For the second quarter ended June 30, Reston, Virginia-based Sprint Nextel posted net income of $370m, down 38% from $599m a year ago. The operator blamed disposal and merger costs for the decline. Sales however rose 76% to $10bn, from $5.67bn in the year-ago quarter. However, this rise was mostly the result of the inclusion of Nextel’s revenues, and was below market expectations of $10.4bn.

Sprint Nextel blamed the decline in profit partly on the disposal of its fixed-line business, Embarq Corp, and partly on the acquisition costs of Nextel Communications Inc. However, the markets did not react well to the news, and shares in the operator fell 14.06% to $17.30 on the New York Stock Exchange following the announcement.

Sprint spun off its fixed-line business Embarq on May 18, and its shares are now listed on the New York Stock Exchange. The decision to spin out the business was made after Sprint Corp and Nextel announced their decision in December 2004 to create the third largest mobile operator in the US with a $35bn merger.

Kansas City, Missouri-based Embarq is the fifth largest local communications company in the US-based in terms of access lines, with 7.4 million consumer and business access lines in 18 states. It offers local and long-distance voice and data services, including high-speed internet access. It also offers a mobile service under a VNO agreement with Sprint Nextel. For the second quarter it posted earnings of $216m, down from $249m, on sales up 3.8% at $1.58bn.

Sprint Nextel did not add as many customers as the markets expected during the quarter. During the three months, Sprint added 708,000 wireless customers, below market expectations of 940,000. In addition, more than half of the 708,000 additions came from the less lucrative prepaid customers. Sprint Nextel now has a total customer base of 51.7 million.

There are also concerns that Sprint Nextel is losing ground to its bigger rivals, Verizon Wireless and Cingular Wireless. The percentage of postpaid customers leaving Sprint Nextel was 2.1%, level with the operator’s first quarter. Churn levels for Boost was 6%, versus a normalized rate of 5.4% in the first quarter. ARPU declined 6% from a year ago to $62.

In an effort to turn the decline around, Sprint’s president and CEO Gary Forsee, said he would refine the operator’s target markets, and adjust the marketing and branding message. He also promised to restructure the combined operations, including sales, service, and distribution. In addition, he promised to extend the 3G broadband service to a population area of 200 million by the end of the year.

Forsee will have to perform a balancing act here because net debt at the operator is $17.9bn after it paid $6.6bn and assumed $1.2bn of debt to acquire the 72% of Nextel Partners stock it did not already own. During the quarter it also paid off a $3.2bn loan and almost $420m of a long-term debt.

Looking forward, the operator said it expects revenue to be $41bn to $41.5bn for the year, reflecting lower wireless revenues.