The Sprint-Nextel figures came out just after we closed last week, and although millions of words have been written about them, we owe them a cursory glance because they were reported as so bad, at a time when all the other US cellular operators are doing so well.
Wireless revenues, which are the ones that matter, are going down slightly and are at $34.7 billion for the year, income is going down radically with operating income reaching $168 million in the fourth quarter, compared to $652 million last year. Meanwhile the remaining Wireline business, now around 20% of the company is more or less static, perhaps growing slightly, and ironically making more operating income than the wireless business.
The company recorded a goodwill impairment charge of $29.7 billion which took the net loss for the quarter to $29.5 billion. The company’s value fell under $20 billion on a share price that has gone as low as $6.75 in the last few days.
Few would envy the job of the new Sprint CEO Dan Hesse, advised by a weak board, with activist investors breathing down his neck, having inherited a grand WiMAX plan that would have made the company a genuine force in US telecommunications, and having stumbled on ill thought merger processes, that have seen wireless customers, in particular those from Nextel, queuing to jump ship, and spending less and less each month.
Much ink was spent discussing the new $99.99 Simply Everything plan, which many observers say is the plank that has to hold the company together, and to be fair, the total loss of just 108,000 wireless customers in the quarter, isn’t quite at disaster level, and neither is the 2.3% post paid churn rate for the quarter. Perhaps the more alarming figure is the 7.5% pre paid churn, but that isn’t so much higher than the 6.5% this time last year.
While at an investor level, this and the 4% drop in ARPU does constitute a good reason for dropping the stock, operationally we have seen companies produce far worse numbers and not only survive, but go on to thrive. In the early days of the Comcast AT&T Broadband merger, the company very carefully managed expectations, but it bled customers, spent money like water, and its ARPU fell initially. Sprint Nextel has 53.8 million wireless customer to work its way through, and although the US market is not saturated and AT&T in particular is acquiring new wireless customers like there’s no tomorrow, this is really about Sprint missing an opportunity to grow, rather than losing high percentages of the company’s customers.
What is more alarming is the way the leadership seems to be frozen. Work on the WiMAX network at least continues, but little is being done to make the transition of cellular customer from the Nextel iDen network to the Sprint CDMA network a comfortable journey. Rumors that the new CDMA Push-to-Talk initiative is being starved of funds, and may never emerge, do little to slow the customer departure rate, and it appears that Hesse has simply accepted that hunks of the Nextel base will continue to disappear, and the only thing is to make offers on the CDMA network so attractive that they are more or less replaced.
Hesse has killed the dividend and borrowed extra funds now in case he finds it hard to do so later, as it needs to repay debt instruments and it turns out he is still talking with ClearWire about merging their two WiMAX networks, or agreeing on roaming and sharing agreements. That was such a sensible thing for him to be doing that we all assumed that he was doing that anyway. Things will continue to get worse operationally for the next two quarters at least, the company feels, before it starts to get better, if it ever does.
On the key subject of Sprint’s huge 2.5 MHz holdings and its proposed Xohm network, Hesse said the company had a three year lead towards offering true wireless broadband with multi-megabit speed and said that the company plans to introduce dual-mode CDMA/WiMAX devices later this year.
So at least we can tell that Sprint expects there to BE a WiMAX network, and one that it can use, even if it doesn’t pay for the build out itself or eventually ceases to actually own the spectrum. The favored deals that outsiders continually suggest are that Google and Intel part fund ClearWire to acquire the spectrum, with perhaps some help from Private Equity groups, or that they at least to pay for the network build out, removing that risk from the Sprint balance sheet, but with Sprint as the go to market proponent for the network, which will own the main customer base.
If Sprint can find a sane, and investor-sensitive outcome for its spectrum and its WiMAX strategy, and then leave someone else to build out the network, then it can get on with the house cleaning, and customer appeasement that it clearly needs, and avoid becoming a basket case. With the current board in place we cannot assume this will happen, but if it does the upside will be palpable.