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WIKI ANALYSIS
Sprint Nextel (NYSE: S) is the third-largest wireless carrier in the United States by number of subscribers, servicing 48.3 million subscribers as of 3Q09[1]. It was formed in 2005 with Sprint's $35 billion purchase of Nextel Communications, an acquisition that has resulted in a lot of difficulties for the newly-formed company and resulted in a $2.6 billion net loss in FY2008[2] and an operating income loss of $28.9 billion in FY2007[2].
As of late, Sprint Nextel has sought strategic partnerships and acquisitions to compete with AT&T and Verizon Wireless. On July 9, 2009, Sprint announced a seven-year agreement with Ericsson that places Ericsson in charge of managing the day-to-day network services and Sprint in charge of customer service and cost reduction. Sprint will pay Ericsson between $4.5 and $5 billion over the life of the contract and will retain complete ownership and decision-making capabilities of its network[3]. In November 2009, Sprint announced the completion of its $483 million purchase of prepaid wireless reseller Virgin Mobile USA, granting the company access to roughly 5.2 million additional subscribers[4]. A month later, Sprint also announced it had finalized its acquisition of IPCS for $831 million, adding 700,000 wireless customers to Sprint's subscriber base[5].
In the past couple of years, Sprint's most pressing problem has been a high churn rate for post-paid subscribers, 2.05% in 2Q09[6] and 2.17% in 3Q09[1]. Pre-paid churn rate (usually substantially higher than post-paid) improved in 3Q09 to 6.65% from 8.16% in 3Q08 as a result of the implementation of its $50 Booth Monthly Unlimited Offering[1]. Although fluctuations in Sprint's churn rates can in part be attributed to seasonality, their secular rise has been fueled mainly by migration to other wireless carriers. This has stemmed from Sprint's difficulties integrating its iDEN and CDMA networks, which disrupted Sprint's once stellar customer service, as well as unlimited calling plans by competitors, which have rendered the iDEN network's minute-saving "push-to-talk" capability obsolete. In the first half of FY2009, Sprint lost roughly 1.15M iDEN post-paid customers in 1H09[7].
To counteract the steady loss of subscribers, Sprint made a large bet on WiMAX, a 4G technology, by spearheading $14.5 billion joint venture with Clearwire, with investment from Comcast, Time Warner Cable, Bright House, Intel, Trilogy Equity Partners, and Google to build a WiMAX network covering 140 million people by 2010[8][8]. The investment in WiMAX is a departure from major competitors AT&T and Verizon, who are making their reach into 4G through a technology called "Long Term Evolution"[9]. Sprint’s WiMAX network, however, is well ahead of any 4G network by AT&T and Verizon, which expect earliest implementations of their new networks to come in 2010[9].
Business Overview
Sprint offers a wide array of wireless mobile telephone and wireless data transmission services on networks that utilize CDMA and iDEN technologies. In addition, it provides a broad suite of wireline voice and data communications services targeted to domestic business customers, multinational corporations and other communications companies.
History
On December 15, 2004, Sprint and Nextel announced they would merge to form Sprint Nextel Corporation. While billed as a merger of equals, the transaction was actually the purchase of Nextel Communications by Sprint Corporation. At the time of the merger announcement Sprint and Nextel were the third and fifth largest wireless providers in the US mobile phone industry, respectively.
Sprint shareholders overwhelmingly approved the merger on July 13, 2005. However, Sprint and Nextel also faced some opposition to the merger - mostly from regional affiliates that provide wireless services on behalf of the companies. These regional affiliates felt that the new company would be violating non-compete agreements that the former companies had made with the affiliates. The merger deal was finally approved by the Federal Communications Commission (FCC) and US Department of Justice on August 3, 2005. The FCC placed a condition on the merger that Sprint is to provide wireless service within the 2.5 GHz band within the next four years.
