• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Sprint Writes Off $1.2 Billion Investment in Fixed Wireless Internet Service

Posted on: Thursday, 23 October 2003, 06:00 CDT

Oct. 24--The party has been over for at least three years, but Sprint Corp. is still cleaning up some of the mess.

On Thursday, the Kansas City area's largest employer wrote off a $1.2 billion investment in fixed wireless Internet service. It was one of several high-dollar projects undertaken by the telecom giant during the cash-rich 1990s, before layoffs, cost cutting and offshoring became industry watchwords.

The write-off resulted in $498 million in red ink for Sprint's third quarter -- only the second time in 18 months the company didn't turn a quarterly profit.

The wireless venture was one of several remnants from former chief executive William T. Esrey's tenure that are still affecting Sprint's bottom line.

Gary Forsee, the company's new chief executive, has launched a campaign to trim the excesses of the last decade.

Sprint is planning to spend the next several months paring its management ranks. Sprint will reduce the ranks of its top executives by 20 percent this year, with plans also to flatten out an overall management structure that has grown to 24,000.

Forsee said the company's new organizational chart will help Sprint better address its laundry list of challenges: long-distance and local telephone businesses that are feeling the crunch of increased competition; and a slow-growing wireless business that could soon be caught in a nasty price war as customers are allowed to change carriers and keep their current phone numbers.

"The legacy of the heyday of the '90s has to be cleaned up," said Jeff Kagan, a telecommunications analyst in Atlanta. "There were a lot of directions that all companies headed in the late '90s that just didn't work."

Despite the difficult quarter, Forsee, who has been in the chief executive's job for just over eight months, on Thursday sought to be positive.

Sprint's traditional telephone business will do better this year than previously forecast, Forsee said. Despite a weak third quarter in which Sprint PCS trailed all its major competitors in signing up new customers, the wireless division reported that monthly revenue per user improved to just under $63, up a dollar from last quarter. The wireless division's sales were up 5.8 percent from a year earlier.

"We're staying very focused on the agenda," Forsee said.

Overall, sales for the Overland Park company slipped 1.2 percent for the quarter from a year ago. Sprint reported total sales of $6.71 billion, down from $6.79 billion during the same period in 2002.

The reaction from Wall Street was mixed.

Shares of Sprint's flagship FON stock closed Thursday at $15.90, up 16 cents, as investors took note of progress in cutting expenses and debts.

But investors hammered Sprint PCS after learning that the wireless division had missed its target for new customer additions. Shares of PCS closed at $4.41, down 91 cents.

Sprint's big quarterly loss resulted from the decision to drop out of the fixed wireless business, a service started in 1999 to offer high-speed Internet access through a series of towers and antennas, eliminating the need for telephone lines or television cables.

Forsee chose to take the $1.22 billion write-off after deciding that bringing a third technology to the highly competitive broadband market was a losing battle.

The loss comes 18 months after the company wrote off more than $2 billion it spent developing Sprint ION, another major technology initiative that ultimately was canceled.

Without the fixed wireless write-off, Sprint said, the company would have reported a net profit of $785 million for the third quarter -- up about 15 percent from a year ago.

Sprint's long-distance and local operations were expected to see reduced sales because of the erosion of customers from its core long-distance and local service markets. The poor showing in the wireless division, however, was unexpected.

Sprint's PCS wireless division reported adding 496,000 customers during the quarter, but reseller Virgin Mobile USA accounted for almost 59 percent of the additional customers. More-lucrative Sprint retailers, Radio Shack outlets and others signed up only 184,000 PCS customers. Sprint's series of affiliates signed on 22,000 customers

"We were not satisfied with our net customer additions out of retail channels," Forsee said.

But he added that while some competitors lowered prices more aggressively than Sprint, Sprint's revenue per user remained strong.

"This is about balance, and I think we've kept that balance in place this year," Forsee said.

PCS revenues rose to $3.34 billion, up from $3.15 billion during the same three months in 2002. The division lost $65 million, up from $7 million a year ago.

PCS is now into its second year of trailing its competitors in customer growth.

"We were slow to react to competitive conditions," Len Lauer, Sprint's president, said during a conference call with analysts.

Customer growth may be a real challenge for Sprint and the rest of the industry in the next year. Two-thirds of American homes already have wireless phone service. And, on Nov. 24, new rules will allow wireless customers to move from one service to another while maintaining their current phone number.

Sales in Sprint's local division declined 3.2 percent to $1.53 billion during the third quarter. Total access lines declined 2.2 percent from the previous year and 2.4 percent from the previous quarter.

The global markets division, including long-distance and data services, reported net operating revenues of $1.97 billion, a decline of 11.5 percent from the previous year. Voice sales were down 13.5 percent, data increased 3.8 percent and Internet sales fell 9.7 percent.

Sprint is not the only telecom company reporting disappointing earnings. Much of the telecommunications industry is "muddling through," said Berge Ayvazian, an analyst with the Yankee Group. But he said Sprint is on the right track with its plan to cut costs and reorganize.

Sprint Chief Financial Officer Bob Dellinger said the company recently completed a study to identify where trims should be made.

In addition to the structural reorganization, which is expected to be complete by the end of the year, the company also is trimming costs through outsourcing. Last month Sprint said it had signed contracts with IBM Global Services and EDS to outsource hundreds of technology jobs, which are expected to save $150 million over the life of the five-year contracts.

Sprint also is making progress on its campaign to reduce debt, Dellinger said. In December, company officials said they would trim net debt by $7 billion by the end of 2004. Already, the company has trimmed net debt by $3.9 billion. Sprint's net debt now totals $17.1 billion.

Sprint has said it wants to reduce annual expenses by $1 billion by 2006. The cost-cutting plan includes 41 projects, and it is likely to mean more layoffs.

Forsee shied away from equating the structural reorganization under way with major layoffs, as has been widely rumored around Sprint's corporate campus and the Kansas City area generally. Since October 2001, the company has shed more than 18,500 jobs.

"A lot of this is not about cost cutting in the traditional sense but identifying best practices against telecom and other industry players," he said.

The company is combining three product divisions -- local, long-distance and wireless -- into two customer-focused divisions. Under the new structure, some employees will work with business customers while others will work with consumers.

The reorganization is being handled layer by layer, from the highest ranking officers to the rank-and-file employees. Last week, directors and officers were appointed to the new structure. Sprint has said that once the structure is complete, there will be 20 percent fewer employees assigned to that level of the company.

Forsee said the objective for the reorganization was to create a more efficient organization, with fewer layers of management between customers and Sprint's top executives. But he said there is no master plan for more layoffs.

"There's no target that says we have to go from 70,000 to some specific number," Forsee said.

By David Hayes and Suzanne King

-----

To see more of The Kansas City Star, or to subscribe to the newspaper, go to http://www.kansascity.com.

(c) 2003, The Kansas City Star, Mo. Distributed by Knight Ridder/Tribune Business News.

FON, PCS, IBM, 6680,

More News in this Category