Merger Dents Sprint's Results

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By Yuki Noguchi
Washington Post Staff Writer
Friday, October 27, 2006

Sprint Nextel's customers, fed up with dropped calls and a service that hasn't kept up with the features offered by mobile phone competitors, left the company in droves last quarter.

That, alongside a tumbling stock price and dramatic changes in the executive lineup, led to a disappointing three months for the Reston company.

It posted a profit of $247 million (8 cents per share) on revenue of $10.5 billion for the quarter ended Sept. 30. That compares with $516 million profit (23 cents) for the same period last year on revenue of $7.83 billion.

One year after Sprint and Nextel merged, the firm is investing in a faster, more advanced network and working on partnerships to sell more of its services. Still, during a conference call yesterday, president and chief executive Gary D. Forsee acknowledged the troubles, which largely stem from thousands of the core customers defecting to competitors because of poor service.

Sprint lost 2.4 percent of its customer base every month during its third quarter -- a rate much higher than that of Cingular Wireless, which lost customers at a rate of 1.8 percent a month and last week posted a 280 percent increase in its net income.

Overall, Sprint, the country's third biggest carrier, landed 233,000 new customers during the quarter. It lost about 188,000 customers who are on contract plans and pay monthly, but offset that loss with gains elsewhere, including those who use month-to-month prepaid services.

Verizon Wireless is expected to announce its third-quarter results next week.

"Our operating results are not what we and you expected," Forsee told Wall Street analysts during the conference call.

The company spun off its local phone division, Embarq, and now operates a wireless and long-distance division.

Cingular and Verizon Wireless are benefiting from Sprint's decline because they haven't made Sprint's missteps, said Jonathan Atkin, an analyst with RBC Capital Markets. Those companies invest more consistently in their networks, and have offered a greater array of new phone devices, as well as package deals that appeal to families, he said.

Sprint plans to release a hybrid phone next month that works on both Sprint's and Nextel's networks, a move that could reduce customer dissatisfaction, Atkin said.

"[Sprint is] in rebuilding mode, and they're going to be in rebuilding mode for a while," particularly in 24 markets like Los Angeles and New York, where the Nextel network is overtaxed and dropping calls, Atkin said.

When the two companies merged in August 2005, the company's executives set high expectations that the marriage of two wireless companies would produce a powerful behemoth that would partner with cable companies and deliver a host of new services. But the company has struggled to manage two very different mobile phone networks, as well as combine two very different corporate cultures.

"We know the challenges . . . we operate two wireless networks, manage the Sprint and Nextel brands, and . . . integrate the cultures," Forsee said. "There remains substantial work ahead of us."

During the most recent quarter, Sprint did invest more in the development of an advanced high-speed network called WiMax, Forsee said. Sprint is also trying to market itself as a wireless wholesaler, and has partnered with 12 cable companies to sell wireless and Internet-phone services.

"The question is: Can they stabilize the bleeding at this point?" said Christopher King, senior analyst with Stifel, Nicolaus & Co. "It's certainly going to be a challenge for Forsee."

In August, the company ousted chief operating officer and longtime Sprint executive Len Lauer.

Then, earlier this month, company chairman Timothy Donahue, the ruddy, pep-talking former chief of Nextel who led that company through its entrepreneurial years, announced plans to leave the board by the end of the year. Donahue, who previously said he would stay on the board until August 2007, would have been an ideal person to oversee the launch of the new advanced network, King said.

Shares of the company closed up $1.18 yesterday at $18.90 a share, a boost analysts attributed to a hope that the company has hit its nadir.


© 2006 The Washington Post Company

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