The third largest mobile US operator, Sprint Nextel Corp, reassured the markets with its fourth-quarter results, despite heavy investments in building several WiMAX networks and adding cell sites to improve quality and coverage.
For the fourth quarter the Reston, Virginia-based operator posted net income of $261m, up from $195m in the year-ago quarter. Sales meanwhile rose 7% to $10.4bn from $9.8bn.
For the year ending December 31, net income fell slightly to $1.33bn from $1.78bn. Sales rose 43% to $41bn from $28.8bn, but this later figure only included Sprint’s standalone results prior to the August 12, 2005 merger with Nextel Communications Inc, plus the combined Sprint and Nextel results for the remainder of the year. Pro forma sales in 2005 was actually $38.2bn, meaning that sales actual only rose 7% in 2006.
The results reflect the financially turbulent year the operator experienced in 2006, which was blamed on disposal and merger costs as it struggled to combine the separate entities of Sprint and Nextel. Sprint was a strong player in the consumer market, while Nextel was more popular with the business community thanks to its innovative press-to-talk feature (iDEN) that allowed mobile phones to function as a walkie-talkie.
Sprint Nextel said it had 31.5 million CDMA subscribers in 2006, with 21.6 million iDEN subscribers. It added 742,000 customers during the last quarter of 2006, bringing its total customer base to 53.1 million, compared to 47.6 million in 2005. However, it lost 306,000 post-paid (monthly contracts) customers in the quarter, with its churn rate at 2.3%, down from 2.4% in the third quarter. However, in the year-ago quarter churn levels were only 2.1%.
Post-paid ARPU (average revenue per user) during the fourth quarter was just over $60, down just under 5% from a year ago, as the operator struggled with lower voice revenues, which it claims is being partly offset by growth in data revenues.
CDMA ARPU was sequentially flat at $59, but down 1% from a year-ago. iDEN ARPU declined 2% sequentially to $62 as more and more customers left the service, a clear sign of the problems Sprint Nextel has with its walkie talkie operation, ARPU levels declined 8% from the previous year. It has introduced PowerSource phones (from Motorola) to try and bridge the two networks, and has so far sold 200,000 of the devices. It hopes to sell 2 million to 3 million of these devices in 2007.
However, the carrier’s operational performance has been under severe pressure of late, especially as the carrier exceeded capital investment by $670m, bringing the full year spend to $5.8bn. It spent $2.2bn in the fourth quarter alone, as it added 1,800 cell sites to improve capacity and coverage.
This is reflected in the figures, as net debt increased to $21.1bn, while cash and cash equivalents have declined from $8.9bn at the end of 2005, to $2bn at the end of 2006. The company also lowered its spending budget for 2007 to $8bn from its previous target of $8.5bn.
Sprint Nextel will cut another 5,000 positions and expects to incur approximately $700m in merger integration and severance costs in 2007. CEO and Chairman Gary Forsee said these staff reductions would lower operational costs by $400m.
Sprint Nextel is also investing heavily in building-out of its WiMAX network. We are building internal momentum and are very pleased with the progress and the vendor and support device community, Forsee told journalists and analysts in a conference call.
Motorola and Samsung are currently building Sprint Nextel’s WiMAX networks in Chicago and Baltimore, Washington DC respectively. Forsee expects these networks to be operational by end of 2007, with a commercial service expected in early 2008. He believes that most WiMAX devices will be laptop and PDAs initially, but consumer electronics catching up in 2008 and 2009.
The operator also has a cable joint venture with six markets launched commercially in 2006, with 40 plus markets expected by end of 2007.
Looking forward, Sprint Nextel stuck to its gloomy forecast for 2007. It expects revenue in 2007 of $41bn to $42bn, and warned that the revenue growth from a larger subscriber base was expected to be offset by lower ARPU and lower wireline revenues. Sprint predicted 2007 operating profit, excluding depreciation and amortization, of $11bn to $11.5bn.
Despite this, shares in the operator rose 6.02% to $19.56 on the New York Stock Exchange on Wednesday on the reassurance it would see a net gain in post-paid customers in the second quarter. But this is still well down from May last year, when its shares were trading above the $25 mark.