Nextel Naysayers Get New Ammo

The third quarter is strong, but per-user revenue is in decline. Is the growth story past its peak?
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Nextel (NXTL) posted another shiny quarter Friday, but Wall Street is finding the company's flaws harder to ignore.

Looking beyond the Reston, Va., wireless shop's

impressive profit and subscriber growth, some investors are increasingly focusing on some nagging details. It's not that these trends -- like slipping per-user revenue and rising capital spending -- suggest Nextel is in trouble. All the same, it's looking to some people like this growth story may be past its peak.

"Nextel had always been about pluses," says Deutsche Bank analyst Viktor Shvets, who has a neutral rating on the stock. "Now, they have a few minuses against those pluses."

Shares rose 29 cents to $25.56 in midday trading Friday.

Dulling Edge

To be sure, for now Nextel remains the paragon of the wireless sector. Laggards like

AT&T Wireless

(AWE)

have been driven into the arms of more stable rivals such as

Cingular

, in part by the gains of fast-growing Nextel and

Verizon Wireless

. Meanwhile Nextel's customer growth, cash generation, debt reduction and refinancing efforts were characteristically strong again in the third quarter.

But in areas like average revenue per user, or ARPU, Nextel weakened slightly. Third-quarter ARPU fell to $69 from $70 in the prior quarter and $71 a year ago. Analysts and investors say that while Nextel has one of the highest ARPU levels in the industry, the fact that that number came down may be a first indication that Nextel's walkie-talkie edge is dulling.

Adding to the concerns, the company lowered its cash flow forecast and raised projected capital spending by $200 million to $2.4 billion for the year.

Nextel CFO Paul Saleh, in an interview Friday, says people may be looking a little too hard in the dark corners and missing the brighter overall picture.

"A lot of people focus on one metric and get excited about it," says Saleh, referring to the concerns about ARPU falling. "We are generating higher cash flow from operations" than peers, says Saleh. "The reason we don't worry about ARPU is because that's not how we run the business."

But Deutsche Bank's Shvets says what tends to eat at Nextel investors is "an accumulation of things."

Part of it, says Shvets, is that Nextel investors are a bit spoiled. "People get a good number, but they want a better number," he says.

Slippage

All elements considered, Shvets calls the No. 5 cell phone service a strong company that's growing faster than the rest of the pack in terms of market share.

But growth has its pains.

For example, analysts point out that Nextel's core customer group has been incredibly loyal and willing to pay extra for the company's signature two-way radio feature. But as the company starts to tap a wider audience, it is finding new users who aren't necessarily rabid walkie-talkie fans. And less two-way radio traffic equals lower monthly phone bills.

Also, the two-way radio feature will eventually be available from nearly all wireless telcos. As that defining characteristic becomes more common, Nextel's 1.5% monthly churn or customer defection rate will rise.

Customer loyalty isn't an immediately looming threat. Still, it's one more overhanging concern where there used to be none.

And that's the point, says Shvets: "It used to be a one-sided story."