SPRINT NEXTEL CORP.’S OPERATIONAL STRUGGLES sunk to new lows last week as the nation’s No. 3 carrier had its CEO step down and the company reported that it would not meet its guidance for the year.
The carrier noted that it lost 337,000 postpaid customers during the third quarter, compounding its struggles to retain once-lucrative iDEN subscribers following Sprint Corp.’s acquisition of Nextel Communications Inc. in 2006. The losses come at a time when its nationwide rivals AT&T Mobility, Verizon Wireless and T-Mobile USA Inc. have consistently posted at least 1 million net customer additions per quarter and even smaller rivals like Alltel Corp. have managed to grow their customer bases.
Forsee replacement sought
Sprint Nextel said it has formed a committee to search for a new CEO to replace Forsee, who was brought to the carrier after a protracted fight with BellSouth Corp. and oversaw Sprint’s $35 billion acquisition of Nextel, and will focus on external candidates. In the meantime, Paul Saleh, Sprint Nextel’s CFO, will take over as acting CEO. Board member James Hance Jr. will serve as acting non-executive chairman.
Cowen & Co. analyst Tom Watts said that the company had previously tried to recruit a new COO to replace Len Lauer, who left Sprint Nextel in August and whose position has not been filled; his duties were assumed by Forsee. But, Watts said, no one wanted the No.2 slot, and attracting a high-caliber CEO should be easier for the carrier.
“The new CEO will benefit from the completion of merger integration efforts already under way, but must grapple with the larger issue of making Sprint relevant in the marketplace,” Watts said.
MarketWatch reported that early speculation as to who will fill the slot has included Inmarsat plc CEO Andrew Sukawaty and Dan Hesse, CEO of Embarq Corp.-the local landline business which Sprint Nextel spun off in May of last year. Sukawaty led Sprint in its early years, while Hesse headed AT&T’s wireless business in the 1990s.
More postpaid losses expected
Pali Research analyst Walter Piecyk said in a research note last week that even the selection of a new CEO was unlikely to save the company’s 2008 results, and he would expect a new CEO to dramatically lower expectations for Sprint Nextel in order to regain credibility. Piecyk also noted that the very strength of iDEN customers-the fact that business users stayed with the company due to their push-to-talk groups-could essentially be reversed as more people abandoned the service.
“The same networking effect that kept Nextel’s product so sticky will continue to be its undoing as key members of those business networks opt for other service providers,” Piecyk said.
Piecyk followed up with a second note claiming analysts’ consensus estimate of Sprint Nextel’s earnings before interest, taxes, depreciation and amortization-currently about $12.2 billion-” needs to fall by $1.5 billion or more before the stock can bottom.” Piecyk estimated that Sprint Nextel could lose another 1.2 million customers from its postpaid subscriber base next year.
“The company has been unable to improve its churn rate but has been able to mask that failure by boosting their gross additions by paying nearly $600 to acquire a customer,” Piecyk said. “That strategy clearly could not last forever, but what investors now need to realize is that churn is still high and if they pull back on marketing and commissions the company could see a contraction in the postpaid subscriber base that is much larger than our forecast.”
Bad guidance
Sprint Nextel pre-released a few metrics for the third quarter and said its consolidated operating revenue for 2007 would fall “slightly below” its previous guidance of $41 billion to $42 billion. The carrier also reported that it lost 337,000 postpaid wireless customers during the third quarter. The company did not specify whether those were iDEN customers-which have been abandoning the company in recent quarters-and whether or not the figure included customers gained through the $312.5 million purchase of Northern PCS in the quarter. Northern PCS had 167,000 direct customers and about 69,000 reseller customers.
Sprint Nextel is slated to release its full third-quarter results on Nov. 1.
Stifel Nicolaus downgraded Sprint Nextel stock from “hold” to “sell.” Cowen & Co. lowered its expectations for the company, with analyst Watts noting that better marketplace performance is probably “still several quarters away” for Sprint Nextel.
