hasn't yet answered how it will turn itself around. This is particularly worrisome as more than four out of every five consumers in the U.S. already has a cellphone - a decreasing base of potential new customers.
In the second quarter, Sprint lost 901,000 customers and reported a turnover rate for its contract subscribers of 2%. While the results mark an improvement from the first quarter, they are overshadowed by Sprint's belief that the turnover rate and subscriber losses are expected to worsen in the third quarter.
The third quarter is typically a stronger period for Sprint, according to Walter Piecyk, an analyst at Pali Research. He was surprised at the expectation that gross subscriber losses would only moderate, rather than show improvement.
"When they're already down that much, that's problematic," he said. "At some point, you have to go out and attract new customers and they're not doing that."
Sprint Chief Executive Dan Hesse noted that his focus on customer retention over adding new customers would weigh on gross additions, but he believed it represented the best return on investment.
Once Sprint's reputation is restored with existing customers, the value of the brand will improve, Hesse said in an interview with Dow Jones Newswires.
"There's a lag between making improvements and when the rest of the world finds out about it," he said. "We do need to get back to growth, but we realize it will take a while for customers to realize it."
Sprint reported on Wednesday a second-quarter net loss of $344 million, or 12 cents a share, compared with a year-earlier profit of $19 million, or a penny a share. Revenue fell 11% to $9.06 billion.
Excluding items, Sprint earned 6 cents a share, topping Wall Street's average forecast of 3 cents a share.
Hesse has taken bold steps to change Sprint's direction. Hesse consolidated its headquarters to Overland Park, Kan., and laid down plans to spin off its WiMax business. In the second quarter, it closed 50 direct retail stores and cut the number of dealers by 25%. Its Apple iPhone imitator, Instinct, has sold out in Sprint stores.
"We made progress in the quarter, but we're far from satisfied," Hesse said. "We're still not in a position to deliver sustained earnings and revenue growth. I've been clear this will take time."
Sprint hasn't figured out a way to meaningfully reduce the number of customers who have defected. Larger carriers AT&T and Verizon Wireless have picked off the best customers and continue to do so. AT&T added 1.3 million total subscribers, while Verizon Wireless added 1.5 million customers in the second quarter.
One method Hesse wasn't high on was lowering prices. He pointed to the "Simply Everything" plan as a way to attract higher value customers. He said he was reluctant to lower prices for growth. "You shouldn't anticipate that we'll be looking at cutting prices as a way of attracting subscribers," he said.
While the turnover rate, a metric closely monitored by Wall Street, improved by 45 basis points, the improvement likely wasn't enough to meet expectations that were propped up by the success of the Instinct.
Piecyk said before the earnings release that Sprint had to report a turnover rate of 1.9% or less to surprise investors. He noted normal seasonal issues helped results in the second quarter.
The subscriber losses were partially offset by increased customers from its wholesale business and from 112,000 new Boost Unlimited customers.
The monthly average revenue per user was $56, flat with the first quarter, although wireless revenue of $7 billion fell 11% from a year earlier and fell below Bank of America analyst David Barden's estimate of $7.93 billion.
Shoring up its balance sheet and cash concerns, Sprint also said it intends to offer $3 billion worth of cumulative perpetual convertible preferred stock. The company ended the quarter with $3.5 billion in cash and $1.2 billion of borrowing capacity under its revolving-credit facility.
New Chief Financial Officer Robert Brust said the company is taking on fewer "subprime" customers with poor credit. The company is also in compliance with its debt covenant for the "foreseeable future," he said. He is confident about the financial health of the company.
Brust added he expects Sprint to substantially improve its free cash flow in the second half, and that the company expects to retire at least $1 billion in debt.
The company declined to comment on the potential use of cash from the convertible debt offering.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020; firstname.lastname@example.org
(END) Dow Jones Newswires