Business and Financial Metrics
For 3Q09, Sprint reported net operating revenues of $8.0 billion, an 8% decrease from 3Q08 and a 1% sequential decrease from 2Q09[10]. It also witnessed a net loss of $478 million as the firm was impacted by seasonal costs as well as costs associated with customer additions and previous quarters' subscriber losses[10]. For the quarter it generated $664 million of free cash flow, and as of September 30, 2009 the company has $5.9 billion in cash. The company served 48.3 million customers as of the end of 3Q09, compared to 48.8 as of the end of 2Q09. This resulted from a 545,000 decline in net wireless customers and a 135,000 decline in net retail subscribers[10]. At quarter end, wireless churn stood at 2.17% for post-paid subscribers and 6.65% for pre-paid subscribers. The pre-paid rate improved from 3Q08's churn of 8.16% as a result of growing popularity for its Boost Monthly Unlimited Offering, whereas the post-paid rate increased negligibly from 3Q08's churn of 2.15%[10].
| Metric[11] | 2006 | 2007 | 2008 |
| Year-End Average Post-Paid ARPU | $60.00 | $58.00 | $56.00 |
| Year-End Average Prepaid ARPU | $32.00 | $28.00 | $30.00 |
| Year-End Postpaid Churn | 2.34% | 2.29% | 2.16% |
| Year-End Prepaid Churn | 6.47% | 7.47% | 8.205 |
| Net Postpaid and Prepaid Subscriber Additions | 1,660,000 | (685,000) | |
| Total Prepaid and Post-Paid Subscribers | 45,817,000 | 45,239,000 | |
Business Segments
Sprint currently offers wireless phone services under its Sprint PCS and Nextel brands. It is also a provider of landline, long distance, and business telecommunications, as well as Internet service under the name SprintLink. The revenue split for 3Q09 between these businesses is shown in below figure.
Wireless (83% of operating revenue in 3Q09[1])
The wireless mobile voice communication services of Sprint include a variety of basic local and long distance wireless voice services. Through a variety of roaming arrangements, the company also provides roaming services to areas in numerous countries outside the United States. Data communication services include wireless imaging, internet access and e-mail services, entertainment such as live radio and television, and location-based capabilities including dispatch services and navigation tools. These services are provided using a wide variety of handsets and personal computer wireless data cards manufactured by various suppliers. These devices are generally sold at prices below cost in response to competition, to attract new customers and as retention inducements for existing customers.
In addition, Sprint offers wholesale services on its network to resellers, commonly known as mobile virtual network operators, or MVNOs. MVNOs purchase wireless services from Sprint Nextel at wholesale rates and resell the services to their customers under their own brand names. Under these MVNO arrangements, the operators bear the costs of acquisition, billing and customer service. The company currently provides wholesale services, through multi-year, wholesale agreements, to a number of MVNOs, including Embarq, Movida Communications, Inc., Virgin Mobile, CBeyond, Liberty Wireless, Airline Mobile, and Tracfone.
Wireline (17% of operating revenue in 3Q09[1])
Through the long distance segment, Sprint provides a broad suite of wireline voice and data communications services, including domestic and international data communications. Wireline is simply the wired connection between the customer and the phone companies circuits. Sprint also provides services to cable operators that resell the long distance service in support of their telephone service provided over cable facilities primarily to residential end user customers. Although Sprint continues to provide voice services to residential consumers, it no longer actively markets those services.
Network Infrastructure
Network infrastructure is fundamental to any mobile operator in order to provide mobile services. The mobile network enables customers to place and receive voice calls and allows the wireless carrier to provide other services, such as text messaging. Sprint offers its services over a CDMA network for Sprint-branded services and over a iDEN network for Nextel-branded services. The acquisition of Nextel has given Sprint access to communications towers erected for use in connection with the Nextel iDEN network, which enables Sprint to install CDMA cell site equipment on these towers, instead of erecting new towers or installing the equipment on towers owned by third parties, thereby reducing the company's cost
CDMA Network
Sprint-branded and wholesale wireless services are provided over a CDMA network, an all-digital wireless network with spectrum licenses that allow services in all 50 states, Puerto Rico and the U.S. Virgin Islands. The CDMA network uses a single frequency band and a digital spread-spectrum wireless technology that allows a large number of users to access the band by assigning a code to all voice and data bits, sending a scrambled transmission of the encoded bits over the air and reassembling the voice and data into its original format.
iDEN Network
Nextel-branded wireless services are provided over an iDEN network, an all-digital packet data network based on iDEN wireless technology provided by Motorola. Sprint is the only national wireless service provider in the United States that utilizes iDEN technology, providing a walkie-talkie like service under the Boost Mobile brand name. Unlike other wireless technologies, iDEN is a proprietary technology that relies principally on Sprint's and Motorola’s efforts for further research, product development and innovation, and iDEN handsets generally cannot roam onto wireless networks that do not utilize iDEN technology.
