Struggling Sprint Reports Huge Loss
Friday, February 29, 2008
Sprint Nextel yesterday reported a $29.45 billion fourth-quarter loss and said legions of subscribers continue to abandon its service, many because they can't pay their bills.
The nation's third-largest wireless carrier last year courted people with poor credit to boost its number of subscribers. Now the company is feeling the pain disproportionately as the economy weakens and consumers default on their debts.
Sprint said it expects 1.2 million wireless subscribers to drop their service in the current quarter, roughly the same number that left in all of 2007. The company offset losses by signing up new customers, but it has steadily lost ground to its two main rivals, Verizon Wireless and AT&T.
The loss of subscribers is projected to continue well past March. Chief executive Daniel R. Hesse, who took over in December, said Sprint's problems were more serious than he had anticipated and would take time to fix.
"We'll have a difficult 2008 as we turn this ship around, but the long term looks promising," Hesse said on a conference call with analysts. "The fourth-quarter results speak for themselves. They are disappointing. . . . This turnaround will not happen for many quarters."
Sprint yesterday announced its latest effort to recruit more customers, a $99.99 unlimited voice and data plan. Sprint has been searching for ways to differentiate itself from its competitors, much as AT&T got a leg up by making an exclusive deal to carry the Apple iPhone.
Sprint has struggled since it purchased Reston-based Nextel in 2005. The two cultures did not blend well and customers complained about the quality of Sprint's service.
Hesse announced two weeks ago that Sprint would move its corporate headquarters from Reston to Overland Park, Kan., to unify the company. Sprint's operations center is in Overland Park.
Much of the fourth-quarter loss was related to the company's decision to write down much of the remaining value of the Nextel purchase. Sprint relegated the unit to one of its several brands -- in this case, for walkie-talkie-like push-to-talk connections. To conserve cash, the company said it was eliminating its dividend (previously 10 cents per share) and borrowing $2.5 billion from an existing line of credit to sustain business operations.
In an interview, Hesse acknowledged Sprint's operational problems, whether spotty wireless connections, poor customer service or confusing billing policies.
"Customer experience is clearly job number one," he said. "We have not done a good enough job historically with providing great experiences to the customer."
He said the company loosened its credit requirements last summer to attract customers with poor or little credit histories. Sprint ended the year with 53.8 million total subscribers, 700,000 more than it had in 2006. It made up for the loss of core monthly contract subscribers by adding less-lucrative prepaid and wholesale accounts.
"We have a lot of subprime customers in our customer base and we were disproportionately hit hard versus other carriers," Hesse said.
Sprint's earnings report yesterday laid bare the historic nature of the loss. The company's $29.45 billion ($10.36 per share) fourth-quarter loss compared with a profit of $261 million (9 cents) in the fourth quarter of 2006. It was the fifth-largest quarterly loss by a company in the Standard & Poor's 500-stock index since 1990, according to Bloomberg. Sales were $9.85 billion, down 6 percent.
For the full year, Sprint lost $29.58 billion ($10.31), compared with a profit of $1.33 billion (45 cents) in 2006. Sales fell slightly, to $40.15 billion.
Sprint's stock has lost a third of its value this year. Yesterday, shares closed at $8.09, down 86 cents.
In the past two months, Hesse has cut 4,000 jobs, let go three senior executives, closed 125 retail shops, and agreed to add an activist shareholder, Ralph Whitworth, to the company's board.
Hesse also said he has reopened talks with Clearwire, a telecommunications company in Kirkland, Wash., about Sprint's plan to deploy a nationwide high-speed wireless network known as WiMax.
His biggest challenge could be merging the Sprint and Nextel cultures. Even with the headquarters moved to Kansas, 4,500 employees will still work in Reston. Two weeks ago, Hesse addressed employees about the importance of "a very singular" culture.
Analysts referred to Hesse's strategy as a "kitchen sink" approach: presenting the bleakest picture possible in hope of showing progress in the coming months.
"We believe the company's limited guidance, however, sets a rather low bar, which we believe the company will be able to meet, if not beat," Christopher C. King, an analyst at Stifel Nicolaus, wrote in a research note.
Hesse would not speculate on when Sprint would hit bottom.
"I've been here two months. I'm getting my hands dirty into the operations of the company, coming up with plans, with actions plans to address them," he said.