Sprint Nextel,reported deeper than expected subscriber losses on Friday and said it would cut about 4,000 jobs, sending its shares down 26 percent and raising fears that a U.S. economic slowdown would take a greater toll on the wireless industry.
The No. 3 U.S. mobile phone service has been losing ground to bigger rivals such as AT&T and Verizon Wireless amid network and customer service problems that drove away valuable post-paid subscribers who pay monthly bills.
On Friday, the company said it lost 683,000 post-paid subscribers in the fourth quarter, far worse than analysts' forecasts for a loss of 350,000 to 500,000 subscribers.
Post-paid subscribers are those who pay monthly bills and are often on a contract, as opposed to prepaid, who pay in advance for a set amount of service.
Analysts said it was a dismal performance even for Sprint, which lost post-paid subscribers in five of the last six quarters, since end-year holiday sales are usually a strong point for wireless carriers.
"They're trying to keep ahead of a business ... that seems to be springing new leaks faster than they can plug them," said Sanford C. Bernstein analyst Craig Moffett.
While Sprint may be more vulnerable than competitors in a recession, other carriers may struggle to attract subscribers this year.
"The losses we're seeing at Sprint may be just the tip of the iceberg, and that we are heading into an industrywide deceleration," Moffett added.
Sprint shares fell $3.01 to $8.56, its steepest drop in a single trading day for nearly three decades. AT&T shares slipped 2.8 percent to $36.27. Shares in Verizon Communications , which along with Vodafone Group owns Verizon Wireless, dropped 3.9 percent to $39.30.
Sprint said post-paid churn, or the rate of customer cancellations, was 2.3 percent, similar to the third quarter.
The company expects "continued downward pressure on subscriber trends, revenues, and profitability in 2008." It plans to cut nearly 7 percent of its work force and close about 8 percent, or 125 of its stores.
Sprint will also eliminate more than 4,000 kiosks within other retailers. Sprint has 20,000 total distribution points, including 1,400 of its own retail stores.
The measures are expected to trim labor costs by an annual rate of $700 million to $800 million by the end of 2008. Sprint expects to complete the job cuts in the first half of the year and post a first-quarter charge for severance costs.
Hesse's First Move
The cost-cutting plan is the first major strategy move by Sprint Chief Executive Dan Hesse, who was appointed to the role in December after holding the top job at the company's fixed-line spin-off Embarq.
Analysts expect Hesse to give a grim forecast for 2008, well below Wall Street estimates, when the company reports quarterly results on Feb. 28.
"His previous strategy (at Embarq) has been to lower expectations and underpromise, with the potential to overdeliver," said Michael Nelson of Stanford Group.
He questioned whether Sprint should scale back its retail presence at a time when it most needs to catch the attention of consumers. "It really puts the company at risk of even slower growth," he said. Job cuts could help the company, provided the layoffs don't further hurt its customer service operations.
"What the company really suffers from is an extremely poor marketing message," Nelson said. "That's something that can potentially be turned around in a relatively short period."
Some analysts said more drastic steps may be in store.
"We believe a decision on the WiMax business will come soonest, as the board has already spent considerable time on the issue," JPMorgan's Jonathan Chaplin wrote in a note to clients, referring to the likelihood Sprint would separate its high-speed wireless assets. Other options include selling its long distance business.