NEW YORK (Reuters) - Sprint Nextel Corp. (NYSE:S - news), the No. 3 U.S. mobile phone service, posted a 55 percent drop in quarterly net earnings on Wednesday, hurt by merger expenses and disappointing wireless growth, sending its shares down.
Some investors were disappointed that the company reported lower-than-expected growth in high-value wireless customers who pay their bills monthly.
Sprint is spinning off its declining local phone business later this year in order to focus on its higher-growth wireless business. But some investors are concerned that wireless growth is slowing as most U.S. consumers already have cell phones.
"Sprint Nextel is having to go after a lesser quality subscriber," said Stifel Nicolaus analyst Chris King, referring to wireless customers who pay for calls in advance rather than receive a monthly bill.
Growth in prepay customers was strong in the fourth quarter, but Nicolaus said he expected 900,000 new bill-paying customers, compared with Sprint's report of 746,000.
Shares of Sprint, which acquired Nextel Communications last August, were down 75 cents, or 3 percent, at $24.18 in afternoon trade on the New York Stock Exchange. They fell as low as $24.06 earlier in the session.
Rivals like Cingular Wireless, the No. 1 U.S. service, also derive a lot of their growth from less valuable customers who pay for calls in advance and buy discounted postpaid family plans. Because its Nextel brand does not offer family plans, Sprint missed out on some growth in the fourth quarter.
Sprint Chief Financial Officer Paul Saleh said the company would change its Nextel pricing plans in order to improve its chances of winning customers looking for group discounts. But he said Sprint is holding its own in the market.
"We're maintaining our share in the marketplace so I'm not sure what people are disappointed at," he told reporters in a telephone conference.
The Nextel brand depends mainly on the popularity of a walkie-talkie style service among business clients. Sprint runs separate networks and service plans for Sprint and Nextel customers.
As some analysts had expected, Sprint said it would offer a nominal recurring dividend after it spins off its local business next quarter. It also said its board may consider buying back some of its shares. It did not give details.
Sprint also said that by year-end its work force of 60,000, excluding the local unit, would be about 4 percent smaller as it looks to reduce job duplication following the merger.
MERGER COSTS WEIGH
The company said fourth-quarter net profit fell to $197 million, or 7 cents a share, from $437 million, or 29 cents a share, a year earlier.
Before unusual items, such as a charge of 18 cents per share mostly for merger-related amortization, it earned 33 cents a share, a penny short of analysts' average forecast.
Revenue rose 7 percent to $11.3 billion, assuming Sprint owned Nextel in both quarters. This was slightly ahead of the average Wall Street estimate of $11.26 billion.
Sprint Nextel shares are down about 5 percent since the company was formed, reflecting investor concerns about slowing wireless industry subscription growth. This was its first full quarterly report as a merged company.
It said it expects 2006 consolidated revenue of $41 billion, assuming high-single-digit to low-double-digit growth in wireless and a mid- to high-single-digit revenue decline for its long-distance business.
King said the 2006 revenue forecast was in line with his estimates but appeared to disappoint some investors.
Sprint forecast 2006 adjusted operating income of about $13 billion before depreciation and amortization.
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