Trends and Forces
Slow Growth in a Maturing Market
Revenues from voice traffic for a wireless carrier are driven by its number of subscribers and the average revenue generated per customer (ARPU). In the US, the wireless market is almost saturated, allowing for small organic growth in any provider's subscriber base. According to CTIA, a telecommunications association that publishes semi-annual reports on the industry, total U.S. subscriber counts grew at an annual rate of 11% in the 2000's, compared to 33% in the 1990's[12]. CTIA also believes that the only significant sources of growth for wireless carriers are teenagers and competitors' customers (which has plagued Sprint).
Subprime Credit Customers are Vulnerable to Economic Downturns
In recent periods, Sprint has struggled in attracting new wireless subscribers for and lowering its subscriber churn. With profitable post-paid customers leaving Sprint, a large portion of the remaining customer base is subprime. While the company is in the midst of upgrading its customer base through more stringent credit requirements, it is estimated that 30-35% of Sprint Nextel’s total wireless subscribers could be sub-prime credit quality customers. These customers are particularly vulnerable in a slowing economy, and could drive higher than expected churn rates due to credit-related deactivations.
4G Network
Sprint entered into a partnership with Clearwire, Intel, Google, Time Warner, Comcast, Trilogy Equity Partners, and Bright House Networks, to build the first and only 4G WiMax network, which is now available in 17 markets[10]. Sprint expects it to serve a population of 30 million by the end of 2009 and up to 120 million in 80 markets by the end of 2010[10]. The Federal Communications Commission approved Sprint’s $14.5 billion deal to merge its WiMax business with Clearwire. WiMaX is a fourth generation wireless technology, that covers a much larger area than Wi-Fi and offers speeds that are 5x faster than existing wireless networks. The new company received $3.2 billion[13] from strategic investors such as Intel, Google, Time Warner Cable, Comcast, and Bright House Networks in exchange for roughly 22% of the company[14]. Sprint is working with Samsung, Motorola, and Nokia to manufacture handsets that are compatible with both CDMA and WiMaX.
By forming this joint venture Sprint is preempting its competitors AT&T and Verizon in the transition to a 4G offering. The two companies are investing in a technology called Long Term Evolution, but production of that network is not expected to start until 2010 at the earliest[15] Sprint is the only major service provider making such an investment in WiMAX, as many of its competitors have GSM based networks which, technologically, makes Long Term Evolution an easier transition.
A Highly Regulated Environment
The telecommunications industry is a heavily regulated market. In the U.S., communications services are subject to regulation at the federal level by the FCC and in certain states by public utilities commissions, or PUCs. With regards to wireless, the FCC regulates the licensing, construction, operation, acquisition and sale of all wireless operations and wireless spectrum holdings. With regards to wireline, The Telecommunications Act of 1996 was designed to promote competition and eliminate legal and regulatory barriers for entry into local and long distance communications markets. It also required companies to allow resale of specified local services at wholesale rates, negotiate interconnection agreements, provide nondiscriminatory access to unbundled network elements, and allow co-location of interconnection equipment by competitors. It speaks for itself that in such a heavily regulated market, any significant regulatory change could have a major impact on the company or industry as a whole.
