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Wall Street turned a jaundiced eye on



shiny numbers Wednesday.


nailing its second-quarter earnings report Wednesday morning, Nextel saw its shares drop 5%. The setback came as surly investors gnashed their teeth about big spending decisions looming at the fast-growing, but debt-laden, wireless service provider.

Nextel's conundrum centers on the evolving and closely watched high-speed wireless data arena. If the company stands pat, it risks losing a lucrative share of the business services market. But engaging in a costly network-expansion war, while facing billions of dollars in potential expenses related to a government-backed radio spectrum swap, could break the bank.

The threat comes from deep-pocketed rivals like

Verizon Wireless

-- a joint venture of


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. Both are charging ahead with network upgrades that will better position them to offer fast mobile Internet access.

After a long honeymoon in which Nextel surged fivefold over the space of a year, skeptics have turned their focus on whether the company has reached its peak. Sure, the company is a popular profit leader in a robust industry. But investors know competition in Nextel's lucrative walkie-talkie niche is only growing more fierce. As a result, Nextel shares have stagnated during 2004 in spite of massive gains in users, earnings and revenue.

On Wednesday, the stock slid $1.21 to $24.79.

Costly Rise

To be sure, the Reston, Va., wireless shop had impressive numbers in key areas. It added 546,000 new subscribers, reduced monthly customer churn to 1.6% and bumped up average revenue per user to $70. But it was a slight bulge in costs that seemed to get the most attention on the company's earnings call Wednesday.

The company said higher costs in the June quarter were fed by expansion of the Boost prepaid service plan, plus a wireless broadband trial using Flarion gear in Raleigh, N.C. Also padding the expense line: an unexplained increase in legal costs, stemming presumably from lobbying on the emergency services spectrum swap.

Some analysts say only skeptics would care to highlight those costs.

"People who have been paying attention shouldn't have been surprised by the costs of Boost and Flarion," says a Wall Street analyst with a buy rating whose firm does underwriting for Nextel. "And of course, there were legal fees."

In an interview Wednesday, Nextel CFO Paul Saleh emphasized the company's profit leadership.

"I think people lose perspective," says Saleh. "We are posting 43% margins, which is far better than any of our competitors. It's not at risk. We have been there for some time."

Going Forward

But investors say the looming costs of possible data expansion plans, undetermined though they may be, cloud the horizon. Perhaps more to the point, any big commitment to a data upgrade technology could limit Nextel's opportunity as a merger partner.

U.S. wireless players are largely divided into two technology camps. Verizon and Sprint are code division multiple access, or CDMA, shops that have chosen the evolution data only, or EV-DO, path to data upgrades. On the other side,


and buyout target

AT&T Wireless


are in the global systems for mobile, or GSM, camp. Cingular, a venture of






, has been leaning toward universal mobile telecommunications system, or UMTS, data tech.

Ever the maverick, Nextel has opted to test a third mobile broadband technology called flash-orthogonal frequency division multiplexing, or flash-OFDM. That technology is offered by closely held Flarion of Bedminster, N.J.

Though executives said they are pleased with the performance and speeds of the Flarion system, they insist their options are still open.

"People are jumping to the conclusion that we will make an announcement about our data expansion plans," says Saleh. But sticking with company protocol, Saleh didn't offer concrete alternatives to build any new assumptions on.

"People assume that what we will do is more expensive than what's out there," Saleh concluded.