Sprint Nextel Profits Drop on Merger Costs, Outlook Disappoints

Sprint Nextel (NYSE: S) posted sharply lower profits in its first full quarter as a merged company, saying the cost of combining the wireless powerhouse with the traditional long-distance company kept profits down even while the company added subscribers.

Sprint Nextel said it earned US$197 million, or 7 cents per share, compared with $437 million, or 29 cents per share, a year ago. Revenue was strong, rising 63 percent to $11.3 billion.

The company also disappointed with its forecast for 2006, saying revenue would likely come in at around $41 billion or more, below the $46.8 billion average estimate of analysts.

Sprint Nextel CEO Gary Forsee said the results for the fourth quarter of 2005 are impressive when viewed in context of the massive changes underway at the merged company.

"We exceeded key financial goals that Sprint and Nextel each established at the start of the year and the goals we set for our combined company," Forsee said. "This is particularly impressive when you consider that we were simultaneously undertaking the integration of two substantial organizations, building a new brand, preparing for the launch of [its new local business service affiliate] Embarq, and forging partnerships with cable companies and others."

Future growth in wireless will be "partially offset" by declines in long distance and the company will continue to move closer to the eventual $1 billion per year savings it said it would achieve through its merger.

Industry in Transition

Sprint Nextel shares were down about 2.5 percent in midday trading Wednesday to $24.29.

While the results were being scrutinized for signs of market share gains or losses in the wireless space, they mainly reflect a company, and an industry, in transition, telecom analyst Jeff Kagan told the E-Commerce Times.

"Sprint Nextel as a company is going through a lot of changes, along with the rest of the telecom industry," he said. "The company is in the process of a major transformation away from the slow growing parts of telecom toward the hot products and services. The way we look at and measure the success of Sprint Nextel, and in fact all the telecom firms, is changing."

Going forward, telecom firms, especially wireless companies, will likely have fewer customers among them, but focus more intensely on driving additional revenue from each customer . He also said that a company like the newly combined Sprint Nextel needs to be watched closely because its wireless business may continue to grow while its wire-line long distance services stagnate or even shrink in size.

"Telecom is in the process of change so we have to look beyond traditional ways to measure it and try to understand what it will look like," Kagan added. "The changes Sprint Nextel are making look very healthy so far."

Job Cuts, Spinoff Ahead

Sprint Nextel said it would make strides toward the cost-savings to be had from the merger in 2006 by cutting as many as 2,500 jobs, a reduction of about 4 percent.

Also closely watched will be the company's spinoff of its local service, to be known as Embarq Corp. The new firm will focus on delivering residential and small business services in smaller cities and towns, packages of DSL Internet service, local and long-distance landline services and through a partnership, the Dish Network satellite service.

The Sprint-Nextel merger was one of several that altered the face of the telecom industry during 2005. Verizon's $6.8 billion acquisition of MCI is also still in its early days. In the long run, the companies are expected to be able to use their expanded market reach to drive higher per-subscriber revenue each month by offering higher-end services, including wireless services such as downloadable music and video and in-home services delivered over Internet connections.

That long-range outlook hasn't changed, but investors, many of whom questioned the wisdom of the mergers, may want to see more immediate results.

In a possible nod to those investors and analysts who may be getting antsy to see more impressive results in the early days of the merger, Sprint Nextel said it was evaluating how much of a dividend it would pay after it spins off its local business and said it was weighing a stock buy-back plan.