Novice Investing - Sprint Is Losing The Race

Date: Tuesday 13th 2008f May 2008 07:32:45 AM

Sprint Is Losing The Race - 01/20/2008

By: Novice Investing Staff

Sprint Nextel Corp. (S) delivered another bad news that snowballed after its acquisition of Nextel several years back. This week, Sprint reported a 109,000 subscribers' drop for the 4th quarter of 2007. At the same time, Sprint announced a 6.7% reduction of its work force or 4000 jobs and a closure of 8% of retail locations or 125 stores. They say, this will save them between $ 700 - $ 800 Million per year. Is it enough?

Let's see. The 109,000 subscribers' loss is actually a net loss. Sprint had attracted 574,000 new subscribers while losing 683,000 existing subscribers. To calculate the impact of this change in Sprint's subscriber's base, we have to know two things; One is average revenue per subscriber. Two is subscriber acquisition cost. Average revenue per subscriber is the amount of money a subscriber spent using Sprint's celullar plan.Subscriber acquisition cost is the cost of enticing users to switch to Sprint's celullar plan. This can include rebates on phone or cash rebates. Let's use average revenue per subscriber of $ 30 per month and subscriber acquisition cost of $ 30, which is conservative estimate for this exercise.

Hence, the impact of 109,000 subscribers loss is: $ 39.24 Million annually. while subscriber acquisition cost will add expense by $ 17.22 Million. Total impact on profitability will be 60% x $ 39.24 M + $ 17.22 M = $ 40.76 Million. This assumes a 60% gross profit margin for Sprint. Suppose that Sprint will lose 109,000 subscribers over the next four quarters, the impact on profitability will be: 4 x $ 40.76 Million = $ 163 Million.

Thus, the impact is relatively meager compared to the cost savings achieved by store closure and workforce reduction. What worries analysts is the eroding competitive advantage of Sprint relative to other celullar carriers. Other carriers such as AT&T and Verizon are expected to gain subscribers. This will weaken Sprint further which is the number three players in the market. However, please note that Sprint does have 53.8 Million wireless subscribers in total.

Weak is not the word you want to hear as a Sprint shareholder. Sprint does not have a stellar balance sheet with negative net cash of $ 18.5 Billion or $ 6.51 per share. Interest expense alone costs Sprint $ 1.6 Billion annually. Currently, Sprint shares are trading in a single digit at around $ 8.50 per share or $ 24 Billion market capitalization. While Sprint is trading at below book value, please note that more than $ 59 Billion of Sprint's long term asset is intangible and goodwill, which is valued close to zero in the event of bankruptcy.

While the impact of 109,000 subscribers loss is small for Sprint's current profitability, longer term, Sprint needs to reverse the subscribers' loss trend in order to compete with its bigger competitors in term of fixed cost, efficiency and so far. Further with a leveraged balance sheet, Sprint can't wait for all of its current subscribers to defect before making a turnaround effort. Turnaround is desperately needed now, which is the reason why Sprint's shares fell 25% on the news of subscribers loss.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Sprint Nextel Corp. (S) or any other securities.

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