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As good as it gets for wireless?
Nextel's numbers were fantastic, but it, and other wireless stocks, didn't do much on the news.
October 16, 2003: 5:15 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - In the spirit of Nextel's new ad campaign, which shows people getting things done quickly thanks to its push-to-talk service, I present the following recap of the company's stellar third-quarter earnings report.

"Higher revenues." Ba-beep. "Strong subscriber growth." Ba-beep. "Raised earnings guidance." Ba-beep. "Stock soars." Silence. "Uhh, I said stock soars." Static. "Hello? Can you hear me now?"

Yup, shares of Nextel (NXTL: Research, Estimates) rose only slightly more than 1 percent Thursday even though it reported third-quarter sales that exceeded expectations and lifted guidance for full-year earnings.

With those numbers, you'd expect Nextel's stock, and the shares of other wireless companies for that matter, to be substantially higher. But competitors AT&T Wireless (AWE: Research, Estimates) and Sprint PCS (PCS: Research, Estimates), which will report their third-quarter numbers next week, actually fell Thursday.

Why the investor disconnect?

Wall Street appears to think that the third quarter will be the best the wireless group has to offer for a while.

There is a season, churn churn churn

One problem that promises to shake up the industry is the long-awaited FCC rule change that allows wireless customers to keep their cell phone number when they switch carriers. It takes effect Nov. 24.

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Paul Saleh, CFO of Nextel Communications, talks about his company's earnings, competition and the future.

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So far, carriers have been able to demonstrate low churn rates, good for profits since customers who switch services a lot aren't as profitable as faithful ones. But that is likely to change.

Robert W. Baird analyst William Power said he expects all the major wireless carriers to report strong third-quarter subscriber additions and little change in churn as well, but that investors should not get too excited. Going forward, he thinks churn rates will probably start rising throughout the industry.

Given this backdrop, he said the tepid reaction to Nextel's earnings made sense. The stock has doubled this year, after all. "It's a combination of expectations already having been very high and the stock having rallied ahead of the news," said Power.

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BellSouth (BLS: Research, Estimates) and SBC (SBC: Research, Estimates), which co-own Cingular, will release their earnings next week. Verizon (VZ: Research, Estimates), which co-owns Verizon Wireless with Vodafone (VOD: Research, Estimates), is on tap to report earnings Oct. 28. And Deutsche Telekom (DT: Research, Estimates), which owns T-Mobile, is scheduled to report its latest results in November.

Nextel and Verizon in the best shape

And the scary thing for the rest of the industry is that Nextel has arguably the strongest fundamentals right now, with the lowest churn rate due to satisfaction with its Direct Connect walkie-talkie service.

The company also generates the highest monthly average revenue per user (ARPU) in the business, helped by the success of its recent offer of $10 a month for unlimited national calls on the Direct Connect service.

Third quarter's the charm
Third quarter subscriber growth estimates for the six major wireless carriers.
Company Est. net subscriber additions* 
Nextel 646,000 
Cingular 628,000 
AT&T Wireless 372,000 
Sprint PCS 449,000 
Verizon Wireless 1.3 million 
T-Mobile 640,000 
 * Nextel's numbers are actual
 Source:  Robert W. Baird

So Nextel is probably in the best position to weather the looming number portability storm.

But other carriers, which are primarily competing on price and quality of service, may have a tougher time.

Based on Nextel's strong report, Verizon's entry into the push-to-talk market hasn't hurt Nextel . And despite a plethora of ads for snazzy phone services, such as pictures and Web access, there is skepticism about whether this will be what keeps customers happy and truly add substantially to revenue.

"People don't care about data speeds and picture phones just yet. That's not what people buy cell phones for. They want reliable voice quality all over the place," said Thomas Friedberg, an analyst with Janco Partners, a research firm focusing on telecom.

Along those lines, Friedberg said Verizon has the best quality of service and should gain the most customers from wireless portability while Sprint PCS will be the big loser.

He added that the other three carriers will probably "tread water."

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And the number portability concern probably will probably plague the industry until at least the second quarter of next year. While some expect that a flood of people will rush to change carriers as soon as the rule takes effect, that's probably not going to happen since many customers are locked into contracts.

"There will not be a surge in one quarter. This gets played out over first six months of next year as opposed to just one month," said Ben Abramovitz, an analyst with Jefferies.

That's not great news for Nextel or Verizon, but it will probably hurt AT&T Wireless, Sprint PCS, SBC, and BellSouth the most.

Analysts quoted in this story do not own shares of any of the companies mentioned and their firms have no investment banking relationships with them.


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.