Investors are finding more and more reasons to drool over the wireless sector's strength.
Exhibit A is
, whose hot streak only got hotter Thursday in an impressively broad show of strength.
Yep, there's nothing quite like a good old fashioned estimate-beating, target-raising performance like Nextel turned in Thursday to rekindle a warm glow among tech fans. And with Nextel the first of the six-pack of national wireless telcos to report earnings in coming weeks, Wall Street is reading the results with an eye for what may be in store for the group.
While Nextel and
appear to be some of the quarter's early winners, observers are growing concerned for players such as
, which may shake out as the laggards in the cell-phone services race.
Perhaps the biggest looming issue for the industry is the approach of number portability rules that allow users to keep their phone numbers as they change service providers. Come Nov. 24, when the rules are planned to go into effect, the spread between winners and losers is expected to widen.
Nextel says it welcomes number portability and expects to be a beneficiary as new subscribers consider alternatives and opt for snazzy services such as the company's two-way radio technology.
Nextel certainly hasn't felt any lapse in momentum so far. On Thursday the Reston, Va., service provider posted earnings of $346 million, or 32 cents a share, down from the year-ago $526 million, or 55 cents a share. The latest quarter included debt retirement charges of $132 million, or 13 cents a share, and the year-ago quarter included 44 cents in debt-retirement gains. On a so-called adjusted basis, latest-quarter earnings jumped to 46 cents, from 14 cents a year earlier.
Nextel's revenue rose 27% over the year-ago level to $2.89 billion, as the company added 646,000 subscribers. Average monthly revenue per subscriber hit $71 for the third quarter, up from $69 in the second quarter and highest in the industry. Churn, meanwhile, was 1.4%, its best mark since 1997.
For the full year, Nextel raised its free cash flow forecast to $1 billion from $600 million and raised its EPS forecast to $1.15 from $1.
Despite predictions that the market is saturated, growth in wireless continues. The wireless industry continues to benefit at the expense of conventional wireline services, say COO Tom Kelly and CFO Paul Saleh in an interview Thursday.
"Wireline substitution is accelerating," says Saleh. "Average monthly calling time grew to 740 minutes this year from 660 last year," says Saleh, illustrating an ominous traffic trend for the wireline telcos.
On the topic of number portability, the executives said the company with the happiest customers will do the best. "There will be a blip," says Kelly, referring to a rise in expected churn, or account losses. But nothing more, he indicates.
In wireless, customer happiness tends to hinge on factors such as network service quality. No carrier has landline-quality service all the time, but outfits such as Sprint and AT&T Wireless, especially in the Northeast, are mentioned most often as weak.
Says one Wall Street analyst: "Everyone I've talked to who is with AT&T is ditching the service on Nov. 24." Though that's an admittedly small sample, other industry observers warn that when number portability reshuffles the subscriber deck, Sprint and AT&T Wireless will likely be holding fewer customers.