Sprint Nextel Corporation Q3 2008 (Qtr End 09/30/08) Earnings Call Transcript

 |  About: Sprint Corporation (S)
by: SA Transcripts


(Operator Instructions) I would like to welcome everyone to the Third Quarter Earnings Conference Call. I would now like to turn the call over to Yijing Brentano, Vice President of Investor Relations.

Yijing Brentano

Thanks for joining Sprint Nextel’s Third Quarter Earnings Call. For the format of the call Dan Hesse our CEO will discuss operational performance and notable events in the quarter, then our CFO, Bob Brust will cover financial results. After Bob’s remarks we will open it up for questions.

Before we get underway let me remind you that our release and the presentation slides that accompany this call are both available on the investor relations page of Sprint’s website. Slide two is our cautionary statement. I want to point out that in our remarks this morning we will be discussing forward-looking information which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings which I encourage you to review.

Turning to slide four throughout our call we will refer to several non-GAAP metrics. Reconciliation of our non-GAAP performance and liquidity measures to the appropriate GAAP measures for the third quarter can be found on the attachments to our earnings release and also at the end of today’s presentation which are stored on our website at www.Sprint.com.

On slide five we provide the normalization of net income and earnings per share for the quarter. We reported a net loss of $326 million or $0.11 per share which compares with income of $64 million or $0.02 per share in year ago period. Special items in the third quarter totaled a net loss of $17 million after tax or $0.01 per share. Merger related amortization expenses net of taxes were $344 million or $0.12 per share.

Adjusting for these two items yields an adjusted net income before amortization of $1 million and adjusted earnings per share before amortization of $0.00. This compares to $0.23 per share in the third quarter of 2007 and $0.06 per share in the second quarter of 2008.

I will now turn the call over to Sprint’s CEO, Dan Hesse

Dan Hesse

On our last earnings call as I have on every earnings call I discussed our focus on three priorities; improving the customer experience, strengthening the brand and enhancing profitability. We also provided an outlook for the third quarter. We have continued to make progress on our priorities during the third quarter and we delivered results that were in line with or better than the outlook we provided. As I said on the last call we have yet to turn the corner.

Cash has been a focus throughout the year and we maintained disciplined spending in all aspects of our operations. Our prior guidance that free cash flow would improve substantially in the second half of the year was evidenced in the third quarter as we generated $1.1 billion of free cash flow in the quarter. This added to the already solid cash position we held coming into the quarter afforded us the financial flexibility to reduce our debt obligations by the $1 billion we committed to on our second quarter call. Even with that payment we ended the third quarter with $4.1 billion in cash.

Additionally as announced earlier today we have paid down an additional $1 billion of debt so $2 billion in total and we reduced our revolving credit facility from $6 billion to $4.5 billion and increased the allowable ratio of indebtedness to the last quarters of EBITDA from 3.5:1 up to 4.25:1. We felt it was prudent to take external speculation about our ability to meet our covenants off the table. This allows us to stay focused on improving our operations.

Outside of some contraction in the enterprise space from companies downsizing we’ve seen some but still little impact thus far from economic conditions but we’re monitoring our business very closely. We would expect wireless communications to demonstrate greater resilience than many other industries as many people view wireless as a staple today versus what would have been seen as a luxury eight to ten years ago.

With the FCC approval this week we are even more confident that the Clearwire transaction will be completed this year. The feedback we’re receiving from customers and from the many published reviews from the launch of our WiMAX 4G service in Baltimore have been excellent. In addition, last week the FCC granted our waiver to remain on the interleaved portion of the 800 MHz spectrum through March 2010 vacating in a phased manner based on the readiness of the public safety licensees.

The decision is a positive outcome for all shareholders including Sprint as we continue to work closely with public safety to complete the rebanding effort for this quickly and with as little impact to licensees as possible. We expect the cost of rebanding to stay within the range we have estimated.

Additionally we announced our decision to rejuvenate our iDEN business. After exploring various alternatives our original conclusion remained in tact. Sprint is best positioned to take advantage of this valuable asset. Sprint is the leading wireless provider to American business. Much of our success in this arena stems from the value businesses find in the Nextel Direct Connect applications.

Customers using our iDEN network have the largest selection of devices including military specification compliant rugged devices as well as an ecosystem of rich business solutions including GPS, inventory, and fleet management, dispatch operations and workforce management. Push to talk is a key differentiator for us in an area where we see opportunity to further extend our industry leadership. Eighty percent of our current iDEN post paid users are heavy to moderate users of the button.

We also have a great opportunity to extend our reach into the prepay unlimited market with our Boost brand where customers will increasingly be looking for value and simplicity in this economy. We have also extended our partnership with Motorola to expand the Nextel Direct Connect handset portfolio and enhance the products and services we offer customers on the iDEN network.

Moving to operating performance, the third quarter came in largely as we expected. We produced relatively stable ARPU of a little under $56 as growth in data mostly offset declines on the voice side. As we predicted post paid Churn increased about 15 basis points from second quarter levels to 2.15%. All major carriers saw a sequential increase in post paid churn. Our increase was noticeably less than that reported by T-Mobile or Verizon. We are making progress.

