Nextel: Inspiring loyalty
Cellular provider enjoys lucrative and devoted customer base, but faces some leadership tests ahead.
By Erik Sherman -- Movers and Shakers, 6/15/2001
| AT A GLANCE | |
| Nextel |
Nextel was born of the two-way radio business for vehicle fleets. Customers in trucking, plumbing, construction, and other blue-collar businesses might not sound as attractive to telecommunications companies as white-collar workers, but Nextel understood that such people need communications services as much as anyone.
“We grew top line revenues...by 51 percent to more than $5.7 billion,” said CEO Timothy Donahue in a May 1 teleconference that announced the company’s results. “This metric will likely place Nextel among the top 300 companies within the Fortune 500. We also doubled our domestic operating cash flow during the year to approximately $1.4 billion.”
Nextel’s main customer base remains the blue-collar crowd, according to Tole Hart, a senior analyst at Gartner Group. “Nextel phones have a nice feature called push to talk,” Hart says. That feature provides immediate connections within workgroups, a traditional type of communications among Nextel’s core customers.
That client base has become the envy of the industry. Last year Nextel’s customers generated average revenue per unit (ARPU), or average monthly subscription fees, of $74, which was close to double the industry average. Churn, or customer turnover, was well under 3 percent—tiny for cellular businesses. In other words, these are customers that by and large spend the most and stray the least. Other cellular companies are reputedly setting bounties on Nextel’s clientele. But the company has no intention of letting them go.
 |  |
| “We grew top line revenues... |
International operations have been an important area for the company, and are likely to become only more critical. To that end, Dan Ackerson, who has been chairman of Nextel’s board of directors, is stepping down to head the board of Nextel International. “I will assume the responsibilities as executive chairman of Nextel International in anticipation of a potential IPO later this year,” Ackerson said at the teleconference.
The company has also been spending heavily on its packet-data network. “They did that fairly efficiently this last year,” Hart says. As a result, the network was able to handle customer usage that has increased 14 percent between 1999 and 2000. In addition, the company has been introducing new data services and handsets to support them. During the fourth quarter alone, Nextel customers sent about 23 million Internet text messages, which was a 180 percent increase over the same period in 1999. Riding on new technology, the company has already introduced a Motorola handset that runs a special version of Java, which opens the door to phones potentially replacing PDAs.
But for all the good news, Nextel has some immense challenges ahead that will require the utmost in ingenuity and perseverance from its management. In the first quarter of 2001, the company saw a net loss of $428 million, or 56 cents a share, which was more than financial analysts’ consensus estimate of 51 cents a share. That came after analysts had already reduced expectations in April, when Nextel had warned that the slowing US economy would affect results. The company has decided to cut 850 jobs in response.
A possibly more endemic problem is customer use of the network. In the last quarter of 2000, on a per-subscriber basis, Nextel customers increased their network usage by 14 percent compared to the same period the previous year. But according to the company’s public relations firm, ARPU has remained fairly constant. That means customers, on the average, are providing the same revenues as before, but making greater use of resources, which will likely drive up costs and make the company less profitable.
In addition, the customer mix is changing. According to CFO John Brittain Jr, about 30 percent of the fourth quarter growth in customers came from white-collar demographics, while only one-third came from the company’s existing base. The company expects to continue the trend to broaden penetration into white-collar and other segments, which suggests that ARPU could potentially drop while churn could rise. Customer-acquisition costs have also begun to rise, which makes customers less profitable over the lifetime of their relationship with Nextel. Un-fortunately, the company did not arrange an interview with Donahue after repeated requests and also failed to answer emailed questions before publication time. Therefore, the company’s views on such matters can only be the subject of speculation.
According to analysts, the company also has a fundamental weakness. “They are debt laden,” Hart notes succinctly. One of the company’s largest stockholders is Craig McCaw, founder of McCaw Cellular, which he sold to AT&T. “[His] strategy has always been to get heavily in debt and then sell out the company,” Hart says.
Last year, the company completed a $1.25 billion private placement of 9.5 percent notes in January and another $650 million at 12.75 percent in August. Nextel also placed another $1.25 billion this January at 9.5 percent.
Nextel also faces a potential difficulty with its handset technology. “They’re so intimately tied in with the Motorola product line [a major shareholder] as far as the phones they’re putting out on the market,” says Forrester analyst Charlie Golvin. “They don’t have the leverage other carriers have to go to other manufacturers and get the best features and pricing on those models.”
An emerging cellular standard called 1xRTT might prove an answer. But to upgrade would require replacing equipment everywhere in the network, an expensive and possibly difficult-to-finance proposition for a company already mired in debt.
The answer might be to seek a purchase by another company. In fact, the company carried on negotiations a couple of years ago with WorldCom, according to Hart, but the talks broke down over the acquisition price. Given the level of debt and the fact that most cellular companies have more bandwidth, it might be difficult to find a suitor, even considering the attraction of Nextel’s customer base.
Yet despite the difficulties, Hart remains a believer in the company’s management. “I’m sure they’ll still be around [in the future],” he says.
