Kenneth Li

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Nextel's Strong Results May Bode Well for Wireless

Kenneth Li

With thoughts of insolvency now far in the background for the first time in months, Nextel crashed through analyst estimates for its second quarter and raised guidance for the year, driving wireless carrier shares higher in the morning session and kicked off the earnings season to a good start, analysts said.

The nation's fifth-largest wireless carrier beat estimates by a staggering 61 cents, and achieved net profitability for the first time, earning $325 million, or 37 cents a diluted share, on improved revenues of $2.2 billion for its second quarter. Analysts polled by Thomson Financial/First Call expected the company to report a loss of 24 cents per share.

Those results compare favorably against the year ago period's net loss of $369 million, and 56 share loss, on revenues of $1.72 billion.

The company reported a year-over-year jump of 69% in earnings before interest, taxes, depreciation and amortization to $816 million. Analysts expected the company to report in the $650 million range.

"This sets a positive tone for the wireless carriers reporting season," wrote J.P. Morgan wireless services analyst Thomas Lee, following Nextel's good news. "More importantly, we believe that the convincingly strong results from Nextel will substantially improve the credit environment for wireless carriers."

For a brief moment, investors dismissed long-standing issues afflicting the wireless shares, with some seeing double-digit boost in morning trading, led by Nextel. Nextel shares were up $1.32, or 26.40% to $6.32. AT&T Wireless was gaining, up 20 cents, or 3.35% to $6.20. Sprint PCS, which is prepared to report this Thursday, was ahead 45 cents, or 7.21% to $6.69. Triton PCS rose 42 cents, or 10.42% to $4.45. Western Wireless also was up, gaining 24 cents, or 6.40% to $3.99.

All rational thought flew out the window with Leap Wireless also, which missed its own subscriber addition targets a week ago, gained 25 cents, or 22.12% to $1.38.

Even the most somber of moods were lifted, from as far as Germany, where investors in Deutsche Telekom, which owns U.S.-based VoiceStream, also took a breather, bidding up shares by 11 cents, or 1.01% to $11.02. Nextel's surprise helped stave off Deutsche Telekom's freefall this week, after investors voiced displeasure over the German government's anointed successor candidate, company veteran Gerd Tenzer, to current CEO Ron Sommer. A vote is expected today.

The Philadelphia Stock Exchange's wireless telecommunications index gained 1 point, or 2.18%, to 46.96.

Possibly most important to Nextel's job to regain investor's confidence was its efforts to reduce the company's debt. As part of this quarter's activities, the company also took steps to pare down its debt by $1.5 billion, including the retirement of about $1.1 billion in debt and preferred stock and an agreement to repurchase $400 million of its indebtedness. Long-term debt now stands at approximately $13.4 billion. The debt activity will help the company save an estimated $2.5 billion over 9 years in forgone interest, principal and dividends, the company said in a statement. Its debt-to-EBITDA ratio is now at 4.1, which falls below its debt covenant requirements.

"Strong customer demand for our unique and differentiated services and a keen focus on operational and capital efficiencies helped make this a breakthrough quarter for Nextel," said Nextel president and CEO Tim Donahue in a statement. "The combination of accelerated cash flow, reduced expenditures and the gain from our significant debt reduction activities generated our first-ever positive quarterly net income.

Just a month ago, the debt-strapped wireless carrier reaffirmed its cash flow guidance of reaching at least $2.5 billion. Those projections were raised this morning to at least $3 billion for the year. Capital expenditures will be $2 billion or less. Nextel chief financial officer Paul Saleh also maintained the company would be likely to continue to report postive EPS for the remainder of the year. Guidance for 2003 is expected in the fourth quarter this year.

In particular, the company had much to cheer about when it came to subscriber metrics. The company added an additional 471,000 new domestic subscribers for the quarter, down 3% year-over-year, finishing the quarter with 9.64 million subscribers in total. Churn, or the rate at which customers leave the service remained flat at a relatively low 2.1%. Deflecting comments regarding slowing growth in the industry, company executives pointed out that about 90% of its new subscribers defected from other carriers, and were not first-time customers.

Nextel's average revenue per subscriber, or ARPU, has traditionally been among the highest in the industry. This quarter, ARPU surged even higher, up $3 sequentially to $71. Minutes of usage per customer also drove higher to 650 minutes, compared to about 580 minutes year-over-year. Executives say the spring months generally bring in higher over-usage minutes with customers paying higher fees for breaking through the allotted minutes in their plans. Turns out that customers like to gab more when it gets warmer out.