Sprint Nextel warned subscriber defections would swell in the current quarter and shocked investors with a $3 billion convertible offering that sent its shares down 11 percent.
Analysts were puzzled by the convertible preferred share offering as the No. 3 U.S. mobile service did not seem to have an imminent liquidity crisis to merit such a large sale.
"It is disturbing for investors to do a convertible offering at these levels," said Stifel Nicolaus analyst Chris King, who noted that it could dilute the value of existing stock by 10 percent to 15 percent.
Sprint's current market capitalization is about $24 billion Its shares have lost 70 percent of their value since Sprint bought Nextel Communications in August 2005.
Sprint plans to use the proceeds for "general corporate purposes, which may include, among other things, debt reduction," the company said in a statement.
It expects to remain in compliance with its debt covenants for the foreseeable future and plans to reduce gross debt by at least $1 billion by the end of the third quarter.
Sprint has struggled to stem customer losses amid service problems, weak marketing and the economic downturn, which especially hurt its credit-challenged customers.
In the second quarter, Sprint lost 776,000 post-paid subscribers, who pay monthly bills, though that was higher than the average estimate of a loss of 906,000 subscribers, based on estimates by seven analysts contacted by Reuters.
While its customer cancellation rate fell to 2 percent from 2.45 percent in the first quarter, Sprint's results lagged far behind bigger rivals AT&T and Verizon Wireless, a venture of Verizon Communications and Vodafone.
In the same quarter Verizon Wireless added 1.5 million customers while AT&T added 1.33 million customers, compared with total customer losses of 901,000 at Sprint, including prepaid users who pay for calls in advance.
"The company's still not out of the woods and things are likely to get worse before they get better," said Stanford Group analyst Michael Nelson. "There's nothing to get overly excited about. The company still faces significant challenges."
Quarterly Loss, Revenue Down
Sprint posted a loss of $344 million, or 12 cents a share compared with a profit of $19 million, or 1 cent a share in the year ago quarter. Revenue fell 11 percent to $9.06 billion.
Excluding amortization and other items, Sprint earned 6 cents per share compared with average analyst estimates for 3 cents a share, according to Reuters Estimates.
Sprint ended the quarter with just under 52 million customers, down from 54 million customers a year-earlier.
Sprint CEO Dan Hesse said the launch of the Instinct phone from Samsung Electronics and unlimited voice and data plans reduced customer defections in the quarter.
"We are seeing signs of progress from our efforts to improve the customer experience, rebuild the Sprint brand and increase our profitability," he said in a statement.
But after reporting average monthly revenue per user (ARPU) of $56, similar to the first quarter, Sprint warned of "modest pressure" on post-paid ARPU for the rest of 2008.
As a result, the company said adjusted operating income before depreciation and amortization will fall in the third quarter compared with the second quarter.
Sprint said the convertible issue would be a private placement of 3 million shares of perpetual convertible preferred stock.
Sprint shares were down 96 cents to $7.59 in early trading on the New York Stock Exchange Tuesday.