Sprint Nextel's Bleak Outlook

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."