Sprint Nextel's Bleak Outlook
Robert Holmes
09/04/08 - 04:16 PM EDT
Sprint Nextel (S Quote) was dealt a blow after a Standard & Poor's analyst said the wireless carrier's credit measures will weaken over the next year due to operational challenges brought on by greater competition and weak subscriber growth.
S&P Rating Services credit analyst Allyn Arden said that while Sprint has made some progress in reducing its exposure to customers affected by subprime problems through the tightening of credit checks, the company's iDEN network, acquired in its 2005 purchase of Nextel, continues to lose high-revenue-generating customers.
Arden added that S&P would consider an outlook revision to negative if Sprint faces further margin pressure due to its inability to moderate subscriber losses and demonstrate improvement on churn. Shares of Sprint Nextel were lately down 47 cents, or 5.4%, to $8.10. The stock is now lower by 38% for the year.
"The substantial amount of rated debt outstanding has prompted numerous investor inquiries on the company's current and long-term business prospects as well as its financial profile," Arden wrote in a research note.
"Standard & Poor's views the Nextel segment as being the weaker part of the overall business given its significant subscriber losses and declining [average revenue per subscriber]."
Sprint should continue to face covenant-related challenges, Arden says, as S&P remains concerned that the margin of compliance will be thin in 2008 and 2009. "Still, we expect the company to take some measures to reduce debt, including the recently announced agreement to sell 3,300 towers for $670 million, which should modestly improve its covenant cushion."
In May, S&P's Rating Services lowered Sprint Nextel's corporate credit and senior unsecured ratings to BB, or junk status, from BBB-, concluding that the company's business risk profile "is no longer supportive of an investment-grade rating given its deteriorating operating performance and lack of visibility in the wireless business."
At that time, S&P said that it could revise its outlook to negative if Sprint's subscriber losses accelerated or churn rose beyond expectations, resulting in further margin pressure and even weaker credit measures. The firm said it would like to see Sprint Nextel stabilize subscriber losses and for ARPU and churn levels improve so much so that leverage is sustained.
Since the downgrade in May, Sprint has seen its total count of wireless subscribers dwindle to 51.9 million from nearly 54 million at the end of 2007. Sprint's churn rate has remained over 2% while rivals
AT&T (T Quote) and
Verizon (VZ Quote) have enjoyed churn rates much closer to 1%. The average revenue per wireless subscriber, or ARPU, has also continued to slide.
Of course, it doesn't bode well for Sprint Nextel that it expects to report higher post-paid subscriber losses in the current quarter due to a seasonal uptick in churn when compared with second quarter results.
Arden says the decline in Sprint's business is due to several factors, mostly due to its damaged reputation in the marketplace. Dan Hesse, Sprint's CEO, is quite familiar with how poor his company's customer service is, as he has said Sprint is "taking the customer defection issue very seriously, and we're addressing it. Because we have not provided the right experience, customers are leaving us."
Even with the introduction of Samsung's Instinct touch-screen handset, which is exclusive to the Sprint network and is priced competitively at $129.99 in order to fend off
Apple's (AAPL Quote) iPhone, Arden says that Sprint suffers from "the lack of attractive handsets and features relative to 3G wireless networks.
"Additionally, Sprint Nextel will be challenged to grow its customer base over the next few years as wireless industry penetration passes 85% and competition increases from other carriers, including AT&T Mobility and Verizon Wireless," Arden wrote in his report.
However, a divestiture of the company's iDEN network would be a positive for the overall business risk profile, Arden says. "In addition, if the approximate $5.4 billion of Nextel debt were transferred to that entity in the event of a sale, the new Sprint would also likely have a better financial risk profile with a correspondent reduction in leverage. Still, since the Nextel business is largely integrated, disaggregating it could cause additional operational challenges for Sprint, which could negate some of the benefits."
