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Sprint PCS Predicts a Sharp Climb for Profit Next Year

Updated from 4:28 p.m. EST Sprint PCS (PCS) expects some big improvements in 2002.

Speaking to a congregation of analysts intrepid enough to head to Kansas in December, the wireless carrier outlined its plans for 2002. The company expects to use its rapidly increasing customer base to drive a 30% increase in revenue and an 88% rise in profit before taxes, depreciation and amortization. Impressive as those numbers may be, the company's increasing size will mean less flattering performance in some of the metrics the Street uses to measure a carrier's progress.

Sprint PCS finished the third quarter with 14.4 million subscribers, including those of its affiliates, and it expects to finish 2001 having signed up 4.2 million new customers throughout the year. The growth was driven by its popular "account spending limit" plans that appeal to the "subprime" credit quality customer. Next year, however, the carrier forecasts a decline in additions, to 3.6 million or 3.7 million. Similarly, Sprint PCS doesn't see any great strides to be made in average revenue spent per user each month, and it hopes that with ever-expanding ranks it can hold the number steady with 2001 levels. In the second and third quarters, customers spent $62 a month on average.

The company says revenues will grow from a range of $9.7 billion to $9.8 billion in 2001 -- a 50% jump over 2000's results -- to $13 billion in 2002. The carrier plans to squeeze $3 billion to $3.1 billion in EBITDA from those revenues, compared with a projected $1.6 billion in 2001 EBITDA. Sprint PCS expects to improve pretax profits by reducing the amount it spends on customer support.

Additionally, Sprint PCS hopes to keep its churn rate in the high 2% range in 2002, despite a predicted rise to a high 4% mark for its fourth quarter of 2001. Management believes it can reduce customer dropoff as it invests in its network to enhance mobile coverage and gets better at customer service. "The reasons people get ticked off at us are slowly going away," argues Sprint PCS Segment President Chuck Levine. "Very few customers leave us for price."

"A lot of these (ASL) customers came on in the third quarter, or at least a good chunk of them, and there's a certain degree of lag effect because you don't really know what they look like," explains Peter Friedland of W.R. Hambrecht about the habits of low-credit customers that now make up 25% of Sprint PCS' population. The company hopes to keep their average spending up and wants to entice them to stick with the company so it can reduce overall churn, but it will take time to see if these customers are as stable as Sprint PCS is anticipating.

Sprint PCS doesn't expect to make headway on the amount it spends to attract consumers to sign up in 2002, because the bulk of those costs are paid to retail partners such as Radio Shack (RSH) and Best Buy (BBY - Get Report) and for nationwide advertising. Finally, the carrier plans to spend $3.5 billion to build out its networks in 2002, after a $3.6 billion outlay this year. That will require Sprint PCS to raise $1.8 billion in 2002, which it plans to do by selling off assets and debt offerings.

With a sizable customer base in place, it's time for the bottom line to outpace Sprint PCS's other statistics when it comes to growth.

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