Gross adds declined again but to a lesser degree than what we have seen in recent quarters. We decided to conserve marketing resources during the second and most of the third quarter and we focused the marketing dollars we did spend more on retention versus acquisition then we have done in the past. Our share of voice was at its lowest level ever in the second quarter which impacted gross adds in the third quarter. The net result was a loss in third quarter of $1.1 million post paid subscribers.

While the post paid base declined overall we have seen a market growth in the high value data centric segment. This growth in data usage continues to present the wireless industry with a new platform for growth and Sprint is uniquely positioned today with the largest and most reliable 3G network in America. We’re building this country’s first 4G network as well.

We felt it was important to have our house in order to know we could provide a good customer experience at all customer touch points before inviting new customers to visit. We stepped up our marketing efforts toward the end of the third quarter. While we’re not 100% of the way to our end goal the customer experience at Sprint today is vastly improved from where we were at this time last year and we’re comfortable inviting customers to experience what we have been calling the Now Network, the network customers should go to when they want it now.

Slide eight highlights the solid performances for Sprints networks. Both the CDMA and iDEN networks continue to perform at best ever levels, they continued to in the third quarter with dropped calls below 1% our performance matches that of our larger competitors. In fact, an independent third party study of the second and third quarter showed that our iDEN network had the fewest dropped calls of any national carrier. Our CDMA network is the largest and most reliable 3G network in the industry.

Steve Goodall, President of J.D. Power & Associates recently presented Sprint with the award for the top call quality performance in the Southwest region and noted major improvements in call quality across five of their six regions. On the Wireline side we’ve invested more than $1.5 billion over the past several years to build an un-congested IP core. Our IP revenue growth rate now leads the industry and we were recently recognized by an independent third party as a leader in the delivery of domestic managed MPLS services to businesses.

Additionally our relationships with the cable MSO’s create a VOIP footprint covering over 30 million households in 43 states. The bottom line, Sprint networks are now in excellent shape. Our lower capital spending this year is primarily due to reduced wireless build out needs, the completion of numerous strategic investment initiatives last year like CDMA Rev A also known as 3G and lower capacity requirements associated with our subscriber trends.

Network quality is obviously central to providing a great customer experience and we’re committed to maintaining strong performance across our wireless and wireline networks.

As slide nine demonstrates we’re making great progress in customer care as well. Throughout the year our focus has been on two things, first improving the quality of interactions with our customers and second, improving and simplifying the customer experience so that customers have fewer reasons to call us. We have seen continuous improvement in both areas. In terms of the quality of customer care interactions, first call resolution and care satisfaction levels have continued to increase steadily throughout the year.

On the volume side third quarter calls were down nearly 20% from first quarter levels. As a result staffing levels have been reduced by an equivalent degree resulting in significant cost savings. We have closed 11 call centers so far in 2008.

In addition, turning now to slide 10, we’re gaining momentum around our data centric Now Network brand message. Our advertising has been particularly effective with MWI (Most Want to Investigate) and other key metrics of advertising effectiveness improving markedly despite of a lower share of voice or share of advertising spend.

The Now Network is about data leadership. Customers should use Sprint when they want their information for entertainment now. The foundation of the Now Network is America’s largest and most reliable 3G network and the fastest push to talk network. Like high hard to predict bills resulting from roaming charges that stymied voice growth 10 years ago the additional charges for what we call data; email, texting, surfing, GPS navigation, or TV can discourage customers from trying and using wireless data.

Simply Everything was developed to create the worry free environment that we believe will grow the data category. More customers are now buying up to Simply Everything than buying down. As a result of Simply Everything our lowest absolute churn levels and our greatest level of churn improvement this year have been from the segment made up by our highest value customers, those with monthly recurring payments of $80 or more.

Further strengthening the Now Network is a strong set of data centric devices anchored by the record breaking Samsung Instinct. Forbes.com recently released their top 10 list of wireless devices for the holidays. Sprint led all carriers with six category winners. The critical component of accelerating the adoption of the Now Network is a user experience that is simple and easy. We recently launched four handsets that have the exclusive Sprint developed one click user interface and we now have the ability to make this simple experience available across a wide variety of phones in our portfolio.

One click brings the data experience to the home screen, the customer no longer needs to click through multiple menus to find interesting data services. The one click user interface gives customers the ability to completely personalize the experience on their phones so they can pick the content and services that are most important to them and customize the experience on their phone to fit their lifestyle.

As easy to use as a speed dial function on your phone whether its email, voicemail or simply using your favorite website its just one click away. One click won the best new product at CTIA and because of our open data strategy we also have a long list of partners that make content available such as Google and Disney.

Another major enhancement to the Now Network that we recently introduced was the new Sprint web portal. Sprint Web creates an optimized experience for our customers when they access the internet. We present personalized content to the user so that they can quickly access the most relevant content then we give them a search engine powered by Google so they can find whatever they need.

