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Sprint Nextel Corporation (NYSE:S)

Q4 2012 Earnings Call

February 7, 2013 8:00 am ET

Executives

Brad Hampton – Vice President of Investor Relations

Dan Hesse – Chief Executive Officer

Joseph J. Euteneuer – Chief Financial Officer

Steve Elfman – President, Network Operations and Wholesale

Analysts

Jonathan Chaplin – New Street Research

Kevin Smithen – Macquarie Research

Phil Cusick – J.P. Morgan Securities Inc.

David Dixon – Friedman, Billings, Ramsey & Co. Inc.

Mike McCormack – Nomura Securities International, Inc.

Ric Prentiss – Raymond James & Associates, Inc.

David Barden – Banc of America Securities-Merrill Lynch (BAS-ML)

Operator

Good morning. My name is Laura, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprint 2012 Fourth Quarter Earnings Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to Mr. Brad Hampton, Vice President of Investor Relations. Sir, please go ahead.

Brad Hampton

Thank you, Laura. Good morning, everyone, and welcome to Sprint’s fourth quarter 2012 earnings call. On today's call Dan Hesse will discuss operational performance in the quarter; Steve Elfman will provide an update on Network Vision; and Joe Euteneuer will cover financial results. After that we will open the call to your questions.

However, due to securities law issues relating to the pending transaction, we will only address questions relating to the ongoing business and not with respect to the pending SoftBank or Clearwire transactions. We appreciate your understanding and cooperation regarding this issue.

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 the Sprint website.

Slide 2 is our cautionary statement. I do 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, including our Annual Report on Form 10-K for the year ended December 31, 2011. Our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, and when filed our Annual Report on Form 10-K for the year ended December 31, 2012.

Turning to Slide 3; throughout our call, we will refer to several non-GAAP metrics. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures for the fourth quarter can be found in the attachments to our earnings release and also at the end of today’s presentation, which are available on our website at www.sprint.com/investors.

Let’s move on to earnings per share on Slide 4. Basic and diluted net loss per common share for the fourth quarter were $0.44, compared to $0.26 in the third quarter and $0.43 in the year ago period. Basic and diluted net loss per common share for the full year 2012 was $1.44, compared to $0.96 in the full year 2011.

There were a couple of noteworthy items impacting EPS this quarter that I’d like to cover. First, the loss per share in the current period included incremental deprecation expense of approximately $400 million or negative $0.13 per share, on a pre-tax basis, primarily due to accelerated depreciation expense related to the expected shutdown of the Nextel platform.

Accelerated depreciation for the full year 2012 was approximately $2.1 billion, or negative $0.72 per share on a pre-tax basis. We continue to expect higher levels of accelerated depreciation in the first half of 2013, due to the Nextel platform becoming fully depreciated by the middle of 2013.

The fourth quarter also included $45 million, or approximately negative $0.01 per share on a pre-tax basis related to impacts from Hurricane Sandy and $19 million, or approximately negative $0.01 per share on a pre-tax basis related to costs associated with the SoftBank and Clearwire transaction.

Net tax expense was $45 million dollars in the fourth quarter and $154 million for the full year 2012. Net tax expense for 2013, excluding the impact of pending strategic transactions is expected to be between $170 million and $220 million.

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

Dan Hesse

Thank you Brad, and good morning. Thank you for joining us and as always thank you for your interest in Sprint. Before I recap our overall performance for 2012, let me take a moment and touch on some of the key highlights from the fourth quarter.

Turning to Slide 6, our adjusted OIBDA performance of $860 million marks the sixth consecutive quarter we've exceeded in street consensus expectations and represents over 2% growth compared to the fourth quarter of 2011. Our wireless adjusted OIBDA margin held steady compared to the fourth quarter of 2011, in spite of a record quarter of iPhone activations and a larger year-over-year increase in dilution from our Network Vision project.

Driven by continued strengths in postpaid ARPU, Q4 represents our 11 consecutive quarter of year-over-year growth in Sprint platform service revenues and our 12 consecutive quarter of sequential growth. Total Q4 operating revenues of $9 billion are up year-over-year for the tenth consecutive quarter and reached our highest level in over four years. Smartphone sales were strong for us in the quarter. We sold over 6.1 million smartphones in the quarter, including 2.2 million iPhones, a new quarterly record with 38% going to new customers. Smartphones represented 77% of our retail Sprint platform handset sales and 89% of our postpaid Sprint platform handset sales in the quarter and we achieved a balanced sales mix between the OS platforms.

