Nextel Communication Inc.’s third-quarter operating results indicated it reached the financial milestone of achieving domestic positive operating cash flow, but investors clearly focused on other aspects of the financials, as the company’s stock fell more than $4 per share when results were released Oct. 15.
By mid-afternoon, the stock rebounded slightly in heavy trading on the NASDAQ stock exchange to close down $2.38 at $17.31 per share at the end of trading.
Investor concerns focused primarily on a decline in subscriber adds compared with the previous quarter and an increase in capital expenditures. Nextel added about 375,000 domestic digital subscribers to its network during the third quarter, compared with 400,600 during the second quarter. The company ended the third quarter with about 2.42 million digital units in service, with an average revenue per unit of $70.
“We were slightly down in our net subscriber adds from where we were in the prior quarter. This is the first time we’ve ever been sequentially down,” said Steven Shindler, Nextel’s chief financial officer. “Investors wonder about the momentum.”
Shindler attributed the consecutive quarterly decline in subscriber adds to the fact that not only are the summer months typically a slow season for wireless sales, but also that Nextel’s introduction of the Motorola i1000 handset in September caused a slowdown in August sales in anticipation of the new product.
However, Nextel underestimated demand for the new handset and did not have enough supply during the first month of the offering.
“There were not enough handsets the first month we received shipments,” Shindler said. “When Nextel introduced the i600 in January, it accounted for 15 percent of net adds that month. We thought the i1000 would do better than that.”
More than 30 percent of new subscribers in September signed up with the i1000, said Shindler. “If we had the phone in that month, we could have added more customers. We didn’t anticipate as many as we would need that month. Had we given Motorola a higher forecast, we could have had that phone,” Shindler stated. The company now is stocked up on the i1000 handsets and said that “supply will not be an issue” going forward.
“This is a classic case of not seeing the forest for the trees,” said Colette Fleming, a wireless analyst at Morgan Stanley & Co., New York. “We were really surprised to see the stock trade-off and even more surprised to hear the primary concern was that their subscriber adds were down sequentially.
“Everyone’s gotten too obsessed with whether they came in at 400,000 or 375,000. These are still very impressive subscriber numbers-the best subscriber figures in the industry in the [United States].”
Net loss deepened 39 percent to $442 million, or $1.56 per share, compared with $319 million, or $1.26 per share for the same period last year. However, the loss was a 20-percent improvement on the loss of $531.3 million, or $1.94 per share, for the previous quarter.
The third-quarter loss includes a $40.1 million impact for cumulative preferred stock dividends, a $69 million impact from international operations and a one-time non-cash charge of $46.9 million from losses on interest-rate hedging activities.
Revenues during the third quarter totaled $506.6 million, 144 percent better than the $207.2 million in revenues reported for the same period a year ago. Churn in domestic operations was 1.75 percent. Capital expenditures, net of capitalized interest, totaled $511.5 million for the recently completed quarter, about 19 percent more than the $430 million in capital expenditures during the previous quarter.
“On the capital expenditures side, we alluded in our second-quarter [earnings report] we were going to [accelerate] expenditures,” Shindler said. “From a quality standpoint we were a little behind where we needed to be …
“Our network now is in the best shape it’s ever been in. We feel very justified on our expenditures.”