Earlier this year we opened up full HTML browsing on all of our CDMA phones. Customers don’t want their wireless carrier to construct a walled garden restricting their access to the open internet. We’ve configured our network to support virtually all websites on the internet. This capability helps us ensure that the customer has the best possible data experience when using Sprint phones.

Nothing shows of the Now Network like an application customized for the 3G wireless experience. Such an app is NFL Mobile Live. We launched our exclusive NFL Mobile application on September 4th and on Sunday, September 7th it set a record for the highest single day download since any application in our history. NFL Mobile Live and NASCAR Mobile Live are examples of an impressive list of exclusive wireless content we are delivering to our customers.

The robust Now Network capabilities I’ve described provide a framework that can be leveraged as we expand our 4G services. We’re the first and only company in the market with 4G mobile broadband services. In the third quarter, as promised, we launched 4G WiMAX in Baltimore under the zone brand and the early coverage response from customers, media and technical analysts has been very encouraging. In fact, we received a leading lines for best new service. 4G will redefine what getting it now means.

Finally, and perhaps most important to the Now Network experience we completely redefined the wireless data experience via our recently launched ReadyNow program. The most returned electronic device of last year’s holiday season was the SmartPhone or the PDA. The top reason given was that they were too complex to set up. We have roughly 1,200 Sprint retail stores throughout the country and each one of them our reps are trained to educate our customers on how to use the various features their handsets are capable of.

From the basics like setting up voicemail to more advanced applications like family locator, navigation and Sprint TV. In addition to education ReadyNow is about personalization. Our reps will load and configure the customer’s applications and make sure they’re working before the customer leaves the store. They will walk out an expert so to speak. Customers who have experienced the program are not only satisfied but highly satisfied over 90% of the time.

We’ve also seen a significant up tick in data attachment rates. Finally the program is driving down handset returns and exchanges which are transactions that have a negative impact to subsidy expense. Additionally this week we began to roll out ReadyNow to our dealers with plans to have 750 new active locations by the end of November. We will continue to look for ways to expend the ReadyNow program as we continue to focus on providing an exceptional customer experience.

We find the more applications a customer uses on their phone the lower their churn. In terms of customer lifetime value the customers that buy PDA’s even with the additional subsidy are our most profitable customers because they have higher ARPU and lower churn.

Our data centric strategy is gaining attraction. In the third quarter overall CDMA data ARPU grew to $16.50 which represents 29% of total CDMA ARPU. This continues to be the highest in the industry. Within CDMA, PDA and SmartPhone users are growing at an especially impressive rate, up 140% over the past year. As the charts illustrate these customers have excellent economic attributes when compared to our average post paid subscriber with ARPU over $80 and churn of about 1.5%.

Wayne Gretzky once said, “I skate to where the puck is going to be not to where it has been.” One study says that beyond 2010, 100% of mobile retail service revenue growth will come from data. This is why Sprint is focusing so intensively on making the Now Network the wireless data benchmark.

Overall we made good progress on our operating priorities in the third quarter and we resolved a few important issues. Still, subscriber losses are too high and this pressured our top and bottom line performance. As I’ve said before turning this trend around in a recurring revenue business happens gradually. Stabilizing revenues will be a focus area of ours going forward.

In the fourth quarter we hope to stabilize the trend of declining sequential gross adds that we have seen for many quarters now. We anticipate that fourth quarter churn will be consistent with third quarter levels and that ARPU will decline modestly.

Now Bob will cover third quarter financial results in more detail.

Bob Brust

As we said on the second quarter earnings call our key financial focus areas are improving Sprint’s cash position, reducing the company’s long-term debt and controlling costs. We made progress in these areas during the third quarter. As Dan already mentioned we generated $1.1 billion in free cash flow during the third quarter. This resulted in a cash position of $4.1 billion at the end of the quarter.

The sequential free cash flow differential was driven by three main factors; strength in spending controls in both capital and expense, careful inventory management, and a benefit from timing of receivables that depressed second quarter cash flow levels.

In terms of capital spending we spent $485 million in the third quarter which is down from $646 million in the second quarter and $1.18 billion a year ago. As Dan stated, we understand the importance of the customer experience in terms of network quality. We are focused on spending the right amount of capital primarily in the area of capacity.

We continue to take steps to de-leverage our balance sheet in the third quarter by using cash to retire $985 million of debt. Specifically the $235 million of US unwired senior secured notes and $250 million of Alamos senior notes were retired early. In addition, we repaid $500 million of our revolving credit facility.

During the third quarter we also completed the tower transaction with Powerco which generated $645 million in cash during the quarter with additional funds to be received 90 days after closing. Due to the accounting structure of the transaction a balance of $694 million is now reflected as debt on our balance sheet through 2028.

