Sprint Nextel shares have outperformed Apple this year, along with all but one other stock in the Standard & Poor’s 500 index. Can this be real?
“I tell the team here, ‘You’re not going to see any ‘‘mission accomplished’ ’’ signs anywhere on this campus,” Chief Executive Dan Hesse said from his office in Overland Park, Kansas. “This is a long process.”
In his five years running Sprint, Hesse has worked to fix the mess he was handed after the $36 billion purchase of Nextel failed and 7.7 million monthly subscribers fled. Though he has had his own struggles, such as a turbulent joint venture with Clearwire and a foray into dead-end WiMax technology, he predicts Sprint is on track to return to profit growth in 2014.
Some analysts agree, with reservations.
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“One thing that keeps people skeptical is that we’ve seen these head fakes before,” said Phil Cusick, an analyst with JPMorgan Chase in New York. “There’s no one on Wall Street who has been around for a while that hasn’t lost money on Sprint.”
Sprint’s challenges remain daunting. It’s a distant third to Verizon Wireless and AT&T in customers, and the bigger rivals have more extensive LTE networks, letting them offer speedier service. Even if Sprint turns the corner in 2014, it will have suffered almost $50 billion in losses over a seven-year stretch, including estimated losses for 2012 and 2013.
A year ago, investors worried Sprint would crack under the pressure of a $7 billion network-upgrade plan and a costly bargain to get the iPhone: a deal that requires Sprint to buy $15.5 billion worth of devices from Apple.
Since then, Sprint has gotten bigger benefits than expected from the iPhone, both by helping it attract customers away from other carriers and by boosting the size of users’ phone bills. Sprint also delivered on its promise to introduce a speedy LTE network in at least six cities this summer, and is adding it to 100 more cities.
“A year ago, management was talking about all the things they needed to do; it was hard to listen to them, they had so little credibility,” said Scott Dinsdale at Montpelier, Vt.-based KDP Investment Advisors, which owns Sprint bonds. “You just held your nose and held the bonds. Now they’ve gotten to the point where you can see light at the end of the tunnel.”
Sprint gained renown as an upstart long-distance competitor in the 1980s, when it touted a fiber-optic network with pin-drop clarity. After shifting its focus to the wireless market, the company pursued Nextel Communications in 2005. Gary Forsee, then CEO, saw the deal as a way to compete with AT&T and Verizon. Instead, network glitches and customer complaints put Sprint further behind.
In 2007, Forsee was forced out by the board and Hesse was hired.
Hesse, 58, has strong ties to the Seattle wireless industry He was CEO of AT&T Wireless when it was based in Redmond, and later headed Terabeam, a Kirkland wireless broadband startup.
Hesse said he’s orchestrating Sprint’s turnaround in three stages. The past four years have been a recovery period. This year and next, he said, are the investment phase. That’s when Sprint dismantles the outdated Nextel network and installs LTE technology.
Stage three will be Sprint’s growth phase, when these improvements begin to show on the bottom line. Sprint will see profit-margin expansion and earnings growth in 2014, Hesse said.
Sprint’s shares have beaten the S&P 500 by 123 percent this year. Before 2012, the stock had underperformed the index by 86 percent since the beginning of 2007.
The transformation has hinged in part on slimming down the company. When Hesse took over in December 2007, Sprint had 60,000 employees. Today it has 40,000.
A return to profitability in 2014 is no sure thing. Analysts predict that Sprint will be right around the break-even point that year, though they do see the company solidly in the black by 2015, according to data compiled by Bloomberg.
The company will continue to post user losses until the Nextel network is shut down next year, Hesse said. Sprint also may eventually drop “Nextel” from its corporate name, he said.
Then there’s Kirkland-based Clearwire. Without enough money to build its own national fourth-generation network, Sprint contributed some of its airwaves to the joint venture in May 2008. The venture has yet to break even.
Sprint’s Apple deal is now seen as smart. “It was a huge transaction; it was transformational,” Dinsdale said. “But it needed to be done and they had the guts to do it.”
Material from Seattle Times archives included in this report.