Sprint Nextel Shows Growth Amid Changes

In what will likely be its last quarterly earnings report before spinning off its local phone unit,Sprint Nextel said growth in key areas, especially broadband Internet access, helped drive revenue higher.

Revenue for the first quarter was US$8.5 billion, up 13 percent from the same time last year, the company said, driven largely by demand for DSL lines andwireless subscriptions — it added 1.3 million new accounts. Earnings were significantly lower, however, down 11 percent on merger charges and other costs.

Making Progress

The company said it was making “solid progress” on its merger integration efforts.

“We continued to advance on our operating and strategic goals and integrate the affiliates we have acquired,” CEO Gary Forsee said. “Our performance in the quarter was marked by balanced growth in wireless, and we achieved good velocity on Long Distance IP and Local DSL services.”

Sprint stuck to its earlier forecast for full-year sales and earnings, citing “an expected ramp-up in merger synergies” in coming quarters.

Like competitor AT&T, which announced merger-impacted earnings of its own on Tuesday, Sprint is in the midst of significant changes. It is integrating not only Nextel — which it bought last year in a deal worth $35 billion — but a number of subsidiaries and affiliates that came along with that purchase. It is also poised to spin off its local phone services unit, known as Embarg, in a move that could come this quarter.

Growing and Shrinking

The spinoff is “nearing completion,” Forsee said, with state regulatory approvals now in place. Once launched, Embarq will be the largest independent local phone operation in the U.S., he added.

Like AT&T, Sprint saw a drop in revenue from some so-called legacy business lines, including a 3 percent decrease in revenues from long-distance to $1.7 billion. Local phone calling revenues were up 1 percent to $1.6 billion.

Sprint also had sharply higher marketing costs — it invested in extensive advertising during the Super Bowl and other events — that ate into profit margins, Chief Operating Officer Len Lauer said in a conference call.

The marketing expenses were also aimed at keeping existing customers, he added, which has helped Sprint reduce churn, a constant problem for wireless carriers as customers seek lower prices and improved customer service from other companies.

Spinning a Strong Story

The spinoff of Embarq will help Sprint become more competitive and help spark growth in the expanding markets of wireless and business services, Baird Co. analyst William Power said.

fter the spinoff, Sprint will be “almost entirely wireless,” he noted, “and should be well positioned for higher dividends” and possibly a share buyback later this year and into 2007.

Sprint’s acquisition and spinoff strategies have it poised for growth in the changing marketplace, analyst Jeff Kagan agreed, although it will face tough competition from wireless competitors and from cable companies and others in the telecom space.

“After a merger, we watch to see if the new company is distracted with integration,” he said. “They still seem to be growing without a problem.”