Sprint Nextel Corp. is doing a fair job of imitating a punching bag, getting pummeled left and right by sliding stock prices, gloomy predictions and integration issues. But while things look rocky for the carrier in the short term and analysts aren’t holding out much hope for good third-quarter results, many industry observers think the No. 3 carrier will be able to turn itself around once it pushes through its merger pains.
“These things usually pay off in the end, but it can be very painful,” said Jeffrey Hines, president of North Moore Capital Ltd.
Since Sprint Corp.’s acquisition of Nextel Communications Inc. in mid-2006, the company has had a long list of challenges to deal with. Among them:
Sprint Nextel has been trying to juggle a re-banding effort that it inherited from Nextel and was part of the conditions for the acquisition, forcing the carrier to carefully manage capacity on its iDEN network in some markets-particularly in regards to Boost Mobile L.L.C. customers, who have been a driver of much of the company’s growth in recent quarters. Meanwhile, the carrier is seeking to gain a network advantage by starting to roll out enhancements to its CDMA2000 1x EV-DO network this quarter and to have a new WiMAX network using its substantial 2.5 GHz spectrum ready to begin launches in late 2007.
Handsets
Historically a leader in handset innovation, Sprint Nextel has been largely supplanted in that position by Cingular Wireless L.L.C. and Verizon Wireless. Sprint Nextel also had a gaping hole in its line-up with the absence of the wildly successful Motorola Inc. Razr. However, the carrier is getting back on track and says it will have the Razr as well as the Krzr and Slvr handsets available in time for the holiday season. Meanwhile, the company also is trying to get dual-mode CDMA/iDEN handsets out in time for the holidays.
Partnerships
Sprint Nextel is still in the process of acquiring its affiliates and dealing with lawsuits related to the Nextel acquisition. An appeal is pending on a judge’s ruling that the carrier will have to divest its Nextel-branded operations within the territory of CDMA affiliate iPCS Inc. Meanwhile, the carrier participated in the recent spectrum auction with several cable company partners, and has promised that the first fruits of its separate joint venture with cable operators will begin to materialize in the fourth quarter with launches in seven trial markets.
Integration/leadership
Sprint Nextel selected a single billing and customer-care vendor, Amdocs. The carrier also set a goal this year of closing between 160 and 170 retail locations and cutting 2,500 jobs. Perhaps most challenging is the meshing of two separate corporate cultures, which analysts say were quite different to begin with.
“As people retire and move on, you’ll bring on new people,” Hines said. “That’ll help get to one Sprint Nextel cultural setting that you need to make the company really be clicking on all cylinders.”
The company’s chief operating officer, Len Lauer, stepped down two months ago after dismal second-quarter financials. Last week, the company announced that Tim Donahue, chairman of the board and former Nextel head, was retiring. Neither of those positions has been filled, and Chief Executive Officer Gary Forsee took over COO duties.
Customers
The carrier tightened its credit requirements to shift its focus away from sub-prime customers, which affected its churn rate. Migrations to lower-priced plans affected average revenue per user numbers, and much of Sprint Nextel’s recent growth has been in prepaid. Third quarter traditionally sees slightly higher churn than other quarters, but analysts still predict that the carrier will be quite a bit behind its larger rivals in terms of churn.
“The thing that’s really killing them is the churn,” said Tole Hart, senior analyst for mobile communications at Gartner Inc. “They’re not really doing that bad on gross adds, but their churn is high, so they’re not really getting that many net adds.”
Marketing
After limping along with advertising campaigns that analysts criticized as unfocused or bland, the carrier has launched a new campaign with the tagline “Power Up” that is supposed to emphasize network capabilities. Sprint Nextel has also gone after Cingular in particular, both in ads comparing its EV-DO network speed to Cingular’s EDGE network and in complaints and a lawsuit related to Cingular’s “fewest dropped calls” ad campaign.
However, Cingular’s experience with its own integration issues following its acquisition of AT&T Wireless Services Inc. in 2004 may provide an outline by which to judge that of Sprint Nextel, according to Hines. He noted that it took time for Cingular to begin turning in good results after it acquired a floundering AWS-and Sprint Nextel faces a greater challenge in bringing together even more disparate cultures, technologies and networks. “This is a common pain. Anybody’s going to go through this, and it’s going to cause big hiccups in the results, near-term,” Hines said.
Cingular has only recently completed the integration of AWS’ TDMA network and is nearly done with its GSM integration plans. Cingular’s customer growth has taken off in recent quarters, leading to what Merrill Lynch analyst David Janazzo described as a bifurcating of the industry: Cingular and Verizon Wireless surging ahead, and T-Mobile USA Inc. and Sprint Nextel falling behind.
Stock
Sprint Nextel’s operational performance has not been gaining Wall Street’s good graces. The company’s stock has been in a steady slide since spring, even before the poor second quarter was recorded. Sprint Nextel stock had topped $25 per share, and as of late last week had slid below $18.
“The stock is inexpensive,” Morgan Stanley analyst Simon Flannery noted in a research note, “but we expect the balance of the year to continue to be challenging with rebanding at Nextel, and rising churn.”
Sprint’s stock specifically has underperformed compared to the rest of the telecom industry during the past decade, the Morgan Stanley report concluded.
Analysts have given a dour outlook for the company’s third quarter, although a ray of light came from Cowen & Co.’s Tom Watts, who wrote recently that Sprint Nextel could be positioned to bounce back in the fourth quarter and in 2007.
Hines agreed that the company has the potential to bounce back.
“At the end of the day,” he said, the merger “will lead to a much stronger company. The question is, when `the end of the day’ is going to be.”
