Sprint dials up more pain

Sprint's $35 billion buyout of Nextel was supposed to create a wireless powerhouse. It didn't happen.

Gary Forsee, who engineered the Nextel merger, was forced out of Sprint in October.

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NEW YORK (Fortune) -- The cutbacks are only beginning at Sprint.

With customer defections hitting a new record, the nation's No. 3 wireless carrier said Friday it would cut 4,000 jobs, or about 7 percent of its workforce, on top of the 5,000 pink slips handed out early last year. Sprint (S, Fortune 500) also said on Friday that it would close 125 stores as its monthly subscriber losses mount.

It's unlikely that the belt-tightening is over. Sprint is getting creamed by its bigger yet nimbler rivals, among them Verizon (VZ, Fortune 500) unit Verizon Wireless and AT&T (T, Fortune 500), despite the overall health of the wireless industry as consumers worldwide embrace mobile technology.

In an attempt to right itself, Sprint in December hired Daniel Hesse, a longtime AT&T executive known for his aggressive cost-cutting, as CEO. Hesse was given a mandate to undo years of damage the company endured during the lamentable run of his predecessor, Gary Forsee. Forsee was forced out in October after a five-year reign that accomplished little beyond a troubled $35 billion merger with Nextel and the departure of several top executives.

Hesse has his work cut out for him, starting with the botched 2005 Nextel deal. The merger was supposed to bring consumer telco Sprint together with Nextel, which served more lucrative business customers. Nextel's chief at the time boasted of how the combined company was perfectly positioned to capitalize on the industry's highest-growth areas: consumers and businesses.

But Sprint failed to take advantage of either growth opportunity. Today it has a reputation for a substandard network and abysmal customer service. That's why the company is hemorrhaging subscribers even as its chief rivals are signing up new costumers at a rapid clip.

The latest subscriber numbers are downright gloomy. Sprint announced that a stunning 683,000 post-paid wireless customers defected in the most recent quarter, or nearly three times the number that analysts had expected. The company's churn rate is now 2.3 percent, which is double Verizon's rate.

Wall Street pays close attention to post-paid customers, who are billed monthly for continuing service and are less turnover-prone than customers who don't have contracts. Analysts estimated that Sprint lost 250,000 post-paid users in the fourth quarter. By way of comparison, Verizon and AT&T, are expected to have added upwards of a million post-paid users apiece in the same quarter (neither company has yet disclosed its subscriber numbers).

Sprint shares plunged 25 percent in furious trading on Friday, reaching a five-year low.

"We believe these results indicate a virtual meltdown in consumer perception of the company's network, customer care, and reputation which will take years to fix," wrote Timothy Horan, an analyst at Oppenheimer, in a research note on Friday. He has a hold rating on the stock - or, in Oppenheimer parlance, "perform."

Not everyone is blaming Sprint entirely for its subscriber woes. Jonathan Chaplin, an analyst at JPMorgan, says customers have been hit hard by the tighter lending standards that have kicked in since the credit crunch began last summer. He says many of Sprint's most lucrative customers - the ones with the highest monthly bills - are among those exiting, due to factors not entirely in their control.

"Ironically, many of these high value customers are sub-prime," Chaplin wrote in a Friday report to clients. "We therefore believe (Sprint) lost subs from credit tightening, economic pressures and heavy competition."

Hesse must now find new ways to attract customers - and keep existing ones from exiting. Hesse is expected to update investors on his plans at the end of February, when the company is due to report its full 2007 fourth-quarter results. One obvious starting point: customer service.

Meanwhile, expect Hess to cut Sprint's cost base as much as he can - to prevent more investors from fleeing.

"[Hesse] has historically been aggressive on cost cuts and conservative on guidance, so look for more reductions when he finalizes his plan," Goldman Sachs analyst Jason Armstrong told investors on Friday.