Correction to This Article
A May 3 Business article transposed first-quarter new-customer figures for Verizon Wireless and AT&T's Cingular. Verizon Wireless added 1.7 million customers in the quarter, and Cingular added 1.2 million.

Post-Merger Problems Catch Up With Sprint

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By Kim Hart
Washington Post Staff Writer
Thursday, May 3, 2007

Despite spending billions of dollars to speed up its wireless networks, roll out new cellphones and rejuvenate its marketing strategy, Sprint Nextel swung to a loss and continued to lose customers to competitors in the first quarter.

Now investors and analysts are becoming impatient with such expenditures, and pressure is mounting for the Reston company's management, including chairman and chief executive Gary D. Forsee, to make serious changes -- including reducing spending and selling its long-distance phone business -- over the next year.

"I think Forsee's job is on the line if they don't turn this around and generate [customers] in the next quarter or two," said Michael Nelson, an analyst with Stanford Group. "He put a stake in the ground and said they'd turn positive . . . and I'm skeptical."

Sprint posted a loss for the first time since it merged with Nextel in August 2005, and to regain its footing against bigger rivals the company will have to slow the steady stream of customers leaving its networks and convince high-paying customers that their service has improved, analysts said.

After six quarters of falling profit, Sprint yesterday announced a first-quarter loss of $211 million, compared with a profit of $417 million in the first quarter of 2006. Revenue for the quarter ended March 31 was $10.1 billion, compared with $10.07 billion in the first quarter a year earlier.

Forsee said the company spent heavily to improve its faltering networks, ad campaign and customer service.

"We are seeing some positive trade-offs," Forsee said. Although Sprint spent more to sign up new customers in the first quarter, he said, the investment helped stabilize the rate at which customers defect to other wireless carriers. He also said the company released new cellphones, including a device that uses both networks, ahead of schedule.

Analysts yesterday acknowledged that the country's third-largest wireless company has made some progress in attracting valuable customers that pay their bills every month, introducing cutting-edge devices and increasing its data services, which include music downloads and Internet phone service.

Sprint plans to spend nearly $3 billion over three years on its WiMax high-speed wireless Internet network, which it said it will launch in Washington this year. That and investments in its walkie-talkie service should pay off, Sprint's chief financial officer, Paul N. Saleh, said in an interview.

The company's service has been spotty since the merger, marring its reputation. Problems with the old Nextel walkie-talkie service in particular prompted many customers to leave. More than 1 million customers have defected from the old Nextel service in the past three months.

Sprint's expensive marketing campaign, undertaken since the merger, has failed to mitigate its problems, highlight any of its products and services or otherwise distinguish its brand.

Sprint said it added 600,000 customers to its base of 53 million wireless subscribers. That included 275,000 users of its prepaid Boost brand, which targets people with poor credit. But Sprint also lost 220,000 coveted regular customers, who are valuable because they tend to spend more.

Sprint must consolidate Nextel's old network with its own legacy network, said Philip Cusick, an analyst at Bear Stearns.

"They're trying to stem the bleeding of the Nextel network, which has been falling apart quarter over quarter," Cusick said. "But periods of transition have been really disruptive for companies. You're essentially inviting customers to see what else is out there."

Customers are apparently doing just that. The number of subscribers using Sprint's legacy network -- about 25 million -- is on par with that of T-Mobile, but the subscription base is growing half as fast, Cusick said. Verizon Wireless and AT&T's Cingular, the company's biggest competitors, acquired 1.2 million and 1.7 million customers, respectively, in the first quarter. Both Verizon and AT&T reported profitable first quarters.

In a note to investors yesterday, David Barden of Banc of America Securities wrote that for Sprint shares to rally, "the business must get better, not simply stop getting worse."

The company's stock closed yesterday at $20.67, up 66 cents.


© 2007 The Washington Post Company

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