Sprint Nextel (S) reported an ugly Q4, including a $29.7 billion goodwill charge for its Nextel unit. The company reported $8.5 billion in Q4 sales, down 6% year-over-year and more than $1 billion short of analysts’ $9.9 billion consensus. Adjusted EPS of 21 cents per share beat analysts’ 18 cents per share estimate, but a nearly $30 billion goodwill write-down for Nextel meant Sprint reported a $29.5 billion Q4 net loss.
Operations even uglier. Sprint lost 108,000 net subscribers during Q4, and expects to lose 1.2 million “post-paid” subs (who get monthly bills, vs. pre-paid subs) during Q1. Customers are spending less money per month, and Sprint expects that to get worse, too.
On the bright side: New CEO Dan Hesse sounds smart, confident, and humble. He seems to understand the mess he’s in, and admits it was worse than he expected. He did a nice job during today’s call, and trotted out a lot of the senior management team to answer questions. And unlimited-calling plans could help a little. But the bottom line is that things will get worse before they get better.
LIVE conference call notes:
8:07 Joining call in progress. Not much so far, just discussion of Nextel goodwill impairment charge and operational stats from press release and slides, available on I.R. site.
8:08 ARPU decline mostly because of Nextel subs. Data revenues continue to grow at double digit rates, but offset by declining voice ARPU.
8:09 Lower overage and roaming revenues, also subprime losses, which tend to have higher ARPU. Expect a sequential decline of $2 ARPU next quarter, mostly because of seasonal light voice usage.
8:10 $2 billion capex in Q4, $6.5 billion in 2007. We expect core wireless capex to be lower in 2008 than 2007.
8:12 New CEO Dan Hesse joins. “The issues we face are more difficult than I expected to find.” Will have a difficult 2008 but the long term looks promising. Turnaround will not happen for many quarters. Reducing employment numbers by 4,000, contractors, 125 company owned stores, 4,000 points of distribution. New corporate culture of customer service, accountability, etc.
8:14 Talking up wireline backbone network.
8:15 We think Nextel iDEN network can be used better than it has been. Launching push to talk on CDMA network this year. Re-invigorating Nextel direct connect, including new phones from Motorola, and first-ever wi-fi walkie-talkie BlackBerry.
8:16 Customer experience most important. “Job 1.” Churn is top metric. Anticipate 1.2 million net postpaid sub loss in Q1. Wow.
8:18 That loss is “unlikely to improve” in Q2. Adjusted OIBDA decline in Q1 to $1.8 billion to $1.9 billion. Will share more of action plans next quarter, but will take time for results to show.
8:20 Network speed by itself is not enough.
8:20 Sprint adding its own unlimited plan. $99.99 “simply everything” including Web, text, TV, navigation, chirp, email, calling. PDA phone sales increased by 1/3 in Q4.
8:22 iPhone has taught people how to try new things like data. $89.99 a month unlimited plan for less stuff, too.
8:26 Existing customers can switch to these plans (or any plans) without having to extend their contract.
8:27 Discussing WiMax deals with Clearwire, but no finalised deal. Will talk more about WiMax at a later date.
8:28 Dual-mode CDMA/WiMax devices coming later this year.
8:29 Q&A begins. Update on QChat? In beta tests right now, rolling out commercially in Q2. 20 market level through the course of 2008 and growing quickly over time. Want to make sure it works before it goes wide.
8:32 How can you have so many brands? There are different segments. Sprint will be overarching brand. Nextel is really becoming an application/button rather than a company brand, but tremendous brand equity. Looking at brand/name assets. Nextel brand is synonymous for walkie talkie. Wise to continue to leverage that. Boost applies to a “certain segment” of the market. Want Xohm (WiMax) to have caché. Hmm. Naming “may evolve over time” but Sprint will be umbrella.
8:34 iDen network performing “extremely well” in part because of fewer customers. Not the best problem to have.
8:37 Q1 guidance lower than what most people were looking for. Why? Something that’s going to help customer care turnaround quickly? Or EBITDA softer in 2009 than even 2008? Currently looking at 2008 plan and operational model. As we look to Q1, single biggest drop is ARPU. Folks leaving at one rate and new subs coming in at a lower rate. We see continued ARPU pressure but think it will stabilise. Making investments in customer service and further revenue erosion. Not much visibility past Q1.
8:39 What measures of success do you need to see that pricing action is going to be enough for Sprint rather than starting down slippery slope of price across industry? If all customers taking packages move to new package, what is dead weight cost? Clearly won’t be enough to deal with issues that we’ve been talking about. $100 range is low to mid single digits of customer base. Simplicity differentiation. In terms of numbers, will this be enough to move the needle around large subscriber numbers? No. Begins to make a difference, take disproportionate share of high-spending customers.
8:43 We think we do data better than everyone. Not about voice anymore. Targeted for heavy users, think it gives customers a reason to stay as well.
8:45 We also have new rate plans we’re launching for broader parts of the market. 450 minute talk/message/connect plan for $49.99, 900 minutes for $69.99, another $20 for unlimited data. Simplifying rate card to be applicable across varying segments. Not really pulling price lever as much as simplifying the things we charge for.
8:51 How nimble with unlimited plan? Why now isn’t good time to roll off wireline business? Right now, most important thing is having all hands on deck around improving customer experience. When you’ve integrated a network, it’s extremely hard to pull them apart . (Dan knows, he led the Embarq spinoff.) Wireline backbone is core part of wireless network.
8:54 Not to say we wouldn’t consider it if the price was right. But it’d be a huge distraction. And it’s a tremendous asset for the company. We will pay very close attention to marketplace and try to be as nimble as possible.
9:01 No final decisions on WiMax.
9:01 Spectrum rebanding? On track, we have market by market playbooks in hands of sales teams and local network teams. All systems are green.
9:07 What dilution from WiMax? EBITDA getting worse? Similar to what we had in Q4, around $100 million of EBITDA dilution from WiMax. ARPU trend in first quarter has a couple of seasonal factors in there, reducing some fees in Q1, which won’t be recurring. Also get typically a meaningful seasonal benefit in Q2. Wouldn’t expect that trajectory to continue in Q2.
9:09 Last question: Not seeing much difference from your new plans. Probably unfair to compare our speed to T-Mobile’s speed. Data offering text and email, everything else slow. Plans we built here improve on data. Not meant to be a price play type of thing only where we’re trying to beat them on price. Trying to change story to data network, which we think is better than T-Mobile’s.
9:13 Salary plan? Incentives in place for Q1, in process of setting targets/objectives for rest of year. Equity grants haven’t been made yet for senior team.
9:13 Not expecting this rate plan to change trajectory of business. This is one element in long list of things. Have to take lots of steps, but we also need to begin to identify who we are, what brands are, etc. We believe new battleground going forward will be data. Intend to own the data world going forward. Won’t turn ship around right away, but gets us on path. Not a silver bullet, one of many actions.
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