Sprint Nextel Corp. Cuts Reflect Merger and Competitor Struggles

Technology problems, strong competitors and cost-conscious customers continue to bedevil Sprint Nextel Corp. as the company struggles to make good on a merger that looked so appealing when it was announced three years ago.

The Reston, Va.-based company announced Monday that it had a net loss of more than 300,000 monthly subscribers during its fourth quarter and was cutting 5,000 jobs.

Sprint Nextel also said that it expected near-flat operating revenue and earnings for the coming fiscal year as it continues to lose customers and increases its spending on marketing and adding capacity to its cellular network.

Company officials predicted a return to growth in the second quarter, but investors hammered the company's stock Tuesday, forcing shares down $2.19, or 11 percent, to $17.45 on the New York Stock Exchange. The stock has traded in a 52-week range of $15.92 to $26.89.

CIBC World Markets analyst Timothy Horan was one of several analysts who downgraded Sprint Nextel's stock, demoting it to "sector performer" from "sector outperformer." He said the company's customer base was "weak" and "exposed to a potentially slowing economy."

Horan removed his target price, which had been $22. He said he expects the company to see difficulties winning back market share from rivals Cingular Wireless and Verizon Wireless, as the two are "locking in customers now with two-year contracts and almost 70 percent of subscribers on family plans and many of the others on enterprise plans."

David Barden, an analyst with Bank of America, said he was taking a "wait and see" approach but clearly was less than optimistic.

"Longer term investors who have been playing Sprint for its turnaround potential will likely stay with the story, but will need to push out expectations for the `turnaround' until (second quarter 2007) at the earliest, in our view," Barden wrote in a research note. "We have shifted our expectations as well regarding this potential inflection, but not toward recovery per-se, but simply toward a moderation of the self-inflicted pain Sprint is incurring to rationalize its subscriber mix."

The bulk of the subscribers leaving are Nextel customers, frustrated by continuing service problems that the company blames partly on technology issues and analysts say are a signal that the Sprint-Nextel merger of August 2005 is far from complete.

When Overland Park, Kan.-based Sprint said in December 2004 that it would acquire Nextel Communications Inc. to create the third-largest wireless provider in the country, industry observers predicted it could be a good marriage. Nextel enjoyed great loyalty from construction crews, taxi companies and other businesses that liked the company's press-to-talk feature, while Sprint built itself as a leader in developing content for the consumer market.

Since the deal's consummation, however, the company has fallen behind its competitors as it struggled to blend the two corporate cultures and assimilate a host of acquired affiliates. It's also been criticized for a marketing plan that experts said has ignored the different desires of Sprint and Nextel customers.

The company has also seen an exodus of Nextel executives, including former Chief Executive Tim Donahue, who stepped down as company chairman at the end of last year.

"On paper, (the merger) didn't look too bad and it maybe made some sense," said Greg Gorbatenko, a telecommunications analyst for Jackson Securities. "But the digestion of that was just horrible."

Sprint Nextel's latest efforts show executives realize the customer service problems. The company says it plans to spend $8.5 billion in the coming year, much of it to add signal sites and improve signal quality.

Last week, the company said it would revisit its marketing plans to better sell Sprint Nextel's strengths.

The company is also continuing to strengthen credit requirements, hoping to weed out low-spending customers who are more likely to drop service. How many of the remaining customers will jump to cheaper or no-frills calling plans is still unknown.