Sprint Nextel slows decline during Q2, but warns of rough waters ahead

Sprint Nextel Corp.’s comeback campaign showed limited progress but remains a work in progress, as the struggling No. 3 wireless provider slowed its hemorrhaging customer churn while recording a $344 million loss in the second quarter.
The Q2 results, which had Sprint Nextel losing 776,000 post-paid subscribers and realizing a 11% drop in sales, is apt to keep Wall Street wary about its ability to deal with the past – the ongoing fallout from it’s $35 billion purchase of push-to-talk king Nextel Communications Inc. in 2005 and a future that includes grand plans to deploy WiMAX service with partner Clearwire Corp. It is daunting task for Sprint Nextel CEO Dan Hesse, challenged with turning around a ship when No. 1 AT&T Mobility and No. 2 Verizon Wireless continue to make steady gains in terms of attracting new subscribers, offering new services and products and acquiring valuable spectrum.
During the carrier’s second quarter conference call, Hesse said the primary impact on the gross add side is due to Sprint Nextel increasing credit score requirements, reducing distribution and being more selective in customers brought in.
“We really are focusing on higher-value subscribers,” Hesse said.
Sprint Nextel’s John Garcia said the carrier is looking at the total value of a customer to drive higher ARPU and lower churn. However, this may not be the best idea. Technology Business Research Inc. took a closer look at Sprint Nextel’s results, anticipating that the company will continue to lose subscribers in upcoming quarters and pay for this in many areas.
“The loss of such high-value subscribers will continue to negatively influence the company’s revenue,” TBR said.
Others agree.
“Continued subscriber losses and investments in customer service improvements are taking a toll on both top-line and bottom-line growth,” said Kate Price, an analyst at NBQ Technology Business Research Inc.
The road ahead for Sprint Nextel likely will continue to be rocky, a mix of progress on some fronts and setbacks on others. Indeed, the company predicted churn will worsen in the third quarter.
“Sprint Nextel currently expects to report higher post-paid subscriber losses in the third quarter due to a seasonal uptick in churn when compared with second quarter 2008 results,” the company said. “We expect sequential declines in post-paid gross adds to moderate, and we expect modest pressure on post-paid [average revenue per user] for the balance of 2008. This combination of factors is expected to result in a sequential reduction in Adjusted [operating income before depreciation and amortization] for the third quarter. Capital spending for the wireless and wireline segments is expected to be comparable to first half levels of $1.3 billion and $261 million, respectively. Sprint Nextel also expects free cash flow to improve substantially in the second half of 2008. Furthermore, the company expects to remain in compliance with its debt covenants for the foreseeable future and expects to reduce gross debt by at least $1 billion by the end of the third quarter.”
Sprint Nextel’s $334 million loss reflected a 12 cent-per-share drop during Q2, which ended June 30, and contrasted with the carrier’s $19 million, or 1 cent per share, loss during the same period last year. Built into the Q2 sales decline were pre-taxes charges totaling $149 million for severance, exit costs and asset impairments and other minor merger-related costs. Without those special items, Sprint Nextel earned 6 cents per share. The company reported cash flow from operating activities of $1.1 billion and a cash position of approximately $3.5 billion in the quarter.
During the call, Hesse also spoke of improving customer service and remained upbeat about the carrier’s churn improvement.
“We are seeing signs of progress from our efforts to improve the customer experience, rebuild the Sprint brand and increase our profitability,” said Hesse. “Our company-wide retention efforts, which include Simply Everything plans, our Now Network campaign and the launch of the Instinct handset are proving to be effective retention tools, particularly for high-value customers, and this is beginning to have positive impacts on churn and ARPU. Our sequential improvement in post-paid churn is the best reported by any national wireless carrier since 2004, and it equals Sprint’s best-ever churn performance post-merger.
Hesse, hired last December to get Sprint Nextel back on track, appears to be under no illusions about the job ahead.
“To increase profitability, we are taking a more aggressive stance on reducing costs, including a more stringent spending review process, minimizing external labor costs, and we have streamlined our distribution channels by more than 25% since the beginning of 2008,” Hesse stated. “Further, our disciplined customer credit and collections efforts have reduced bad debt and strengthened the credit profile of our customer base.”