http://www.businessweek.com/articles/2012-10-04/sprints-long-slow-crawl-toward-profitability

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Sprint's Long, Slow Crawl Toward Profitability


CEO Hesse

Photograph by Jeff Kowalsky/Bloomberg

CEO Hesse

Dan Hesse, chief executive officer of Sprint Nextel (S), sits in a plush office that he inherited from his predecessor, on a half-empty 200-acre campus he didn’t build, trying to lead a company back to a place it hasn’t been in six years: profitability.

Since taking over in December 2007, Hesse has worked to fix the mess he was handed after Sprint’s $36 billion acquisition of Nextel in 2005 failed, causing 3.1 million subscribers to flee the Overland Park (Kan.)-based carrier. Although his regime has had its own struggles, including a turbulent joint venture with Clearwire (CLWR) and a foray into a dead-end WiMAX wireless technology, he says Sprint is on track to return to the black in 2014.

Graphic by Bloomberg Businessweek; Data compiled by Bloomberg

Wall Street has shown increasing faith. Sprint shares are up more than 122 percent this year, outperforming Apple (AAPL) and Google (GOOG) and second only to homebuilder PulteGroup (PHM) as the best performer on the Standard & Poor’s 500-stock index. Still, Hesse is quick to qualify his optimism. “I tell the team here, ‘You’re not going to see any Mission Accomplished signs anywhere on this campus,’ ” he says. “This is a long process.”

Given Sprint’s history of failures, there’s no shortage of doubters, says Phil Cusick, an analyst with JPMorgan Chase (JPM). “One thing that keeps people skeptical is that we’ve seen these head fakes before,” he says. “There’s no one on Wall Street who has been around for a while that hasn’t lost money on Sprint.”

The company’s credibility reached a nadir last year, during a stormy Oct. 7 analysts’ day. Investors were concerned that Sprint would crack under the pressure of a $7 billion network-upgrade plan and a costly bargain to get the iPhone—a deal that requires the carrier to buy $15.5 billion worth of the devices from Apple. During the meeting, Sprint refused to answer questions about the iPhone arrangement and its impact on finances, and the company further angered some investors by saying it would have to raise more money to fund its network-upgrade plan.

“A year ago, management was talking about all the things they needed to do—it was hard to listen to them, they had so little credibility,” says Scott Dinsdale, a vice president and credit analyst at Montpelier (Vt.)-based KDP Investment Advisors, which owns Sprint bonds. “You just held your nose and held the bonds.” He says Sprint is more stable than it was a year ago. But with 32.6 million subscribers, it’s still a distant No. 3 behind Verizon Wireless (88.8 million) and AT&T (T) (69.7 million), according to data compiled by Bloomberg. And Sprint’s next-generation LTE, or Long Term Evolution, network is at least a year behind Verizon’s technology.

Hesse, a lanky 58-year-old who prefers to work in jeans, says he’s conceived Sprint’s turnaround in three stages. The past four years have been a recovery period that involved cutting 20,000 jobs (a third of the workforce) and stopping investment in the Nextel system, which proved incompatible with Sprint’s network. This year and next, Hesse says, are the investment phase. That’s when the company dismantles Nextel and turns on its faster LTE network. “Right now we are spending money like crazy revamping the network,” Hesse says. Adding to the costs are the heavy iPhone subsidies—an upfront expense to acquire lots of customers that he says will “pay off longer term.” Stage three will be growth, when these improvements begin to flow to the company’s bottom line. According to Hesse, Sprint will see profits and faster growth in 2014.

Even if Sprint turns the corner then, it will have suffered almost $50 billion in losses during a seven-year stretch, including a $30 billion writedown of Nextel and losses for 2012 and 2013. But, Dinsdale says, when the LTE network is complete and the full impact of the company’s deal with Apple is known, things could look different. The strategy “was transformational, but it needed to be done and they had the guts to do it,” he says. “There’s a chance they may be heroes in a year.”

The bottom line: After years of losses, Sprint is counting on job cuts, investment in infrastructure, and the iPhone to return it to profitability by 2014.

Moritz is a reporter for Bloomberg News in New York.

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