For Sprint Nextel, it's darkest before the dawn.
Sprint is slated to decommission the Nextel network at the end of June, finally putting to rest one of the worst mergers in corporate history and ridding itself of an awkward dual-network structure that put a hefty, unnecessary burden on the company.
But before Sprint can declare mission accomplished on a turnaround, it'll have to deal with what will undoubtedly be an ugly second quarter.
Sprint earlier Wednesday reported first quarter results that showed a narrower loss and a healthy increase in its adjusted operating earnings. However, a weak performance on the Sprint contract side and a continued defection of Nextel subscribers led to a net loss of 415,000 subscribers.
That figure likely will look even worse in the second quarter. Sprint CEO Dan Hesse said 1.3 million Nextel customers remain, and all will be kicked off when the network is shut down. While the company is focused on retaining as many of them as possible, it already has warned that its projected recapture rate would be lower than that of the first quarter, when it re-enrolled 46 percent of departing Nextel subscribers to Sprint.
But by focusing its sales and marketing resources on the Nextel side, Sprint took its eye off the ball -- namely, its core Sprint service. In the first quarter, the number of net new customers who signed a two-year contract with Sprint fell to 12,000, compared to 263,000 in the first quarter a year ago.
The contract business, also known as post-paid, is seen as the most lucrative part of the wireless industry because customers are locked in for two years and generally pay a higher monthly rate. But those numbers will likely continue to decline in the second quarter as Sprint again focuses its attention on departing Nextel customers.
"It's not that we're excluding the broader customer base, who will still see Sprint ads," Hesse told CNET in an interview. "In terms of messaging, targeting, and effort, we're particularly focused on recapture."
Of the 1.3 million customers on Nextel, 1 million of them are on a contract, and many of them are business customers who will be up for grabs. Hesse conceded that the lack of a wider LTE network has been a disadvantage in that respect. What's worse is some of those Nextel business contracts also have Sprint accounts. If that business customer leaves for AT&T or Verizon, it is bringing both Nextel and Sprint accounts along.
"The last group will be more difficult," Hesse said. "They are business customers up for bid, and it will be highly competitive."
T-Mobile provides some heat
In addition, outside competition could prove to be a bigger hindrance in the second quarter. While Sprint would prefer to look up to larger rivals AT&T and Verizon, it should be looking below at smaller T-Mobile.
T-Mobile has reinvigorated itself by making a lot of noise about abandoning contracts and subsidies. Like Sprint and many other carriers, it's also armed with the iPhone.
"Both Sprint and AT&T reported weak post-paid handset net additions, confirming what we have been saying for the past month: T-Mobile's Value Plans and iPhone launch are starting to gain traction in the market," said Macquarie Capital analyst Kevin Smithen.
Hesse said he would take a "wait and see approach" to the new plans. He noted that in some ways, T-Mobile is simply changing the word contract for commitment, noting that the full price of the smartphone presents another obligation for consumers.
"We always evaluate what's working or not in the markets," he said, adding that he would consider making adjustments over time, depending how consumers respond to offerings like shared data plans or no-subsidy pricing.
For now, Hesse said Sprint has no plans to change its unlimited data offering for smartphones.
"We think it's compelling and a very strong offering in the marketplace," he said.
Life after Nextel
Beyond the Nextel shutdown, the company is positioned for new ownership.
Hesse said on a conference call on Wednesday that the company is on track to close its merger with Japanese carrier SoftBank by July 1. But Sprint also is entertaining a sweeter, unsolicited $25.5 billion takeover offer from Dish Network.
Either way, the company stands to benefit. A deal with Dish brings additional spectrum and a second national salesforce ready to bundle wireless services with satellite TV. Softbank brings a much-needed cash infusion and leadership experienced in operating an underdog wireless player. Sprint will have to look seriously at both offers, even as SoftBank has said that it still believes its offer is more attractive.
Sprint, meanwhile, already is repurposing some of the Nextel spectrum for voice service, which it will begin to use for LTE by the end of the year. In addition, the company expects by July 1 to close the acquisition of the stake in Clearwire it doesn't own.
The end of the Nextel recapture initiative means the company will shift its efforts to its core Sprint service and put an end to the relatively quiet start to the year. That should mean a more vocal -- and more competitive -- Sprint as it seeks to turn the corner.