Sprint loses customers, profit down, shares fall

NEW YORK (Reuters) - Sprint Nextel Corp's (S.N) quarterly profit fell 77 percent as the No. 3 U.S. mobile service lost subscribers and withdrew its 2008 profit growth forecast, sending shares down 2 percent on Thursday.

Sprint, which is searching for a new chief executive, also said customer growth would stay under pressure in the current quarter after a net loss of 60,000 subscribers in the third quarter, dampening any hopes for a near-term recovery.

"Overall, I think they're pretty disappointing results," said Stanford Group analyst Michael Nelson, who expected Sprint to add 283,000 subscribers in the quarter. "The outlook looks equally disappointing with no real turnaround in sight."

Sprint's profit fell to $64 million, or 2 cents per share, from $279 million, or 9 cents per share, a year earlier.

Before items such as merger-related amortization, it earned 23 cents per share, a penny above analyst estimates according to Reuters Estimates. Revenue fell 4 percent to $10.04 billion, below the average analyst estimate of $10.23 billion.

Sprint has been losing ground to bigger rivals such as AT&T Inc (T.N) and Verizon Wireless, owned by Verizon Communications (VZ.N) and Vodafone Group Plc (VOD.L), amid customer service problems, U.S. economic weakness and its struggles integrating its 2005 purchase of Nextel Communications.

It has lost valuable postpaid customers -- who pay monthly bills -- for four quarters out of five, and it expects customer numbers to stay weak in the fourth quarter, typically a strong period due to holiday gift shopping and promotions.

"It is still a lot of pressure on postpaid subscribers," Chief Financial Officer and acting CEO Paul Saleh said in an interview with Reuters.

Sprint's chief executive, Gary Forsee, stepped down last month and the board is working as quickly as possible to find a replacement, Saleh told analysts on a conference call.

MORE PRESSURE

The company withdrew its 2008 target for double-digit growth in operating income before depreciation and amortization (OIBDA) and said it would comment on 2008 early next year.

"This is a company that understands how bad things are," said Bernstein analyst Craig Moffett, who said Sprint shares were holding up surprisingly well on Thursday.

Postpaid customer cancellation rate, also known as churn, rose to 2.3 percent from 2.0 percent in the second quarter.

Saleh said Sprint would make changes in its distribution network, which he said was not working well, and in its pricing plans as it puts retaining customers as a top priority.

"This is going to be a fight in the trenches daily. We intend to bring that churn down," Saleh told analysts.

Along with stiff competition, he said Sprint was also hurt by the credit squeeze for sub-prime mortgage borrowers, who tend to buy prepaid mobile services. He estimated almost 25 percent of customers were in the sub-prime credit category.

As a result, Sprint said it is tightening its controls to reduce bad credit and churn risks. Bernstein's Moffett said this may result in a bigger fourth-quarter customer net loss.

"They've put themselves into a very tight corner because to address the subprime issue and churn, they have to throttle back on customer acquisitions," Moffett said.

To help growth, Sprint is expanding a prepaid, unlimited calling service that targets the subprime market, competing directly with MetroPCS Communications Inc (PCS.N) and Leap Wireless International Inc (LEAP.O).

Sprint cut its target for 2007 capital spending to the mid $6 billion range from its prior target of $7.2 billion, saying third-quarter spending was light as it started spending on a new WiMax network it is building more quickly than expected.

"What we're looking at across the board on capex is to be much more efficient," Saleh said in an interview.

He told analysts Sprint would be "conservative" on share buybacks.

Saleh said Sprint was in discussions with Clearwire Corp (CLWR.O) on a WiMax network partnership the service providers had previously expected to finalize in mid-September. But he would not elaborate on the details of the talks.

Later in the day, the Wall Street Journal reported on its Web site that Sprint was eyeing changes to its high-speed wireless plans including a potential merger of its broadband unit with Clearwire.

Sprint spokeswoman Leigh Horner declined to comment beyond saying the discussions were still ongoing.

Sprint has lost more than a third of its value since it bought Nextel in August 2005. Its shares, which had fallen as low as 4.85 percent earlier on Thursday, closed down 3 percent, or 52 cents, at $16.58 on the New York Stock Exchange.

Its numbers appeared to hurt Virgin Mobile USA Inc VM.N, Sprint's top wholesale client, whose shares closed down 5.35 percent, or 65 cents, at $11.50 on the NYSE.