Dan already discussed the amendment to our revolving credit facility as well as the additional $1 billion we repaid in conjunction with that amendment. Our available borrowing capacity following these transactions for the revolver now sits at $1.3 billion. To reiterate our good financial position we currently have cash on hand that exceeds our maturities including the remaining balance of our revolving credit facility through 2010. During 2009 our only maturity is $600 million due in May.

Now I will move on to discuss results for the quarter. Consolidated adjusted OIBDA for the third quarter was $1.8 billion which compares to $2.1 billion in the second quarter and $2.9 billion in the year ago period. The chart on slide 14 outlines this sequential change. The largest factor in our sequential decline is subscriber losses that Dan discussed which drove revenues down 3% from the second quarter to the third quarter.

ARPU continued to be relatively flat during the third quarter. Post paid data ARPU increased approximately $1.15 from the second quarter while voice decline was slightly greater degree. On an annualized basis data now accounts for more than $6 million of wireless revenue and this is up 25% from the third quarter of last year.

Overall costs were up marginally from the second quarter as the increase cost of service outpaced SG&A declines. Cost of service increased from the second quarter levels by $59 million or 2% primarily due to the higher roaming and premium service expenses. The increase in premium services is a demonstration of the success we are having in data with our Simply Everything plan and handsets such as the Instinct. Premium service costs are associated with application utilization and content downloads most of which have offsetting benefits in revenue from data plan subscribers and content purchase fees.

Third quarter SG&A expenses came down 10% year over year and 2% from the second quarter. Two key areas of improvement during the quarter were customer care and bad debt expense. Across these two categories costs have come down more than $750 million on an annualized basis from peak levels. Dan discussed the drivers of care improvement. In terms of bad debt we saw declines of 46% year over year and 12% from the second quarter reducing bad debt to the lowest level in two years.

The improvement was due to several factors; we have continued to improve the credit quality of our customer base and exited the third quarter with a prime post-paid customer mix of 83%. We have also implemented programs to proactively address certain high balance customers before they get a surprise bill or enter the collections process.

Additionally, for those accounts that enter collection process we saw an improvement in our collections success rate. These programs combined with our improving prime mix contributed to a measurable improvement in the accounts receivable aging for all aged categories and has allowed us to reduce the third quarter volume of account write offs by 35% year over year.

While collections metrics have fared well thus far the improvements we have seen in bad debt could be at risk if the economic conditions remain difficult or deteriorate farther. We continue to watch the situation closely and have implemented programs such as the one that would address high balance customers to proactively head off potential issues early in their development.

Looking forward to the fourth quarter Dan outlined our guidance for gross adds, churn and ARPU. This will obviously continue to pressure revenue. While we will continue to take costs out of our business in the near term we plan to reinvest much of the savings and efforts to stabilize and improve demand. As a result we expect OIBDA to be down sequentially in the fourth quarter.

In light of our sharp focus on network quality in the existing footprint and minimal capacity needs we now expect capital spending to be between $3 and $3.3 billion for the full year excluding rebanding. From a cash standpoint we expect to generate respectable free cash flow in the fourth quarter.

We will now open it for questions.

Yijing Brentano

In just a minute the operator will instruct our listeners how to queue up for the question and answer session. I want to point out that you may access an audio replay or webcast of our presentation on www.Sprint.com. We will now open the lines for your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Phil Cusick - Macquarie

Phil Cusick - Macquarie

I wonder if we can talk about the strategy of stabilizing gross adds. It seems like they’re down dramatically year over year but we’re starting to see a little bit more advertising. The handsets have been I’d say increasing in quality and competitiveness overall. As we think of the fourth quarter should we think about the company getting much more aggressive in advertising in handsets or is it really just a gradual increase over the next few quarters.

Dan Hesse

As I mentioned during my piece and in past quarters we wanted to focus first and foremost on making sure, this is crucial to long term profitability obviously churn that we were inviting customers to an experience that was a good one and they would stay with us for a long time. We tended to move our marketing spend much more heavily toward retention versus acquisition while we, if you will, got our house in order and improved our customer satisfaction levels, care and retail, improvement the quality of our network and what have you.

As a result, we decreased our share of voice very substantially, actually to its lowest levels ever in Q2 and early Q3 then as you’ve noted the advertising levels are beginning to move back up more toward normal levels. I’m not going to talk yet about or give guidance with respect to our advertising levels in ’09 but you’ve hit on a very important point which is the company really for the last since Q4 of ’05 have seen a continually declining trend in gross adds. That of course is being played out in net adds.

That’s really if you were to talk about the major difference between Sprint’s performance and its big major competitors its really less right now of a de-act issue than it is a gross ad issue. We felt we had a good lineup going into the fourth quarter which is why we started right at the end of the third quarter. We think that Simply Everything which is a great value compared to competitive offers for someone who wants to really have unlimited data and voice it’s about $1,000 better value over the life of a two-year contract.

Especially in today’s cord cutter environment you’ve seen the adds have been a bit of that angle to them. I think a lot of customers in this economic environment are thinking about the wireless phone being their only phone. If you don’t have to worry about it we think it can have particularly strong impact this quarter. We’re beefing up our advertising around the value of Simply Everything. Our earlier advertising was more around the simplicity of Simply Everything.

