For Sprint, a tough 2007 ahead

If you are a Sprint Nextel customer, at some point you have suffered from dropped calls. It seems that malaise is spreading to the service provider itself, which has hit a massive air pocket. The company today gave a guidance that could make anyone cringe. The news was so bad, that the company had to cut 5,000 jobs. Quick recap of the bad news:

  • In the fourth quarter ending December 31,2006, Sprint Nextel lost post-paid 306,000 subscribers, the only metric that counts amongst the Wall Street types. Analysts had estimated a loss of about 250,000 subscribers to defect to other carriers. UBS estimates another 330,000 will be gone in the first quarter of 2007 and expect these losses to continue.
  • The capital expenditures are going to be up in 2007 to $8.5 billion versus a shade over $7 billion in 2007.
  • The company will spend $300 million on WiMAX operating costs and $800 million on WiMAX capital costs in 2007 (updated), and more in 2008. No idea, how much, though they did promise coverage for 100 million possible customers by then. Chicago and Washington DC will be their first two trial markets for WiMAX.
  • 2007 revenues are going to be flat when compared to 2006, remaining in the $41-t0-$42 billion range.
  • The good news is that a lot of that money is going to be spent on 4,800 new cell sites, which will raise the total number of Sprint cell sites to 67,000, which compares favorably to 45,000 for Cingular and 26,000 for Verizon.
  • The company is planning a new CDMA based product for Boost customers that uses CDMA network and offers unlimited calling.

The company lost more than expected post-paid customers in the fourth quarter of 2006; will spend more money and will have a flat 2007 in terms of revenues – that’s a left-right-left combination that could leave any investor KO’d. Sprint should count its blessings that all busy bodies, aka bloggers and reporters, are in Las Vegas attending the CES.

In many ways you could predict that this was coming. In Septmeber 2006, Sprint COO Len Lauer quit the company. A month later Tim Donahue left the building. While trying to predict the future because of these developments was akin to reading tea leaves, still two senior executives leaving in quick succession is always a red flag.

Beyond the numbers, Sprint-Nextel’s problems stem from their dual network strategy – CDMA and iDEN. CDMA is doing fine, iDEN is a mess and causing customers to cancel and switch to other carriers. And Sprint-Nextel will remain a mess up until a point when its one network. And if that was not enough, Sprint-Nextel’s decision to add yet another networking protocol, WiMAX, to the mix is only going to create bigger headaches for the company. In a note to his clients, UBS analyst John Hodulik writes, “We believe the company remains committed to WiMAX but is re-evaluating its projections on the project.” Re-evaluating to slowdown, would be a good move at this time.

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