Sprint, on earnings warning, is latest to shift to data from voice

The flight from consumer long-distance continues, as the company's executives warn of earnings weakness and outline their planned transition to a data services business.

4 min read
And then there were none.

Sprint on Friday became the last of the Big Three long-distance companies to outline a plan to become a data services provider and essentially abandon long-distance, while joining the others in issuing an earnings warning.

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As previously reported, the company's announcement was expected and came just two days after WorldCom announced plans to separate its long-distance operations with a tracking stock. Last week, AT&T also announced a consumer long-distance tracking stock, while taking the extra step of spinning off its cable and wireless units.

All three companies have seen their stocks plummet in recent months, as the revenue decline in consumer long-distance has accelerated. Increased competition and new technologies such as wireless phones are said to be the source of the decline.

Chief executive William Esrey said in a statement that Sprint already has become a digital company, citing its PCS network, tier 1 Internet backbone and fiber-optic telephone backbone. The company said Sprint's growth in its non-wireless arm, under the ticker "FON," will be driven by the Internet backbone.

Sprint also announced Friday that it will abandon its efforts to launch local-phone service using Bell-based circuit-switched technology. Len Lauer, president of global business markets, told investors that the company instead will focus on packet-switched phone service using Sprint's ION backbone network and the company's fixed wireless, or MMDS, acquisitions.

"We already have the national footprint" that Sprint's competitors are still dreaming of, Lauer said.

Unlike its competitors, Westwood, Kan.-based Sprint didn't announce a restructuring so much as a change in focus to the areas where it sees growth. "Shifting the mix of revenues from voice to data in the FON Group core businesses will be a primary objective," the company said in a statement.

Long-distance makes up 70 percent of FON's business, but the company said by 2003 the level should be down to 50 percent.

Sprint predicted revenue growth for FON of 3 percent for 2000, with a "mid-single-digit rate" for 2001 and a double-digit rate in 2002 as a result of the shift to digital services.

Earnings per share in 2000 should be $1.80 to $1.90 for FON, with a double-digit growth rate for core earnings per share this year, the company said. A roundup of analysts by First Call/Thomson Financial had projected earnings of $1.90 per share, the top end of Sprint's estimate.

For 2001, Sprint predicted earnings per share of $1.65 to $1.75, with growth in core earnings per share at a "low- to mid-single-digit rate."

By 2003, Sprint said its shift in focus could lead to FON earnings per share of $2.68, up 40 percent to 50 percent compared with this year.

PCS already has a digital focus and steady growth. The company predicted revenue growth for PCS of 90 percent in 2000, with 50 percent growth in 2001 and 30 percent to 35 percent growth in 2002.

Esrey said growth for both FON and PCS will be driven by providing total-access solutions: serving customers at home, at work and on the move; integrating back-office operations; and concentrating geographic resources.

"In addition to our hard assets, Sprint also has invaluable intangible assets--more than 22 million loyal customers, a powerful brand...and an outstanding organization," Esrey said.

Esrey bullish
Despite the company's planned shift to business data services, Esrey told investors and media Friday he wasn't abandoning the consumer market.

"While some industry participants have announced plans to put their consumer business into liquidating trusts, we see a significant growth opportunity serving the consumer market."

He acknowledged that growth would not come from long-distance, noting that see story: Weak business tracks spun off "pricing pressures, concerns about excess capacity and a job market that is the tightest in history are contributing to uncertainty and to investor concern reflected most vividly in the stock prices we see today."

But Esrey said that PCS will continue to grow in part because of consumer demand and predicted that the growth would be fueled as well by wireless Web services. "We expect 60 percent of our consumers will be using wireless Web services within five years," he said.

Underlying Sprint's growth in both the consumer and business markets, Esrey said, would be a need to stay connected digitally. "Demand for bandwidth is nearly insatiable," he said. "It's unlike anything I've witnessed in my 15 years as a CEO."

Esrey admitted the telecom sector was volatile on Wall Street and said it likely would remain that way. But he took issue with what he said was the see story: Telecom downturn failure of investors to make the proper distinctions between winners and losers in assigning valuations.

"It is my view that current valuations across our industry seem to assign loser status to all industry participants," he said. "I believe the substantial discounting of the terrific opportunities that lie ahead is unjustified and is particularly unjustified in the case of Sprint."

"The means to sustained shareholder value creation is consistent execution, and I believe that is a hallmark of Sprint that is not currently reflected in the price of our equities," Esrey told analysts.

Separately, the company plans to swap so-called spectrum--the capacity to send wireless phone calls--with AT&T Wireless in unnamed cities with a total of 18.5 million potential customers, according to a statement confirmed by AT&T spokesman Ritch Blasi. Blasi said no money was being exchanged and declined to provide further details.

Bloomberg News contributed to this report.