Third-party data indicates that in the fourth quarter, Sprint was the top seller of the popular Samsung Galaxy S III handset. We made substantial progress on our efforts to shut down the Nextel platform in the quarter. One third of the Nextel platform subscriber base moved off the platform in the quarter and we recaptured a healthy 51% of the postpaid Nextel deactivations in the quarter, and a record 50% of the prepaid deactivations.

Finally, we made continued progress on our Network Vision deployment, despite the impacts of Hurricane Sandy in the quarter. Sprint LTE service is now available in 58 cities and our run rate for putting sights on air is up 83%, compared to last quarter.

Please turn to Slide 7. As we began 2012, first year of the investment phase of our turnaround, I told you a year ago that our primary focus in 2012 would be OIBDA performance to ensure we were maximizing operational cash generation in support of our substantial investments. I'm pleased to report that we delivered over $4.8 billion of adjusted OIBDA in 2012, $1 billion higher in 2012 Analysts consensus one year ago. In spite of the sizeable new investments in Network Vision and a full year of the iPhone in 2012, our annual adjusted OIBDA decline was only a modest 5% from 2011. Although we are far from where we want to be in adjusted OIBDA margin performance, our achievements are notable under the circumstances. We doubled our wireless CapEx investment year-over-year as we deploy a leading-edge wireless network to enhance our industry leading customer service.

In October, we announced a large investment by Softbank, which when closed, will provide a $8 billion cash infusion into Sprint and serve as a catalyst for accelerating our turnaround efforts. In November, we announced the acquisition of spectrum in customers from US Cellular in Chicago and in St. Louis, which should strengthen our network performance in those markets. And in December, we announced a proposed acquisition of the shares we done on Clearwire which would give Sprint complementary spectrum to our low and medium frequency spectrum assets.

The balance of my remarks this morning will be organized around our three unchanged overarching priorities; the customer experience, the Sprint brand, and cash. If you please turn to Slide 8, I’ll begin with cash. We ended 2012 with cash, cash equivalents and short terms investments of $8.2 billion, up from $5.6 billion a year ago which included the benefit of $3.1 billion of cash received in the fourth quarter from Softbank.

Our adjusted OIBDA performance for 2012 benefited from continued top line growth. We had solid revenue performance across all three areas of our Sprint platform wireless business which resulted in year-over-year service revenue growth of almost 15%. The annual Sprint platform postpaid ARPU rate of $63.05 is our highest level ever and the 5% year-over-year growth represents our best annual improvement ever.

The fourth quarter is our ninth consecutive quarter of year-over-year postpaid ARPU growth for the Sprint platform. And absent the impacts of Hurricane Sandy that Brad mentioned earlier, would have represented a sequential ARPU increase from Q3 as we continue to benefit from a data prince increase in 2011.

For 2012, postpaid wireless service revenue on the Sprint platform increased almost 11% year-over-year. In our prepaid brands, both Boost and Virgin reached their best ever ARPU levels in the fourth quarter, contributing to nearly 32% growth in Sprint platform prepaid service revenue versus 2011. And finally, wholesale and other revenue is up 85% year-over-year.

As I mentioned earlier, full year consolidated adjusted OIBDA was $4.8 billion. When adjusted for the estimated net dilutive impacts of Network Vision deployment, 2012 adjusted OIBDA would be our first year of annual OIBDA growth since 2006, the year after the Nextel merger.

We were able to mitigate the impact of growing subsidy expenses associated with the industry dynamic of smartphone growth and the full year of the iPhone, as well as our loss of revenue from our Nextel platform deactivations with improvements in operational expense, including notably service and repair and customer care costs.

Turning to Slide 9 in the customer experience, 2012 was another record setting year for Sprint. As we reported previously for the first time ever, Sprint is alone at number one among all national carriers in the American customer satisfaction index, the most improved U.S. company in any industry over the last four years and we’re the only company from all 47 industry studied to go from last place to first place in four years.

J.D. Power recognized Sprint seven times in 2012, including awards to three of our brands, Sprint, Boost, and Virgin Mobile. 2012 also marked our best ever levels in both postpaid and prepaid calls to customer care and our lowest ever expense for customer care credits. Also in 2012, we reached our best ever levels for customer satisfaction with the retail experience, as measured by an independent third-party in both our company owned and indirect channels.

