Sprint Finds Nextel a Drag: Telecom Giant Outlines Investments, With an Eye Toward Boosting Subscriber Growth.

By Jason Gertzen and David Hayes, The Kansas City Star, Mo.

Mar. 1–Bigger investments to buttress operations of Sprint Nextel Corp. will squeeze profits this year but help the company regain momentum, chief executive Gary Forsee said Wednesday.

“We are taking a short-term hit in growth,” Forsee, Sprint’s chairman and CEO, said in a call with Wall Street analysts. “That is an equation we are willing to undertake as we set ourselves up for longer-term shareholder gains.”

Sprint will boost advertising spending by $200 million this year, increase subsidies for phones bought by its customers, increase dealer incentives and invest more in network improvements in 2007, Forsee said as his company posted its financial results for 2006.

The company’s 2007 operating income, after certain adjustments, is expected to decline from $12.7 billion last year to $11 billion-$11.5 billion this year, which would mark a drop of from 9 percent to 13 percent.

Cost cutting remains a priority as Sprint is on track to complete the elimination of 5,000 jobs by April, a move that will bring $400 million in annual savings. The company closed 260 retail stores or kiosks in 2006 and plans to shutter 300 more this year.

Forsee warned Wall Street earlier this year about his company’s difficulties in 2006, particularly when it came to signing new subscribers.

Wednesday’s report was consistent with Sprint’s previously reported results and showed few surprises, Richard Klugman, an analyst with Prudential Equity Group, wrote in a research report.

Some of the messages Forsee emphasized Wednesday were that important parts of the business remain strong and weaknesses are being addressed.

Sprint shares rebounded, climbing to $19.30. The stock closed up 85 cents, a gain of 4.6 percent.

Michael Rollins, an analyst for Citigroup, raised his recommendation on Sprint from “hold” to “buy,” saying the company’s streamlining and restructuring showed promise.

While reluctant to disclose such information previously, Forsee and his executive team on Wednesday provided an unprecedented level of detail about a drag coming from the Nextel portion of the business.

The Sprint operation, Forsee said, “is doing as well as it has ever done.”

These positive trends had been discounted by some Wall Street analysts when Sprint did not provide this information, Paul Saleh, Sprint’s chief financial officer, said in an interview with The Star.

“Some people were presuming the worst,” Saleh said.

Sprint joined with Nextel Communications Inc. in August 2005. The two companies ran wireless networks built with differing technologies, a factor responsible for many of the current integration woes.

The company overall serves 53.1 million subscribers, leaving it third to Cingular Wireless’ 61 million and Verizon Wireless’ 59.1 million.

Consider, however, the recent fortunes of Sprint’s two networks.

The Sprint network now is serving 31.5 million subscribers, posting an additional 1.3 million in last year’s fourth quarter. Sales of music, television video and other data services on this network are surging and new offerings geared for businesses hold great promise, Forsee said.

The Nextel-branded network serves about 17.6 million subscribers and has posted limited growth, other than through acquisitions, in the past two years. This part of the business has been under particular pressure in recent quarters, driving an actual decline in a lucrative segment of customers for Sprint Nextel.

Part of the decline came as Sprint culled poor credit-quality customers with spotty bill payment records. Others abandoned the company as the Nextel network was strained with quality problems, although improvements are making a difference, Saleh said.

Of the $5.8 billion Sprint spent on wireless network improvements last year, nearly half was directed to the Nextel network, Saleh said. The company is on track to eliminate any lingering problems by summer.

“We are winning back customers who have left us,” Saleh said.

While Sprint does not have as many subscribers as its top rivals, company executives emphasize they attract more lucrative customers.

Sprint Nextel’s average revenue per customer of $60 per month is down from a year ago, but still tops Cingular and Verizon by at least $9. Sprint executives also view their company as a leader in data services, saying they contributed $8.75, or nearly 15 percent, of an average customer’s revenue.

Sprint trails its rivals in terms of customer defections, though executives said improvements to the wireless network, customer care and other initiatives are bringing gains.

During the fourth quarter, Sprint posted net income of $261 million, up 32 percent from $197 million a year ago. Sales of $10.4 billion were up 7 percent from $9.8 billion. Acquisitions of affiliate carriers contributed to the gains.

Earnings per share of 9 cents were up 29 percent from 7 cents a year ago. Sprint also reported an adjusted earnings-per-share figure of 29 cents.

Wall Street analysts on average were expecting Sprint to report net income of 28 cents a share.

Sprint executives are expecting a turnaround with subscriber growth from the new investments outlined Wednesday.

Nextel had depended heavily on a network of third-party dealers who were particularly effective in selling service to small businesses. This source of sales faltered after the Sprint Nextel merger, but the company is increasing incentives and support to these dealers.

“We believe we will get a whole lot more out of it,” Saleh said.

Forsee, Sprint’s top executive, said these investments and new initiatives such as a joint venture with the cable industry and the development of a next-generation wireless network will move the company forward.

“We acknowledge that we have much work to do,” Forsee said. “I believe the right plans are in place.”

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To reach David Hayes, call (816) 234-4904 or send e-mail to dhayes@kcstar.com. To reach Jason Gertzen, call (816) 234-4899 or send e-mail to jgertzen@kcstar.com.

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Copyright (c) 2007, The Kansas City Star, Mo.

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