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Shares of Sprint Nextel (NYSE: S) plunged Tuesday after the wireless company warned that its growth for the current year would not meet earlier forecasts. The company also said it planned to slash 5,000 jobs from its payroll.
Sprint's warning suggests the company has not yet realized the benefits it had hoped for when it merged Sprint and Nextel in a US$36 billion deal 
in mid-2005 -- and that other recently combined companies, such as AT&T (NYSE: T), may be coaxing customers away from the company.
Deal Not Panning Out?
Sprint's Nextel buy was aimed largely at acquiring its business expertise and customer base, which favors the company's push-to-talk walkie-talkie-like functionality. The deal was also expected to give Sprint, which began as a long-distance company, a more competitive wireless footprint.
While it did not give specific financial results for the fourth quarter, Sprint Nextel issued a fairly detailed 2007 outlook, saying revenue for the full year would be $41 billion to $42 billion. The lower figure would represent no growth over 2006 levels. Income would be significantly lower, meanwhile, at $11 billion to $11.5 billion compared to an estimate issued last year of $12.6 billion to $12.9 billion.
CEO Gary Forsee said 2006 was a "challenging year" for Sprint Nextel but that the company was taking steps to right the ship.
"We initiated actions to improve our operating performance and enter 2007 with signs of progress under way," he added. Still, he said in the near term, several factors, including a revenue mix that includes more lower-margin services and a plant to sink another $1.1 billion to build out its next-generation WiMax network will "pressure profitability."
"We will continue to adjust our cost structure," Foresee added, with 5,000 jobs to be cut by the end of the first quarter. That represents about 8 percent of the company's current workforce.
Growing, Slowly
Sprint said its subscriber base grew by 742,000 in the fourth quarter, many of them gained through prepaid plans and lower-priced calling programs sold through wholesalers. It lost 306,000 monthly subscribers on so-called post-pay plans. Those are generally considered the most lucrative and highest-margin customers for a wireless company. The company said it had a monthly turnover rate of 2.3 percent, relatively high by current industry standards.
Sprint Nextel ended 2006 with 53.1 million customers, making it the third largest carrier in the U.S. behind Verizon Wireless and Cingular.
The company said its decision to tighten its credit requirements for new subscribers also contributed to the decline in new post-paid subscribers. Still, the company said it would likely report better per-customer-revenue figures than its competitors as more customers use more voice minutes and increase their use of data plans.
The warning and outlook hit Sprint Nextel shares hard, with the stock falling more than 10 percent in morning trading Tuesday to $17.64.
To regain growth momentum and profitability, the company said it would focus more on IP-based services in its wireline business, a legacy of Sprint's long-distance days. It also plans a marketing campaign based on the theme of "Power Up." That effort will launch in coming weeks.
Rocky Road
It appeared Verizon and Cingular were grabbing higher-end customers away from Sprint Nextel, a trend that may continue in the near term, according to UBS analyst John Hodulik.
"Over the next few quarters, we expect Sprint to continue to lose post-paid share to the benefit of the other major domestic carriers," Hodulik noted.
Recovering market share may prove more difficult in 2007 and beyond as well, with many analysts saying wireless revenue growth may suffer a period of slower growth before next-generation data services, such as mobile video, begin to take hold.
The bumps in the road may show that Sprint Nextel is still in the process of re-inventing itself after its merger, telecom analyst Jeff Kagan told the E-Commerce Times.
Midway through 2006, Sprint spun off Embarq, a stand-alone local phone service company, a move meant to enable more focus on growth areas such as wireless.
Sprint Nextel may benefit in the future from partnerships with cable companies that want to offer Sprint service as part of a larger bundle of communications and entertainment options.
"Sprint Nextel is in the middle of a fundamental change," Kagan said. "Originally it migrated from long distance to wireless. Then they merged with Nextel. Then they spun off Embarg. Next they intend to partner with the cable television industry. That evolution is still taking place and won't happen overnight. The marketplace is waiting to see some strong signs that things are starting to take hold."
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