Shares of Sprint Nextel (S: Charts, News, Offers), a holding company in wireless and wireline communication products, best known to the public for its mobile services, sank 10% last Wednesday after announcing 3Q earnings that missed Street estimates. Its revenue of $8.2 billion exceeded estimates but it lost 30 cents per share, 2 cents more than the analysts’ expectations. Free cash flow plunged 42%, and the EBITDA dropped 11% from a year earlier. Many signs point to a crumbling bottom line, but some bulls are optimistic that the stock has hit bottom, citing a substantial increase in 644,000 new customers and a 1.5% increase in revenue, the first positive numbers in three years. The stock is also sitting near its 200-day moving average, a formerly established bottom. Can Sprint Nextel survive the increasing pressure of its large, well-positioned competitors, AT&T (T: Charts, News, Offers) and Verizon Wireless (VZ: Charts, News, Offers)?
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To most Americans, Sprint PCS is one of the original cell phone services that had a healthy market share and advertising campaign in the 1990s; indeed, at the end of the millennium, the stock was trading in the mid $70s, an unstoppable tech titan that was touted as one of the soundest investments for a future dominated by wireless services. Today, the stock trades in the $4 range, with growth roadblocks at every turn. The company operates in two main segments, Wireless and Wireline in all fifty states, including Puerto Rico and the Virgin Islands. Its main Sprint branded mobile network operates on the CDMA protocol, like its rival Verizon. Its Nextel network operates on a widely criticized Specialized Mobile Radio band from Motorola’s (MOT: Charts, News, Offers) iDEN technology. AT&T operates on the technically superior, global standard GSM network. At the end of 2009 the company acquired Virgin Mobile and iPCS. It currently has the third largest American mobile customer base, with 48 million, in the United States, trailing Verizon’s 93 million and AT&T’s 87 million, but ahead of T-Mobile’s 34 million.
One of the company’s worst moves was its 2005 acquisition of Nextel Communications, which at the time appeared to be a wise tactical move to quickly gain more mobile customers. However, due to the fact that Sprint operates on CDMA and Nextel on iDEN, the increased burden and cost of operating two incompatible networks under one brand has weighed heavily on the company. Sprint initially attempted to use Nextel’s inferior network for its Boost Mobile brand, which offered cheap unlimited-calling plans. The Nextel network is ill-designed for smartphones and is widely seen by power users as a relic from the past. As such, with the increasing demand for smartphones which rely on CDMA and GSM networks fueled by Apple’s (AAPL: Charts, News, Offers) iPhone and Android’s assortment of phones, the company has seen a huge exodus of Nextel customers to its competitors, or to its own Sprint-branded network. The company has recently announced plans to begin phasing out the Nextel network.
Sprint Nextel has also been hurt by its 54% investment in Clearwire (CLWR: Charts, News, Offers), another company with an incompatible network, WiMax, which has been dubbed Sprint 4G, and is currently facing a large funding gap. Clearwire’s other major investors include Google (GOOG: Charts, News, Offers), which has begun backing out of this losing investment. For the time being, Sprint is stuck with Clearwire with no direct control over the company, and no clear vision of its prospects. Sprint’s Nextel business has lost large, lucrative contracts, in particular the March 2010 $250 million VoIP outsourcing contract with Time Warner Cable (TWC: Charts, News, Offers). It is also facing blistering competition from Verizon, which has announced its 4G service in 39 cities and its newly inked partnership with Apple to sell its iPhone and iPad products. AT&T, now losing its Apple exclusivity, has also beefed up its game plan with new Android, Blackberry and Windows Mobile offerings. Another reason for bearish sentiment is the influx of the 644,000 new subscribers, compared to a loss of 545,000 a year earlier, equals highly discounted handset sales, as Sprint and all major carriers sell each high-end smartphone at a loss of hundreds of dollars in exchange for two-year contracts. This trade-off means impacted operating margins in the short term. Shrinking margins do not complement Sprint Nextel’s quarterly loss of $911 million, which is nearly double its loss of $478 million a year earlier, when it was aided by a large tax benefit. To make matters worse, Sprint has reported a continued loss of contract-based customers, the company’s meat and potatoes. In fact, Sprint’s phones with walkie-talkie functions have proven to be popular among work crews and professionals, which is a sign that customers like the phones, but don’t really care for the mobile service.
Moving into the fourth quarter, Sprint Nextel forecasts a continued increase in its customer base, and an improvement in its main source of revenue, its contract-based plans. “Although our momentum continues, we realize we have much progress still to make,” stated Sprint CEO Dan Hesse. “We’re in a hyper-competitive industry with strong, capable competitors, so making continued progress is hard work. But we intend to persevere.”
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
Probably the reason Sprint is gaining customer base is because of their htc 4g phone. BUT they wont stick around is Sprint cant get its S*** stuff together. To many complaints about DROPPED CALLS!!!!!!!!!!! At times it gets so annoying that your friend would rather you not call…
Something is wrong somewhere!! Need more towers or better POWER on their towers. Wichita, Ks.