NEW YORK (Reuters) - Sprint Nextel Corp’s shares plunged nearly 20 percent on Thursday as heavy subscriber losses in the second quarter called into question the strategy and outlook of the No. 3 U.S. wireless company.
Sprint had spent heavily to promote its service and better compete against larger rivals Verizon Wireless and AT&T Inc. But that strategy backfired as profit margins eroded and customer losses persisted.
The weak results overshadowed Sprint’s announcement of a $9 billion network contract with start-up LightSquared, and sent the stock tumbling to its lowest point since February before recovering a little to close down 16 percent.
Investors questioned whether Sprint would be able to meet its 2011 targets after such a disappointing performance.
“Their cost of doing business went up dramatically,” said Piper Jaffray analyst Christopher Larsen. “People have less confidence they can meet expectations.”
Sprint’s operating profit margin of 16.3 percent was well below the average Wall Street estimate of around 19 percent as the company had changed its product rebate terms in an effort to combat Verizon Wireless’ sale of the Apple Inc iPhone, and an iPhone discount at AT&T.
But the bet did not pay off as Sprint still saw defections of 101,000 net subscribers -- also known as post-paid customers -- compared with analysts’ expectation for losses of 15,000.
Meanwhile, Verizon Wireless added 1.3 million subscribers in the quarter and AT&T added 331,000 subscribers.
Chief Financial Officer Joe Euteneuer said Sprint made a “conscious decision” to spend more in the second quarter in the hope of avoiding getting “killed with market share.”
“This was a unique quarter because of intense competition,” he told analysts on a conference call.
Sprint warned the rate of customer defections would worsen this quarter, in line with typical third-quarter trends, but repeated a promise for subscriber growth in full-year 2011.
Chief Executive Dan Hesse said improvements in subscriber numbers in June gave him confidence the company could meet its targets for the rest of the year.
“If we continue at the current pace of improvement we will get there. The only way we won’t is if performance deteriorates,” Hesse told Reuters.
But analysts doubted if Sprint could meet its target for a 2011 operating profit that is roughly the same as in 2010.
“People are right to be skeptical,” Pacific Crest analyst Steve Clement said. “They didn’t point to any silver bullet.”
Bernstein analyst Craig Moffett was also skeptical.
“Without post-paid subscriber growth, Sprint has little prospect of generating sustainable revenue growth, nor of generating sustainably rising margins,” he said. “On those critical dimensions, Sprint’s results were a clear disappointment.”
Adding to the uncertainty, Sprint did not outline its plans to develop fourth-generation (4G) high-speed wireless services, and instead postponed that announcement to October.
Even news of the LightSquared deal failed to comfort investors, who questioned if they would ever see the fruits of that partnership because it is dependent on LightSquared solving difficult technology problems and raising money.
Under the agreement, LightSquared -- backed by hedge-fund manager Philip Falcone’s Harbinger Capital -- will pay Sprint $9 billion in cash over 11 years. Sprint also has the option to rent space on the LightSquared network through credits estimated to be worth $4.5 billion.
The news pushed Clearwire shares down 22 percent as Sprint is its majority owner and biggest customer. Sprint declined to comment when asked if it would continue to use Clearwire beyond its current agreement which expires in 2012.
“It’s less clear that Sprint and Clearwire will have a long-term fruitful relationship,” Larsen said.
Hesse said he would be in a position to give a clearer picture of Sprint’s strategy on October 7.
“There are some new pieces to the puzzle that were unanticipated that will add strength and color to the story if we wait a little longer,” Hesse said without giving details.
Sprint’s loss widened to $847 million, or 28 cents per share, from $760 million, or 25 cents a share, a year earlier.
Excluding items such as losses from its Clearwire investment, Sprint’s loss per share of 6 cents was better than Wall Street expectations for 12 cents, according to Thomson Reuters I/B/E/S. Net operating revenue rose to $8.31 billion from $8.03 billion.
Sprint shares closed down 15.9 percent at $4.34 on the New York Stock Exchange.
Reporting by Sinead Carew; Editing by Derek Caney, Maureen Bavdek and Richard Chang