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Sprint Slows to a Crawl

Scott Moritz

Updated from 9:53 a.m.

Sprint (S Quote) shares plunged 15% early Thursday after the telco tripped over the integration of last year's big Nextel buy.

Sprint missed second-quarter estimates and trimmed full-year guidance. But worst of all, the company said growth in the high-octane wireless business slowed substantially.

"You had basically a near collapse from what I can tell on the Nextel business side," says Ovum analyst Roger Entner. "And there was a weak performance on a Sprint side. Normally one would offset the other, but not this time," says Entner.

Sprint said it will reconsider its branding approach and restructure some sales, service and distribution operations.

For the second quarter ended June 30, Sprint made $291 million, or a dime a diluted share, from continuing operations. That's down from the year-ago $334 million, or 22 cents a share. On an adjusted basis, excluding certain costs, earnings rose to 32 cents a share from 30 cents a year ago, missing the Thomson Financial target by a penny.

Revenue rose to $10 billion from $9.5 billion, missing the $10.4 billion Wall Street estimate.

"In the second quarter, our distinctive asset mix again produced consolidated revenue growth that exceeded rates posted by the other large-cap telecom service providers," said CEO Gary Forsee. "In the period, we also had solid margin improvement, made good strides on merger and acquisition integration activities and produced strong cash flows.

"However, following the adoption of initiatives earlier this year to improve our customer credit mix and customer loyalty, we achieved higher-quality post-paid additions in the quarter, but we did not meet our expectations on quantity," Forsee added. "In addition, we had higher-than-anticipated migrations in our base to lower-priced service plans."

Among the more alarming signals were the surprisingly light numbers in the wireless business -- a combination of Sprint and Nextel. The company added 708,000 net new mobile-phone customers, well below the 1.2 million the street was expecting.

Wireless customer defections also remained high. Monthly churn was 2.1% in the second quarter. That's flat with the first quarter's cancellation rate but nearly double the comparable rate at No. 2 wireless operator Verizon Wireless. And average revenue per user, or ARPU, dropped below $62. That is down 6% from a year ago and 1% sequentially.

The big problem, say some investors, is integration. Sprint faces big challenges trying to weld together two entirely separate national wireless networks. Nextel had the most loyal and highest-paying customers in the industry, and Sprint seems to be having trouble keeping them in the fold, say observers.

As the No. 3 wireless player, Sprint has been squeezed by the twin titans of Cingular, co-owned by AT&T (T Quote) and BellSouth (BLS Quote), and Verizon Wireless, a joint venture of Verizon (VZ Quote) and Vodafone (VOD Quote).

For one, you have fewer new customers to sell to since there are now more mobile phone owners than non-owners. Second, Verizon Wireless has been attracting new customers with offerings like family plans and robbing users from other carriers, says Yankee's Entner.

That basically leaves T-Mobile, the U.S. wireless unit of Deutsche Telekom (DT Quote), and Sprint with the youth market, and that is slowing down, says Entner.

Another problem is that with the flight of Nextel users, Sprint is losing its most lucrative customers.

"When you churn Nextel subs, you are churning higher-margin subs," says one New York money manager who has no Sprint position.

Looking ahead, Sprint projects lower wireless revenue, putting its full-year sales target at about $41.25 billion. Analysts were looking for $43.2 billion in sales this year.

The company did try to offset the gloomier outlook by announcing a $6 billion share buyback program over the next 18 months.

Sprint shares fell $2.92 to $17.21 in early trading Thursday.