In early July 2009, both the FCC and DOJ have been asked by Senator Herb Kohl of Wisconsin to investigate anti-competitive practices in the cell phone industry [16]. The concern is that 4 companies (AT&T, Sprint, T-Mobile USA, and Verizon) control 90% of the market. Kohl has expressed concern about price increases by the four main carriers for text messaging at the same time. Kohl would also like to see better rates for roaming, a stop to exclusive deals with handset manufacturers, and acceptable rates in the so-called "special access" market where wireless companies pay other carriers to connect to central phone and Internet arteries. AT&T Senior Executive Vice President of External and Legislative Affairs James Cicconi responded to Senator Kohl's concerns by saying that this market is one of the most competitive, innovative, and lowest priced in the world. He said that 95% of the U.S. can choose between at least three different wireless providers, showing that there is not a lack of competition. Increased regulation or a break-up of the industry like what happened to AT&T in the mid-1980s would be very harmful to all wireless carriers as it would reduce margins considerably.
Competition
The table below compares Sprint Nextel on a number of key performance metrics to its main competitors. As is clear from the table, both AT&T and Verizon have seen customer growth remain strong while Sprint Nextel has struggled to add new customers because of an ineffective marketing campaign following the merger.[7]
| FY2009 | Monthly ARPU | Churn Rate | Customers | Total Revenue (in millions) | Subscriber Market Share |
| Sprint Nextel | |||||
| MetroPCS | |||||
| Verizon Wireless | |||||
| AT&T | |||||
| T-Mobile | |||||
| Leap Wireless | |||||
| U.S. Cellular | |||||
First, operating results are still below those of Verizon, the market leader with regards to this metric, as the integration after the merger is not yet complete. For the past several quarters, results have been negatively impacted by costs incurred to achieve synergies between Sprint and Nextel. Sprint has spent just under $1B on costs related to the merger in 2006 and 2007 combined.[17] Such costs generally are not expected to be recurring in nature, and include costs associated with integrating back office systems, severance costs associated with the termination of the employment of certain employees, and lease and other contract termination costs.
| Operator | Customer Base, as of June 2009 (in millions) | Market Share |
| Verizon Wireless | 87.7 | 31.8% |
| AT&T | 79.6 | 28.9% |
| Sprint Nextel | 48.8 | 17.7% |
| T-Mobile | 33.5 | 12.1% |
| Unconsolidated Minorities and Unidentified Others | 8.1 | 2.9% |
| MetroPCS | 6.3 | 2.3% |
| U.S. Cellular | 6.2 | 2.2% |
| Leap Wireless | 4.6 | 1.7% |
| Centennial Communications | 1.1 | 0.4% |
References
- ↑ 1.0 1.1 1.2 1.3 1.4 "Sprint Nextel Reports Third Quarter 2009 Results" 10/29/09
- ↑ 2.0 2.1 Yahoo! Finance: Income Statement. Yahoo! Finance. Retrieved on June 3, 2009.
- ↑ Sprint Gains Network Advantage: Innovative Network Services Deal with Ericsson Delivers Competitive Edge. Business Wire (July 9, 2009).
- ↑ "Sprint Acquires Virgin Mobile USA" Zacks Investment Research, 11/27/09
- ↑ "Sprint Nextel Completes Acquisition of iPCS, Inc." BusinessWire, 12/04/09
- ↑
- ↑ 7.0 7.1 S Q2 2009 10-Q (June 30, 2009).
- ↑ 8.0 8.1 Matt Hamblen (May 6, 2008). Update: Sprint, Clearwire in $14.5 billion WiMax joint venture. Computerworld.
- ↑ 9.0 9.1 Jason Lee Miller (April 4, 2008). Verizon Sees Long Term Evolution. WebProNews.
- ↑ 10.0 10.1 10.2 10.3 10.4 10.5 "Sprint Nextel Reports Third Quarter 2009 Results" Sprint Investor Relations, 10/29/09
- ↑ Sprint Nextel 2008 10-K, pg.23
- ↑ "CTIA’s Semi-Annual Wireless Industry Survey" CTIA
- ↑ FCC Approves Two Big Wireless Mergers, November 5, 2008
- ↑ FCC Approves Sprint-Clearwire WiMax Deal, November 5, 2008
- ↑ Sprint Forms WiMax JV with Clearwire
- ↑ Fawn Johnson (July 8, 2009). AT&T Disputes Antitrust Allegations Against Cell Phone Cos. Dow Jones.
- ↑ Sprint Nextel 2007 10-K, pg.52
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