Sprint Pummeled After Profit Warning

Shares of Sprint Corp. fell to nearly a three-year low Wednesday after it warned of lower third-quarter profit amid stiff competition in the long-distance telephone market and fewer-than-expected subscribers in its wireless telephone unit.

Shares of the wireless unit, Sprint PCS Group, plunged 19% to its lowest level in over a year after it said increased competition and its decision to cancel some unprofitable customers would hurt its third-quarter subscriber growth.

Until now, Sprint PCS had been known for setting industry records for its subscriber growth. “Here’s PCS that beats [estimates] all the time and here they are taking their numbers down and that’s what’s got people nervous,” said Chris Larsen, wireless analyst at Prudential Securities.

Despite the third-quarter profit shortfall, the Sprint parent company said it remained on target to meet its growth expectations for the year. Its cautious outlook for the third quarter followed similar warnings by its larger long-distance rivals and triggered another broad sell-off in the already downtrodden telecommunications sector.

On the New York Stock Exchange, shares of Sprint fell $1.44, or 5%, to close at $26.81, and Sprint PCS, which trades as a tracking stock, plunged $7.56 to $33.25.

The U.S. telecom group, main casualties of April’s technology stock implosion, has suffered amid investors’ concerns about increased competition and price wars in the long-distance telephone market, rising capital spending costs as companies build out wireless and data networks, and the collapse of Sprint’s merger with WorldCom Inc. The recent telecom stock weakness follows gains in the sector of more than 50% last year.

AT&T; Corp. and WorldCom earlier this year scaled back their growth projections for the year, citing intense competition in the long-distance market. Sprint’s warning confirmed that all of the telecom giants have been hard hit by price wars and competition, analysts said.

“The blind telecom euphoria of a year ago is over. Now, more than ever, telecom stock buyers need to be selective and vigilant. . . . The companies that meet or beat [Wall Street] expectations will outperform the market. You can’t rely any longer on consolidation to be a catalyst for the sector,” said ABN AMRO analyst Kevin Roe.

Sprint said it expects third-quarter earnings to be between 45 cents and 47 cents a share for its core FON Group, which includes long-distance and local telephone operations and its data business.

Analysts on average had expected earnings of 49 cents, with estimates ranging from 47 cents to 51 cents, according to First Call/Thomson Financial.

Revenue for the FON Group is expected to grow about 4% in the quarter, driven mainly by growth in data services and bundled service offerings, and partially offset by price pressure in voice services.

Regulatory costs and seasonally higher maintenance costs in its local operations also weighed on the quarter’s results, the company said.

Sprint reiterated that its core earnings for 2000 would grow at a mid-teens rate from the $2.31 reported for the full year 1999.

While weakness in the long-distance telephone business had been somewhat expected, the slower subscriber growth at Sprint PCS caught investors off guard, analysts said.

Sprint PCS said it would add only 800,000 new customers in the third quarter--about 100,000 fewer than Wall Street expected.

Sprint PCS cited increased competition and the company’s decision to cancel some unprofitable customers. The customer cancellations would push its customer turnover, or churn, to the high 2% to 3% range, which would be above Wall Street expectations.

Still, Sprint PCS expects to add 4 million customers for the year, bringing its total to 10 million, including affiliates and resale customers. To meet that full-year target, analysts said the wireless company must add about 1.5 million customers in the fourth quarter, analysts said.

Sprint PCS’ cash flow, or earnings before interest, taxes, depreciation and amortization, will be in the low $100-million range, which is above Wall Street expectations of about $60 million to $70 million, analysts said.

Sprint is set to report its earnings Oct. 17.