It's January, and at Sprint Nextel (S), that means layoff time. In each of the past two years, the No. 3 U.S. wireless service provider kicked off the new year with an announcement that thousands of jobs would be eliminated.
This year is no exception. On Jan. 26, Sprint said it will eliminate as many as 8,000 employees. Investors welcomed the announcement, boosting the shares 2% to 2.51 on the news.
But some analysts say there may be little reason in the long run to revel in this latest attempt to reduce expenses. In spite of about 9,000 jobs eliminated in the previous two years, the company has suffered losses in four of the past five quarters and margins have been narrowing. "Cost-cutting measures like this are akin to a tourniquet," says Craig Moffett, an analyst at Sanford C. Bernstein & Co. "They can help stave the bleeding, but they can't save the patient."
Handing out pink slips may help reduce costs—Sprint will cut expenses by $1.2 billion a year in this recent round of cuts—but the moves aren't doing too much to address the company's biggest challenge: keeping subscribers from disconnecting service and switching to rivals including AT&T (T) and Verizon Wireless, which is owned by Verizon Communications (VZ) and Vodafone (VOD) of Britain.
Narrow Margins
Investors and analysts will get a clearer view of Sprint Nextel's challenges on Feb. 19, when the company is due to release fourth-quarter results. In that period, Sprint likely lost 1.1 million to 1.3 million traditional wireless customers, according to analysts' estimates. Subscriber losses may continue through late 2010, says Michael Gary Nelson, an analyst at Stanford Group Co..
Fourth-quarter revenue may have dropped 13% to $8.55 billion, the sixth straight decline, and margins may keep narrowing, in part because of costs related to the elimination of jobs, according to analysts surveyed by Thomson One. In Sprint's main wireless business, gross margins may slip to 21% in 2009, from 24% in 2008, according to UBS (UBS). Net losses may also continue through 2010.
For CEO Dan Hesse, the task of retaining customers is made more difficult by stiff competition, an already saturated market, and an economic environment that's causing consumers to tighten their belts. "The deck is stacked against them," Moffett says. What's more, as one of the biggest providers of wireless service to bankers, managers, and engineers, Sprint may lose out as Corporate America slashes jobs and other spending.
Rivals, meanwhile, are picking off the few new subscribers by offering devices and services Sprint Nextel lacks. AT&T, for instance, is the exclusive U.S. provider of the Apple (AAPL) iPhone. To its credit, Sprint has snagged an exclusive on the much anticipated Palm (PALM) Pre. But the 3.1-inch touchscreen phone isn't expected to hit stores until May.
Revamping Incentives
Sprint Nextel is taking several steps to stem losses and reverse course. It has stepped up spending on marketing. And on Jan. 26, the company tied its executive and employee incentives directly to subscriber retention and operating income metrics.
The company could also offer deeper discounts, such as bigger phone subsidies and cheaper calling plans, but that's a risky move for a company whose margins are already under pressure. In January, Sprint subsidiary Boost began offering unlimited calling, texting, and other services for $50 a month, paid in advance. The danger is that some current post-paid subscribers paying Sprint an average of $56 a month could switch to this lower-cost plan.
Further cost reductions may be in order. Sprint could hire an outside firm like Nokia Siemens Networks to manage its network, says Walter Piecyk, an analyst with Pali Research. And additional customer-care operations could be relegated to offshore call centers.
Fortunately for Sprint Nextel, the company has plenty of cash—about $4.1 billion at the end of the third quarter—and isn't expected to face a cash crunch imminently. But big debt eventually will come due, and investors' patience may wear thin even sooner. "Sprint still has a relatively long runway to turn this around," Nelson says. "But every quarter it's getting shorter."
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