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Sprint Reports Losses, but Also Progress

August 7, 2008

By Jason Gertzen, The Kansas City Star, Mo.

Aug. 7–Amid its continuing exodus of customers and mounting losses, Sprint Nextel on Wednesday offered a few encouraging signs for its future.

Sprint lost an additional 901,000 subscribers and posted a loss of $344 million on sales that dropped 11 percent to $9 billion in the second quarter. Yet, the company made a notable advance in customer loyalty, its network is performing well, and new phones — such as the Samsung Instinct — are helping it compete with such rivals as AT&T and the new Apple iPhone, said Dan Hesse, chief executive officer of the Overland Park wireless company.

“We have not turned the corner yet,” he said in an interview.

“The turnaround, the complete turnaround of the company, will take some time,” Hesse said. “I have much more confidence than I did three months ago that we are doing the right things and that our strategy is the right one.”

Investors responded with more uncertainty.

Sprint shares were the most heavily traded on the New York Stock Exchange, falling more than 14 percent. They closed down $1.21 at $7.34. The company’s stock has dropped more than 44 percent this year.

Investors seemed to be put off by Sprint executives saying subscriber losses could tick higher in the third quarter and profits will be pressured again.

But in addition to this weak outlook, some analysts attributed at least part of the decline in Sprint shares to another announcement Wednesday. The company is issuing about 3 million shares in the form of convertible preferred stock in a bid to raise some $3 billion.

Much of this money is expected to go toward reducing more than $23 billion in debt now on Sprint’s books.

Bob Brust, who recently signed on as Sprint’s chief financial officer, said the company retired about $1.3 billion of debt in the second quarter and plans to pay down at least an additional $1 billion in the third. Debt reduction also was the goal driving the recently announced sale of thousands of cell towers for $670 million. Brust is keeping a sharp watch on costs. Sprint is reducing labor expenses, cutting back on outside consultants and scrutinizing other spending.

The company didn’t announce any imminent job cuts. After previous cuts, Sprint’s overall work force is down about 1,000 employees from the first quarter to 56,000. Sprint remains the Kansas City region’s largest private employer, with about 12,300 workers in the area.

Hesse took charge of the company last December after Gary Forsee’s ouster.

He’s been scrambling to stabilize Sprint’s eroding customer base while struggling with merger and integration problems years after Sprint joined with Nextel Communications. The combined company consistently has fallen behind industry leaders.

It happened again this quarter.

Verizon Wireless led the industry with the addition of 1.5 million subscribers for a total of 68.7 million. AT&T retained the No. 1 spot, growing its base by 1.3 million subscribers to a total of 72.9 million.

Sprint slipped to a total of 51.9 million customers.

The company reported a net loss of $344 million, or 12 cents a share. After adjustments, including $149 million in one-time costs for severance payments and merger integration expenses, the company earned 6 cents a share.

On average, analysts were expecting Sprint to report net income of 3 cents per share for the quarter, according to Thomson One.

This performance was better than the first quarter, when Sprint lost 1 million subscribers and $505 million.

From Sprint’s top executives to its workers in retail stores and call centers, the charge from Hesse has been clear: Improve the way customers are treated, rebuild the brand and increase profitability.

In the second quarter, Sprint improved its customer loyalty — measured by a statistic known as “churn” — by the most of any company in the U.S. wireless industry since 2004, Hesse said. Still, Sprint’s 2 percent churn figure is twice as high as Verizon’s.

Sprint sales representatives now get incentives for higher customer satisfaction rather than the overall number of new subscribers they sign.

“There is so much more we can do to be world-class,” Hesse said.

Hesse said he was optimistic that Sprint’s improvement efforts will be reflected in new customer perception surveys issued by Consumer Reports and other outlets, and also in future financial reports.

“They are on the right track,” said Dave Novosel, an analyst with Gimme Credit, a firm specializing in corporate bond research.

Hesse has Sprint focusing less on signing as many subscribers as Verizon or AT&T and more on making sure the company seeks and keeps high-quality customers who pay their bills on time and order premium data services.

Snapshots showing progress include the $56 on average that Sprint brings in each month from each of its customers on calling contracts. This is down from a year ago, but it still outpaces $51.53 for Verizon and $50.60 for AT&T.

Sprint still can find a place in the wireless industry if it manages to continue improving customer retention, maintaining network quality and running an overall solid operation, Novosel said.

“They have to change customer perceptions,” Novosel said. “They lost a lot of that with weak customer support in previous quarters. That takes a while to turn around.”

To reach Jason Gertzen, call 816-234-4899 or send e-mail to jgertzen@kcstar.com.

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Copyright (c) 2008, The Kansas City Star, Mo.

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