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-Sprint Nextel (NYSE:S) is the third-largest wireless carrier in the United States in terms of number of subscribers, serving 46 million customers directly and 6 million via resellers at the end of 2006. With a market capitalization of $64.29B, the company offers a comprehensive range of wireless and wireline communications products and services for individual consumers, businesses and government customers. Operating income in 2006 amounted to $2.48B on annual revenues of $41.03B. Only about 15% of sales came from the fixed-line phone and data services.+Sprint Nextel (NYSE:S) is the third-largest wireless carrier in the United States in terms of number of subscribers, serving 46 million customers directly and 6 million via resellers at the end of 2006. With a market capitalization of $64.29B, the company offers a comprehensive range of wireless and wireline communications products and services for individual consumers, businesses and government customers. Operating income in 2006 amounted to $2.48B on annual revenues of $41.03B. Only about 15% of sales came from the [[Fixed-line telecommunication | fixed-line]] phone and data services.
The company was created in 2005 through a $35 billion purchase of Nextel Communications by Sprint Corporation. The merger aimed at securing a number of strategic and financial benefits such as the combination of networks, a diversification in customer bases and services, and the opportunity of improving operating efficiencies through revenue and cost synergies. In 2006, the company spun-off its local landline telephone business, naming it [[Embarq]], and also completed the $6.5 billion acquisition of Nextel Partners, which primarily provided Nextel-branded wireless services to more rural markets in the United States. The company was created in 2005 through a $35 billion purchase of Nextel Communications by Sprint Corporation. The merger aimed at securing a number of strategic and financial benefits such as the combination of networks, a diversification in customer bases and services, and the opportunity of improving operating efficiencies through revenue and cost synergies. In 2006, the company spun-off its local landline telephone business, naming it [[Embarq]], and also completed the $6.5 billion acquisition of Nextel Partners, which primarily provided Nextel-branded wireless services to more rural markets in the United States.

Revision as of 11:01, August 3, 2007

Sprint Nextel (NYSE:S) is the third-largest wireless carrier in the United States in terms of number of subscribers, serving 46 million customers directly and 6 million via resellers at the end of 2006. With a market capitalization of $64.29B, the company offers a comprehensive range of wireless and wireline communications products and services for individual consumers, businesses and government customers. Operating income in 2006 amounted to $2.48B on annual revenues of $41.03B. Only about 15% of sales came from the fixed-line phone and data services.

The company was created in 2005 through a $35 billion purchase of Nextel Communications by Sprint Corporation. The merger aimed at securing a number of strategic and financial benefits such as the combination of networks, a diversification in customer bases and services, and the opportunity of improving operating efficiencies through revenue and cost synergies. In 2006, the company spun-off its local landline telephone business, naming it Embarq, and also completed the $6.5 billion acquisition of Nextel Partners, which primarily provided Nextel-branded wireless services to more rural markets in the United States.

The three largest wireless carriers together (AT&T, Verizon, and Sprint Nextel) control more than three quarters of the US wireless market. In recent years, both AT&T and Verizon have seen customer growth remain strong and margins improve as a result of their dominating market position. Sprint, on the other hand, has struggled to add new customers because of an ineffective marketing campaign following the merger. It also saw average revenue per customer fall, resulting from increased pricing pressures and high churn rates of profitable post-paid customers from Nextel. In addition, margins have further been impacted negatively by costs incurred to achieve synergies from the merger.


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.

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 Nextel is to provide wireless service within the 2.5 GHz band within the next four years.

Company Overview

Sprint Nextel 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.

Products and Services

Sprint Nextel 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 2006 between these businesses is shown in below figure.

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Source: Sprint Nextel Annual Report


Wireless

The wireless mobile voice communication services of Sprint Nextel 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 Nextel 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., Helio Inc., Qwest Communications International, and the Walt Disney Company.

Long Distance

Through the long distance segment, Sprint Nextel provides a broad suite of wireline voice and data communications services, including domestic and international data communications. The company 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 Nextel continues to provide voice services to residential consumers, it no longer actively markets those services. In 2006, only about 15% of sales came from the fixed-line phone and data 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 Nextel offers its services over a CDMA network for Sprint-branded services and over a iDE] network for Nextel-branded services.

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 Nextel is the only national wireless service provider in the United States that utilizes iDEN technology, and iDEN handsets are generally not enabled to roam onto wireless networks that do not utilize iDEN technology.