You’re right on the devise side, we’ve launched four new devices with one click and the Rant is a good example, you’ll see some advertising around the Rant where you get an extremely powerful easy to use 3G phone for under $50. We think that is a value message that will resonate well. Clearly part of the gross add reduction has been the fact that we’ve been focusing more on quality as well.

We increased our credit scores this year. We’re now very happy that we did that and I think as a result you’re seeing even though this quarter you’ve seen some up tick in overall churn we’ve held on the involuntary side well because of our improving quality. We’ve been increasing as part of our gross adds the percentage of those gross adds that are coming as prime fairly substantial and now we’re sitting with a base of about 83% prime which I think puts us in good stead going forward.

Finally, the last thing is the retail experience, before we really wanted to invite customers into our stores. Now we’ve got for example the most recent one, like the one with me in the diner at the end on ReadyNow it’s got a picture of our store. We wanted to make sure the store experience was excellent so we started with what was called the red carpet program to really improve on satisfaction at retail.

Now we have ReadyNow which is the only program anywhere even remotely like it in the industry where we’re completely personalizing customize the devise for end users because now we’re trying to encourage them to come on the Now Network which really means 3G and lots of applications. Our research has shown and we’ve done some real good segmentation research where we look at which customers are the most profitable.

The most profitable segments are segments that really want to use all the features of wireless data but are somewhat sometime intimated by them. They return the phones and we think we can have much better financial characteristics as well as acquisition characteristics around those. That’s why we’ve said we think that, or we’re hopeful that in the fourth quarter we’ll stabilize if you will that trend of declining gross adds and hopefully have gross adds in the fourth quarter that are similar to the gross ad levels in the third quarter.

That will be the first time in a very long time that that’s the case and we’ll continue to monitor how effective our advertising is and make our advertising decisions in future quarters later. Expect the advertising levels this quarter to be closer to our historical advertising levels at Sprint.

Phil Cusick - Macquarie

If I could follow up on one point there, the Simply Everything is certainly more attractive than the AT&T or Verizon pricing, can you give us an idea what share of gross adds are coming in on that? Do you think that that’s an adequate share or do you expect that to ramp up as you ramp the advertising around it?

Dan Hesse

Right now Simply Everything has been focused primarily around migration and retention of customers. We’ve been trying, I mentioned in my comment that not only the lowest absolute churn levels but the greatest improvement in churn has been evidenced by those on the most high value segment of the market, those spending $80 a month or more. Earlier, some time ago that was a significant problem.

If you remember how much ARPU declined in Q1 this year versus Q4, that was fundamentally because we were losing the highest value stubs and so that the customers coming in had a much lower CLV then customers that were leaving. It’s a good question. We don’t disclose where our gross adds come from but think of Simply Everything as important in gross adds. It is a very good strong percentage of the gross adds that we’re bringing in.

We’re trying to bring people into what we call bundled offers. It’s not just Simply Everything at $99 but we have a number of plans that go down to $69 a month that provide unlimited data. It’s been particularly effective and the big numbers have come from migrating our own base.


Your next question comes from John Hodulik - UBS

John Hodulik - UBS

With the new focus of the company on gross add share and stabilization of gross adds is pricing part of the equation there? It sounds like you got the company where you need it in terms of going after share now but you’re seeing increasing competition especially on the handset and the iPhone and the new Blackberry models. Do you think that Simply Everything $100 plan is where it needs to be to grow your share?

Second, we’re also seeing more competition or at least more advertising from Verizon on the push to talk side are you seeing any increase in defection there as that ramps up?

Dan Hesse

There’s no question that there are kind of two thing that are important in customer acquisition. Not only your rate plan but is the strength of your handset lineup and the price of those. We’re seeing some new devices that are being priced out there very competitively. What we’re hoping is in that regard our messaging going forward on Simply Everything’s value but also combined with a lot of new handsets that are also priced very competitively and I mentioned earlier the Rant which is really a great 3G devise with one click. It has great internet functionality for under $50.

That I think will perform quite well in the market. It’s too early to say that we’re in a position to be increasing our share of gross adds in the market other than to say that our intention right now is first to stabilize what has been a declining share and declining number of gross adds.

On the push to talk side I will let the President of our iDEN and Nextel Direct Connect business unit Danny Bowman answer that.

Danny Bowman

Verizon certainly came out with a lot of advertising, we did see a quick spike in defections but we have certainly stabilized that and we have seen several win backs come back to our franchise and we’re very pleased with the performance that we are having.


Your next question comes from Simon Flannery - Morgan Stanley

Simon Flannery - Morgan Stanley

Can you talk a little bit more about your plans to rejuvenate the iDEN network? There’s been a lot of talk about moving Boost Unlimited across to the iDEN side of things, perhaps you can talk a little about that and whether given that you’ve now decided to do this there’s more spending that you need to do to address that and timing of new handsets?

