Technology

Behind Sprint's Sharp Fall


The wireless carrier may not be able to offer new broadband service to customers as quickly as anticipated

December got off to a rough start for equities in general, with the Standard & Poor's 500-stock index down nearly 9%, to 816, on the first day of the month. But wireless carrier Sprint Nextel (S) saw its stock hammered much more than any of the major averages, with shares down 24%, to 2.11.

Why the drubbing? The only news Sprint announced for the day appeared to be relatively benign. The company said it had finalized a previously announced deal to combine its next-generation wireless broadband business with Clearwire (CLWRD), a Kirkland (Wash.) company that's building its own wireless broadband business. By combining the two operations, the companies figure they'll be able to roll out service faster and save on expenses in the process. In addition to Sprint's contribution of assets, Clearwire received $3.2 billion in funding from a number of backers, including Intel (INTC), Google (GOOG), Comcast (CMCSA), and Time Warner Cable (TWC).

Trouble is, that may not be enough money. When the Sprint-Clearwire transaction was originally announced back in May, Clearwire expected to be able to offer its service to 120 million to 140 million people by the end of 2010. But the buildout plans assumed that, in late 2009 or in early 2010, Clearwire would be able to raise an additional $2 billion to $2.3 billion. With the capital markets virtually closed, Clearwire may not be able to raise that money and its rollout schedule may have to be modified. "My preference would be that we continue moving along at the same pace, but that we look at the capital markets on a quarter-by-quarter basis," says Benjamin Wolff, chief executive of Clearwire. Wolff says Clearwire's board could decide to change its buildout schedule when it convenes in early 2009.

Network Access Denied?

Any slowdown by Clearwire could cause Sprint problems. As a Clearwire investor and customer, Sprint plans to buy access to Clearwire's network at wholesale prices and then resell the broadband Internet service to its own customers. If Clearwire's board decides to scale back its ambitions, Sprint may have to wait longer than anticipated to gain access to a high-speed network. (Sprint has two of the 13 seats on Clearwire's board.) That could slow down Sprint's ability to attract new broadband subscribers. Meanwhile, rivals like Verizon Wireless could launch their high-speed networks around 2010.

A Sprint spokesman says the company would "not discuss movements in our stock." He referred questions about the pace of Clearwire's buildout to the Kirkland company.

It's just one of the many challenges Sprint is facing. The company, once renowned for high-quality service, has suffered setbacks in customer service and other quality issues since its merger with Nextel in 2005 (BusinessWeek, 2/21/08). Customers have defected and losses have piled up. The company's stock has fallen from nearly 16 a share last year, a drop of 85%. And Standard & Poor's (which like BusinessWeek is owned by The McGraw-Hill Companies (MHP)) cut the credit rating for Sprint to below investment grade back in May.

There may be further problems ahead. During the company's third-quarter conference call, Sprint executives said they expected to stabilize subscriber losses despite ongoing competitive pressures. But that could be difficult. One reason: While AT&T (T) has the exclusive right to offer Apple's (AAPL) iPhone and Verizon Wireless has Research In Motion's (RIM) new Blackberry Storm, Sprint has no comparable must-have device. The company "doesn't have a flagship phone right now," says Matt Thornton, an analyst with Avian Securities.

Customer Exodus

Sprint had a strong seller over the summer, the Instinct from Samsung. But the device has lost share in the smartphone market in recent months, according to Avian's estimates. Thornton says that, based on Avian's interviews with salespeople in retail stores, the Instinct had about 6% of the smartphone market in October, down from nearly 8% in August. "They just don't have anything that's earth-shattering or exclusive," he says. "Sprint doesn't have that device that's going to woo anyone into the store. They are probably a little more vulnerable [to additional subscriber losses]." Christopher King, an analyst with Stifel Nicolaus (SF), expects Sprint to lose more than 1 million users in the fourth quarter, about the same as the 1.3 million lost in the third quarter.

Sprint has made progress in some areas under Daniel Hesse, who took over as chief executive a year ago. On Dec. 1, Consumer Reports published its latest survey of 51,740 readers' satisfaction with wireless service providers in 23 cities. Sprint improved its score in many cities, including Boston, Atlanta, San Francisco, and Seattle. In Atlanta, for instance, Sprint now enjoys a 66% reader satisfaction score, vs. 54% a year earlier. Still, Sprint trails Verizon Wireless, AT&T, Alltel, and T-Mobile (DT) in most cities.

Despite the company's sinking stock price, Hesse appears to have enough cash for the foreseeable future. As of the end of September, Sprint had $4.1 billion in cash and equivalents, and the company has generated $1.87 billion in cash so far this year. "We don't view them as a risk for default in the next year," says Allyn Arden, an analyst with S&P. The company does have $600 million or so in debt coming due in 2009, and more than $2 billion in 2010.

Serious Trimming

To stem its losses, Sprint is cutting expenses. The company began offering voluntary buyouts to employees in human resources, corporate communications, and finance in November. The workers have until Dec. 3 to apply for the offers, and those who get them will depart by the end of January. Sprint also has stopped buying all but essential office supplies, and has even reduced the number of printers its staffers use to cut expenses. "The cost cuts have been effective, but the EBIDTA [earnings before charges such as depreciation and taxes] is still declining," says Arden. "There's only so much cost they can take out of the business."

The Clearwire deal will help with expenses a bit, too. King estimates that the transaction will offload about $75 million in quarterly operating costs. Still, Hesse has plenty of additional work to persuade investors he's got the company back on track. "They've got a long road ahead of them," says James Moorman, an analyst with S&P. "They are doing all the right things. It just won't turn around overnight."

Business Exchange related topics:

Sprint Nextel

Wireless Broadband

Mergers and Acquisitions

Cost Reduction


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