Unlike other wireless technologies, iDEN is a proprietary technology that relies principally on Sprint Nextel's and Motorola’s efforts for further research, product development and innovation. Sprint Nextel relies on Motorola to provide it with technology improvements designed to expand its iDEN-based wireless services, including improvements designed to increase voice capacity and improved iDEN-based services. Motorola provides substantially all of the iDEN infrastructure equipment used in Sprint Nextel's iDEN network, and substantially all iDEN handset devices.

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, which reduces the company's costs. Similarly, Nextel is able to install iDEN cell site equipment on the CDMA communications towers.

Trends and Forces

Maturing Market

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Revenues from voice traffic for a wireless carrier are driven by its number of subscribers and the average revenue generated per customer. In the US, wireless subscriber growth is slowing as market penetration comes close to reaching 100%. With a penetration reaching 100%, the market is clearly maturing and delivering lower growth as a result. This is illustrated by below graph, showing the incremental penetration is decreasing quarter-to-quarter and year-to-year while overall US market penetration peaked at 77.4% end of 2006.

Pricing Pressures

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As mentioned before, revenues from voice traffic for a wireless carrier are driven by its number of subscribers and the average revenue generated per customer. The average revenue is expressed by the industry as Average Revenue Per User (ARPU) which quantifies the average monthly revenue any customer is generating. Pricing competition leads to declining average voice revenue per subscriber, as both Sprint Nextel and its competitors offer more competitive service pricing plans, including lower priced plans, plans that allow users to add additional units to their plans at attractive rates, plans with a higher number of bundled minutes included in the fixed monthly charge for the plan, plans that offer the ability to share minutes among a group of related customers, or a combination of these features.

With a slowing subscriber growth, competition will further intensify within an already very competitive market. As illustrated by below graph, monthly ARPU for Sprint Nextel already showed signs of deterioration in 2006. Also note that Sprint Nextel has the highest ARPU when benchmarked to its competitors, making the company particularly vulnerable to pricing pressures.

Economic Slowdown

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In recent periods, Sprint Nextel has experienced declines in the number of new subscribers for wireless services and increases in the rate of subscriber churn. While it is hard to point to a single set of drivers for this increasing churn rate, there is a general consensus major forces behind the increase include an ineffective marketing campaign following the merger rand high churn rates of profitable post-paid customers from Nextel.

With profitable post-paid customers leaving Sprint Nextel, a large portion of the remaining customer base is sub-prime. 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.

Line Losses and VOIP Substitution

Several factors have been driving wireline line losses over the past couple of years, including increased VOIP substitution as well as line losses to the cable companies that started to offer bundled wireline services themselves. Going forward, these same trends could affect wireless lines as well. Such line losses would have a material effect on revenues and earnings.

Third-Generation Wireless

Third generation wireless, or 3G is a technology with the capability for high-speed wireless data transfer, making possible a myriad of additional applications such as mobile video, secure mobile ecommerce, location-based services, mobile gaming and audio on demand. For example, using 2.5G (or a slightly better version of second-generation wireless) a three-minute song takes between six and nine minutes to download. Using 3G, it can download in 11 to 90 seconds.

Sprint offers some 3G services currently (e.g., Power Vision) but in the U.S. and most of the rest of the world--except Japan and some parts of Asia--there has been little uptake or demand for 3G services, which are used for data heavy applications such as multimedia. As a result, phone manufacturers have been hesitant to release 3G handsets. If 3G adoption does accelerate in a meaningful way, Sprint would benefit from additional fees for related wireless services.

Regulatory 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.

Comparison to Competitors

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.

The comparison further shows that apart from the churn increase in 2006, as already discussed, churn rates for Sprint Nextel are the highest in the market because of its large sub-prime customer base and credit-related deactivations. While ARPU is by far the highest in the market for Sprint Nextel, driven by profitable post-paid customers from Nextel, it has shown signs of deterioration in 2006.

Key metric (2006) AT&T Verizon Sprint Nextel
Net adds (Millions) 6.9 7.7 1.3
Churn (%) 1.8 1.1 2.3
Monthly ARPU ($) 49 50 60
Monthly ARPU Y-T-Y change (%) 0.9 1.5 -4.8
EBITDA margin (%) 34.4 43.2 35.4

Lastly, 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. 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.

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