Also, there’s been a focus on trying to retain the iDEN customers who are leaving the iDEN network and try to attract them over the CDMA network and how is that proceeding?

Danny Bowman

We’re excited about the rejuvenation opportunities that we have and as many of you have seen we have some excess capacity and we feel a couple of things here. One, with our renewal of our Motorola relationship we have a great stable of new devices that are coming out now and into ’09. One of the lead devices we have is iDEN Blackberry with our guaranteed less than one second push to talk. We see a great rejuvenation in our post paid business for our business customers that take advantage of these business solutions.

At the same time we see ourselves very well positioned to compete in the unlimited and prepaid marketplace. We look at taking our excess capacity, leveraging new devices and taking advantage of that. On top of that our QChat which is our CDMA push to talk service we’ve launched in 66 markets and we continue to see a great connection of offering our less than one second on both CDMA and iDEN and we continue to see growth there as well.

Simon Flannery - Morgan Stanley

Is the Boost Unlimited is that going to be much like the product you had on CDMA before or is it going to be targeted to a different demographic?

Danny Bowman

Yes we have Boost on CDMA today as you know and we see the opportunity as a value play especially in these tough economic times we see that as the opportunity.


Your next question comes from Walter Piecyk – Pali Capital

Walter Piecyk – Pali Capital

A question on Clearwire EBITDA, Simply Everything, and just overall EBITDA for 2009. If you could talk about what cost cutting remains that we can see up in the number? When the Clearwire deal is closed what is the quarterly EBITDA fallout as a result of the closing there? On Simply Everything I guess these customers are obviously using the phones a lot. How should we look at gross margin going forward as you get more customers on the Simply Everything rate plan?

Bob Brust

You asked a lot of questions, I think I follow most of them. If I don’t answer your questions re-ask them please. As we move that business in the Clearwire we will see a reduced spending rate. As you know we do get a cash reimbursement at the time that deal closes. As far as going into 2009 those decision haven’t been made yet and we’re still working on that. We’ll talk about that at a later date.

Walter Piecyk – Pali Capital

The Clearwire question was specifically if the losses of that operation were $25 or $50 million a quarter whatever it was are those numbers going to be de-consolidated out of your reported EBITDA?

Bob Brust

They will be after the closing yes.

Walter Piecyk – Pali Capital

What is the quarterly run rate as of Q3, the EBITDA loss for Clearwire, what you would call your WiMAX operations I guess?

Bob Brust

About $75 million.

Walter Piecyk – Pali Capital

$75 million quarterly?

Bob Brust


Walter Piecyk – Pali Capital

The Simply Everything was just about network expense it looks like you’re obviously getting a lot of success with customers using it for what it was intended should we expect gross margin to contract as a result of this Simply Everything rate plan?

Bob Brust

No, we’re not expecting it to contract over time we’re expecting that to be a benefit to the company.


Your next question comes from Craig Moffett - Sanford Bernstein

Craig Moffett - Sanford Bernstein

If I think about the iDEN network and your rejuvenation efforts longer term is this a very long term rejuvenation effort or does it mean that you have some ambition over time that you can migrate your customers relatively more slowly to the CDMA. In particular what I’m wondering about is as you lose subscribers on that business you obviously have relatively long-term leases on individual cell sites, backhaul from individual cell sites and what have you.

Is there any opportunity that you can normalize those leases to get more consistent range of expirees so you can start to think about a more systematic transition of customers from that network and free up that network?

A second question which is a bit more technical is I wanted to see in the wake of the FCC’s approval of the Alltel merger whether you’re satisfied with the conditions on that merger with respect to roaming and what impact your roaming relationships with Alltel will have under Verizon’s management?

Danny Bowman

We believe that we will continue to operate the iDEN network really into the foreseeable future. Like I said earlier we’ve got a stable of great new products coming. We’ve extended our long-term position with Motorola and we feel very confident in that. At the same time we believe this also give us an opportunity to continue to look at what are ways to optimize our costs going forward in the future. This will buy us time to do that.

Dan Hesse

On Alltel we have not taken a public position on the merger but we don’t anticipate an immediate impact on our current roaming agreement with them.

Craig Moffett - Sanford Bernstein

Do you anticipate any impact in terms of the volumes across that roaming agreement?

Dan Hesse

No, I think over time, less roaming traffic will be coming in our direction as a result of the merger. We don’t expect any impact in terms of our roaming expense.


Your next question comes from Michael Rollins - Citigroup

Michael Rollins - Citigroup

I was wondering if you could just specify the net adds that you got from Boost Unlimited on CDMA versus what happened on the traditional Boost prepaid side?

Secondly, I was wondering if you could talk a little bit about CPGA scale. It sounds like from your comments that CPGA which already seems to be at an elevated level could go higher in fourth quarter if advertising levels are going up but gross adds are only stabilizing so I guess what was implied at the third quarter level. When do you expect to show some more scale in CPGA and what are the big items that you really have to hit on to benefit from those opportunities to improve the scale?

