Slowdown at Sprint? (News) August 20, 1999

Slowdown at Sprint?

By Bill Mann (TMF Otter)
August 20, 1999

Fear of a downturn at Sprint Corp. (NYSE: FON) fueled a rash of revised profit estimates and a downgrade to "outperform" by Lehman Brothers. By midmorning, Sprint shares had dropped more than 7% and trading was halted by the NYSE due to an order imbalance.

Sprint recently offered a "Nickel Nights" plan to its consumer customers, a move which was quickly matched by Qwest (Nasdaq: QWST) and MCI WorldCom (Nasdaq: WCOM). Sprint derives the highest percentage of its revenue from residential usage, relying more on this segment than any other of the top-tier long distance carriers. Several analysts voiced concerns over Sprint's ability to wage a price war over residential customers without causing significant harm to overall profitability.

Analysts cut both short-term and long-term profit estimates, with Lehman Brothers reducing fiscal 1999 by $0.06 to $1.74 and fiscal 2000 by $0.15 to $1.99. Linda Meltzer of Warburg Dillon Read wrote that Sprint "is experiencing some competitive pricing pressures in the low-end small-to-medium (SME) business market and higher losses at Global One, while ION losses are further impacting our 2000 estimates." (Global One is Sprint's troubled co-branded international services collaboration with Telecom de France (NYSE: FTE) and Deutsche Telekom (NYSE: DT), while ION is its new bandwidth on demand offering.)

Unlike its major competitors, Sprint remains vulnerable to the future viability of the incremental cost model (per minute charges) for long-distance telecommunications. In both the domestic and international arenas, carriers have seen their once gold-plated rate structure eroded by increased competition and deregulatory pressures. Some international routes have seen retail rates drop by over 70% in the past year, while domestic long distance rates continue to fall as well.

This rate erosion has hastened the pace of telecommunications mergers, as companies seek to expand their offerings to attract new revenue streams. Already, larger client companies have access to certain flat-rate monthly pricing plans; Voice over IP and other alternative telecommunications protocols are quickly achieving quality levels and economic scalability that increase the threat to the cost-per-minute model.

Sprint has long been viewed -- and rumored -- as a prime takeover or merger candidate, either with one of the "Baby Bells" such as BellSouth (NYSE: BLS) or with one of the large, international telecoms such as Deutsche Telekom. Today's increased weakness could put Sprint in play as potential suitors continue to be attracted by its enormous customer base, particularly in the residential and small business arena. However, Sprint has remained aloof and bucked the trend set by its rivals.

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