Nextel Better Off On Its Own?

Sprint Nextel (S) has been in the news quite a bit lately. First, there is news that Deutsche Telekom (DT) might make a bid for the company. Then we hear that Sprint may be seeking to spin off Nextel. The latest news is that the Sprint Clearwire (CLWR) WiMax combination is on again with backing from a number of big players.

In all the discussion, most writers take pains to point out what a disaster the original Sprint-Nextel merger has been. The finger is usually pointed at Nextel, which has established a dismal trend of losing customers and is now embroiled with the FCC in a disagreement over how to handle network interference with radios used by police and firefighters.

Do Nextel's problems indicate something inherently wrong with the franchise or are these problems the result of the merger?

It may be instructive to look at how the Nextel brand is doing in a situation that doesn't include Sprint.

NII Holdings (NIHD) is a company I have written about before (read earlier post). The company essentially provides Nextel service in Latin America using the same Motorola (MOT) iDEN technology and the Nextel brand.

Where Nextel's U.S. customer base declined by 2.8 million in 2007, NII Holdings saw their customer base grow from 3 million to over 5 million at latest count.

On April 4, NII Holdings announced that its first-quarter net profit rose 35% to $113.6 million, or 65 cents per share, from its year-ago profit of $84 million, or 47 cents per share. Analysts had predicted a profit of 63 cents per share. Operating revenue climbed 39% to $993.2 million as the company added 321,700 subscribers.

Profitability for the Nextel segment of Sprint Nextel? The company is not breaking Nextel out separately; it is lumped into the wireless category. What we see is that in the fourth quarter, wireless segment revenues experienced a 2% sequential decline and a 6% decline from the fourth quarter of 2006. Adjusted Operating Income was $168 million in the fourth quarter, compared to $514 million in the third quarter and $652 million in the fourth quarter a year ago. Suffice to say that these numbers are not pretty.

Conclusion

Nextel's best chance to prosper may indeed be if Sprint spins it off on its own. The success of NII Holdings indicates that Nextel has a viable product and a viable brand. The problem is that here in the U.S. the brand has been eroded. The confusion of trying to combine the Sprint and Nextel networks has served neither company well.

With Nextel's easy-to-use push-to-talk technology still a product differentiator, there could still be a place for the company in the U.S. telecom market. Perhaps it won't be the biggest player but, by concentrating on core markets that value the technology Nextel offers, they could return to profitability and reverse the exodus of customers.

This is not to say that an acquisition by a company that understands and supports the brand might not also result in a positive outcome. It is not clear that Sprint did anything other than try to buy Nextel's customer base. An acquirer with deep pockets could provide the capital needed to get Nextel moving, straighten out the back-end technology issues that will surely result from splitting from Sprint and begin to drive a marketing plan to return Nextel to the public's good graces. There is still potential in the Nextel brand and product.

Disclosure: At time of writing author is long NIHD but has no position in S.

Comments

[User 166267]

I agree spin off Sprint

Linda
VegasBookmarks.com
$99 Vegas Deal

[Geddy]

Good one Linda!

[felixmk]

Agree that NII HOldings is proving that a strong focus on differentiation with push to talk and strong focus on profitable customers equals success. Sprint has simultaneously screwed up marketing and operations to give poor service with poor positioning.

[push to talk]

Sprint is already rolling the Push to Talk over to it's cdma platform. It's up and it works. DT can make a play for a spun Nextel but they cannot have its spectrum holdings...Sprint will not let go of one the only jewels left from Nextel (2.5 GHZ wimax spectrum)

[DJOlde]

If Nextel is so great, maybe Motorola should buy it. They built the network and could probably pick it up for next to nothing.

[Doug Liser]

It's hopeless - Sprint should have just bitten the bullet and dumped iDen while keeping the Nextel customers and spectrum years ago. But I guess that would have been too obvious to Wall Street that they WAY OVERPAID. I can't imagine now, with CDMA so mature anyone else would keep iDen running. It's worth almost nothing -- too bad for those guys in Latin America that made something useful in spite of the mess here -- get a truck and see how Motorola gives you on trade.

[Jay Bruin]

Don't be too optimistic that Sprint will be able to spin off Nextel. Many, Many Sprint sites were integrated into Nextel sites meaning that Sprint and Nextel antennas share a common rack and the Sprint telecom equipment was installed inside Nextel equipment shelters. In layman's terms -- the gear that makes the cellular sites work is too mixed together to separate into two separate cellular sites that two different companies could separately operate. Sprint and Nextel's integration problems were well known, separating them again will be even messier.

[Wireless _KP]

Nextel's best days would be ahead of them if Sprint spun them off. In case everyone doesn't remember, prior to Sprint buying them, Nextel was a gem. Don't get me wrong, Nextel had problems like everyone else, but they provided a great service to a very specified customer. As a result, their ARPU and other financial metrics were envied by all. NII Holdings shows the IDEN service has a good and profitable side if you know how to manage a network and if you are shopping for the right customers. Sprint has never been really good at managing its wireless business from day one. I never thought the cultures of the companies would gel. I would like to see better days of Nextel in the future, as a separate company.

[EdKetchoyian]

Actually, 10% or less than the iDEN and CDMA sites have been integrated. Source: Kathy Walker, Sprint Chief Network Officer on Bear Stearns call. Replay is available at sprint.com

[Louienyc75]

Sprint was bad before Nextel and had spotty coverage because they didn't invest enough in their CDMA network. Sprint could have integrated iDEN as a PTT-only network but its hybrid phones are problematic and lack key features not to mention many people would have only PTT in certain spots with the hybrid footprint. This all comes from ignoring the Nextel brand and alienating its customers. Sprint is not liked by Nextel customers and the merger with Sprint was unwelcome. As for me I hate Sprint for too many reasons and wish Sprint would sell or spin off Nextel ASAP or itself be bought by a more sensible group of people.