Paget Alves

Let me try to respond to the CPGA question, I may ask you to repeat the Boost question, I can also address that. Generally the things that Dan described the devices portfolio we’ve introduced in the fourth quarter show voice returning to more historically, call it traditional levels. The focus around ReadyNow if you put all of those things together the value of Simply Everything those are the things we’re counting on to drive essentially improved unit gross adds, industry stabilization and then growth.

Therefore, we would expect that scale to begin to reduce CPGA because that volume problem we’ve experienced is obviously putting pressure on it. We do continue to expect to have a high mix of PDA’s and SmartPhones which as you know are subsidized a little bit more heavily. We do believe that those are contributing more profitability over time. We think that’s a smart decision and we believe given the growth in the industry, the growth in wireless data that’s a place we want to continue to participate and to some extent outperform our competitors.

The real benefits are going to come from gross add improvements which are going to be a byproduct of the actions we’ve taken in the fourth quarter and will continue to take in 2009. If you would repeat the Boost question I just want to make sure I understood it clearly before I respond.

Michael Rollins - Citigroup

I was wondering if you could breakout the net change in subscriptions between the Boost Unlimited on CDMA versus what’s the traditional Boost prepaid on the iDEN network. You used to give those numbers in the last few quarters I’m just curious for an update on that.

A follow up, are you basically saying that with the new advertising and with the new marketing programs that you’re expecting a lift in gross adds from the current level maybe even beginning in the fourth quarter but heading into 2009 is that your expectation from the new programs that are out there?

Paget Alves

I’m just repeating what you heard from Dan earlier we’re not giving guidance about our plans for advertising in the first quarter 2009. We are stating that the plans we’ve implemented in fourth quarter 2008 are plans that we think are more consistent with historic levels and we think those plans when you take them in totality are going to be sufficient to start stabilizing gross adds and returning to growth.

Dan Hesse

By the way, when we talk about gross adds I’m talking about post paid gross adds. In terms of the guidance and most of my discussions have been on post paid just want to make sure I’m clarifying that as well.

Paget Alves

With respect to Boost the prepaid or the iDEN-based end of period subs for third quarter we’ve got approximately 2.9 million you could call that almost 3 million subscribers on the prepaid product and on the unlimited product roughly 900,000.


Your next question comes from Chris Larsen - Credit Suisse

Chris Larsen - Credit Suisse

As I look at the numbers to get back to a break even where your post paid customer base stays flat you need another million gross adds or churn to drop about basis points. How do you see that playing out and at what point do you feel that the network is ready for you to get aggressive on the gross ad side. You talked about you’ve been advertising a bit more in September and into October has that advertising translated into improved gross add trends in October?

Dan Hesse

There’s about a one-quarter lag in advertising effectiveness. It’s too early to tell so we began if you will the ramp up in advertising lets say in October we’ll start to see that probably right at the end of Q4. Of course the end of Q4 is a very heavy period of time. Hopefully it will have an impact. Make sure I understand your I think your first question had to do with how are you going to get the one million improvement to stabilize net adds, go ahead and ask it again.

Chris Larsen - Credit Suisse

The one million improvement or reduction in churn and how do you see that playing out to get yourself back to the point where the customer base is stable.

Dan Hesse

We need to see improvements in both areas. Our churn levels even though they’ve improved from where they were six; nine months ago they’re still much higher than our top two competitors. We have to make some improvements there but we clearly, as I mentioned earlier, have to begin to address the gradual reduction in gross adds. We are hoping to first stabilize the decline in gross adds then begin to actually increase gross adds.

Also begin, as we make further improvements in churn see an improvement in DX as well and the combination of those two factors we hope and its part of our planning internally to get us to the point where we’re actually growing in gross adds. I think there’s more potential impact for improving gross add performance based upon overall industry characteristics in terms of numbers to get there.


Your next question comes from Mike McCormack – JP Morgan

Mike McCormack – JP Morgan

Attacking the CPGA issue from a different angle instead of thinking about gross adds improving maybe some discussion around how the scale works the other way on the downside. Maybe discuss to the extent you can how much flexibility you have selling expense but still remain competitive. Secondly, the CapEx levels look sort of absurdly low on a percentage of revenue base, is this really a sustainable level or are we going to see CapEx up tick next year?

Dan Hesse

On the CapEx side right now we think that, the thing about capital is that it can be very success based and that’s the way we’re applying capital. If there is a silver lining and I don’t mean to imply that there’s a silver lining at all in our decline in subscribers it means that we have to spend a lot less capital on capacity until we turn that around. CapEx could increase in the future but that will be if in fact we’re successful in bringing new customers and traffic onto the network.

Also, compared to historical trends we have benefited and I quite frankly have benefited from the foresight of my predecessor Gary Forsee in the capital investments we made in the network EBDO Rev A, QChat, a lot of the other capital we spent in terms of integrating or building system between iDEN and CDMA. Last year and the year before we had and even by historical standards but very high spending in CapEx that put us in a great position coming into ’08.

As I mentioned earlier our networks are now performing both our CDMA and iDEN networks at their best levels ever. That is extremely important to us. We recently won a J.D. Powers award here for call quality so we’ll continue to focus on that and we’ll have a very disciplined CapEx spending profile. Right now I would say the answer to you is yes, we do expect to be able to maintain the same levels of CapEx spending going forward but if we are successful in attracting new customers to the company that could change but that will be success based.

John Garcia

Going back to CPGA I think the question was about scale, we have very scalable channels although we don’t share the percent of sales coming through each channel our store channel, our tele sales, our care and our web channels are very scalable in terms of a lot of fixed costs there and as incremental sales come in those new sales obviously come in at lower costs because of the fixed costs in those channels and they’re very, very vibrant channels for us especially with the ReadyNow aspect.

The other thing I would mention two big pieces of CPGA are subsidy. We’ve already talked about higher value customers buying higher cost handsets and we like that tradeoff as do most other carriers. The other chunk of expense there is advertising. Traditionally I think we’ve look at advertising as an acquisition tool, it’s just as much, and in fact more a churn reduction tool as it is an acquisition tool.

In fact the best reaction we’ve had to our advertising so far is with our base really renewing their interest and their appreciation for our brand and our company and the service that we offer. We kind of view the advertising piece probably over weighted acquisition and overly attributed to CPGA when really it’s a retention tool as well.

Mike McCormack – JP Morgan

How flexible is that advertising spend?

John Garcia

The advertising spend is very flexible. There is a lot of media available and particularly on the web it’s very flexible in terms of what you can do quickly.

Mike McCormack – JP Morgan

On the Wireline margins, not that it’s that meaningful but they were stepping down pretty dramatically was there something there that we should be thinking about?

Dan Dooley

No, I think that quarter over quarter wireline is more of a stable business as you know there’s not a lot of new handsets or things that can disrupt our marketplace so we have a lot of our customers we’ve got a few core customers not only our wireless networks, our cable partners but also the businesses that represented where we’ve been growing really at two to three times the market on our IP side.

When you look at it quarter over quarter it’s just some of the billing and the disputes that we see but if you look at it from a more holistic or a longer view time you see that our margin and not only dollars but percentage of margin has gone up slightly over the past couple years.

Mike McCormack – JP Morgan

You’re not seeing economic pressure hurting that?

Dan Dooley

What we’re seeing on the business side is starting to see business customers are a little bit slower in their decision making so we haven’t really seen the beginning, the middle of the economic hard times. We see from a business point you see a lot of business customers just slowing their decisions, delaying their capital purchases, delaying their decisions. We’re looking at our growth coming in 2009 from really value added services like voice over IP, things that are above and beyond just the core network that gives businesses either a value play or more productivity play.


Your next question comes from Tom Sykes – Barclays Capital

Tom Sykes – Barclays Capital

Can you talk about whether or not you think the national Boost Unlimited program is going to require you at all to curtail your efforts at the high end? If you knock it out of the park would you consider reallocating more dollars to that customer segment versus the high end?

Second question, your affiliate IPCS noted that liberal use of credits by Sprint customer service was materially impacting their ARPU I think that’s clearly one of the pressures on your ARPU. Can you talk about in terms of where you’re at in terms of being able to curtail the use of those credits now that dropped calls are down and customer satisfaction is up?

Dan Hesse

The answer to that kind of in a nutshell would be no. We’re going to give preference to our high value customers always and make sure that that experience is an excellent one. If we do knock it out of the park with Boost Unlimited the beauty of a prepaid product is you can be very targeted and tactical in terms of your advertising. Net net if we do knock it out of the park getting back to my earlier answer we would consider making capital investments if in fact that’s financially prudent to handle that traffic we’re not currently envisioning that.

As we mentioned we have spare capacity on the iDEN network we can be very targeted city by city in terms of our marketing dollars to use that additional capacity with Boost Unlimited. We’re hoping it will be quite profitable. The other thing about the prepaid market it does tend to have a higher churn level as well so if we’re seeing any issues its also easier to ramp back the traffic. In essence the priority will always be on serving those high value customers we will continue to do so and we’re going to actually focus our allocation of resources also around those high value customers.

If we have tremendous success we would consider increasing our investments on the iDEN network to handle that additional traffic but it’s not currently foreseen.

John Garcia

With regard to credits I’m not familiar with IPCS’s statement but I would tell you that more than half of the credits that show up in ARPU are really discounts to businesses what we call our NPV credits. The balance of those credits have been coming down sequentially and certainly it’s been an area of focus for us and we believe that we’ve got tight controls over that and we’ll continue to see improvement there. Really most of that, more than half of that are credits that we give to business customers because of their volume discounts.


This is all we have for the questions today. I would now like to turn the call back over to the presenters for closing remarks.

Yijing Brentano

Thanks for your participation today if you have any additional questions please contact Sprint Investor Relations Department.


This concludes today’s conference you may now disconnect.

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