While we’ve made great strides in the customer experience, postpaid churn isn’t where we would like it to be. Sprint platform churn of 1.98% in the fourth quarter is down slightly from a year ago, but up from Q3 as we continue to experience ‘pardon our dust’ transition issues associated with our Sprint platform Network Vision upgrade, in the loss of Sprint platform customers when we lose an entire business account due to our aggressive Nextel platform migration activities.

While I’m pleased with our recent run rates, we are behind our original objectives on Network Vision deployment and admittedly our LTE coverage footprint lags our two largest competitors. We are working hard to catch up and we view these network-related churn drivers as temporary.

In addition, we reached the highest percentage of our postpaid based on contract since the second half of 2007, another favorable leading indicator for future churn improvement. Prepaid churn is a highlight for both the fourth quarter and 2012.. Q4 prepaid churn of 3.3% is our best ever and represents our 16th consecutive quarter of year-over-year improvement. Our Sprint platform 2012 prepaid churn rate of 3.01% is also a best ever number. Both the Boost and Virgin brands showed meaningful improvements in churn year-over-year.

As I moved to our brand results in Slide 10, I will begin with a brief summary of the iPhone. For the full-year 2012, we activated over 6.6 million iPhones well ahead of our contractual minimums with Apple.

As I've discussed on previous calls, the most important early life profitability measure of the iPhone is the percentage of activations that are new to Sprint. And I'm pleased to report that for 2012 40% of our iPhone activations are new postpaid customers. We also continue to be pleased with the operational performance of the iPhone as we are observing fewer care calls, fewer returns in exchanges, and lower early-life voluntarily churn rates for iPhone customers versus comparable smartphone customers in our base. Performance to-date continues to support our decision to carry the iPhone.

Now turning to Slide 11, I'm pleased to report continued strength in the Sprint brand in our related subscriber performance in the quarter when we continued our emphasis on the recapture of our Nextel subscribers. Sprint platform postpaid gross ads were up 17% sequentially. In addition, we recaptured 51% of the postpaid Nextel platform deactivations.

Q4 marked our 11th consecutive quarter, a positive postpaid net customer additions on the Sprint platform. For the full-year 2012, we added over 4.7 million customers to the Sprint platform, including over 1.5 million postpaid and over 2.3 million prepaid customers. And we ended the year with 53.5 million customers on the Sprint platform, the highest number ever.

We believe our corporate responsibility efforts, including our sustainability initiatives strengthened the brand. In 2012, Newsweek ranked Sprint America's third Greenest Company, the only wireless telecom company in the top 25. The Sprint brand also stands for innovation. We were issued a Sprint record 618 patterns in 2012, almost 2.5 patterns every business day.

So in conclusion, I and we have completed the first phase of our turnaround the recovery phase in the first half of the investment phase. One highlight of 2012 was the return generated for our shareholders as measured by Sprint’s stock price. Sprint’s total shareholder return in 2012 of 142% was the second highest among the 500 companies making up the S&P index, but our work is far from over.

Our prospects are improving now. The investment by SoftBank, combined with the operational improvements over the last five years creates a pathway for growth. As mentioned, we announced transactions with SoftBank, U.S. Cellular and Clearwire in the fourth quarter, but we didn’t let these initiatives take our eye off of operations. We look forward to closing these transactions and we believe the Sprint will emerge as a more competitive company.

I’ll now turn the call over to Steve Elfman, who will give you an update on our Network Vision progress.

Steve Elfman

Thanks, Dan. I’m pleased to discuss our continued progress on Network Vision during the quarter. In the fourth quarter, we continue to make strong progress with the Network Vision pipeline and grew our pacing significantly. While the build in the fourth quarter is of course impacted by Hurricane Sandy, our network pacing overall has been strong and we are not changing the outlook of 12,000 sites for Q1 that I shared with you last quarter. We now have zoning complete on nearly 29,000 sites and leasing complete on over 27,000 sites, a 34% increase over Q3 for both

More than 19,500 sites are ready or have already begun construction, an increase of nearly 45% over the third quarter and this represents half of our sites to be upgraded. Our weekly construction starts are up 56% from Q3 and sites completed per week are up 83% from last quarter. We’ve doubled the number of cities under construction to over 450 and we have now launched 4G LTE in 58 cities with nearly a 170 more expected to launch in the months to come. We now have over 8,000 sites on air, nearly double the number I reported three months ago.

We are also very pleased with the performance we are seeing on LTE sites we have on air. Average downlink and uplink speeds are highly competitive in the range of 6 to 8 megabits per second for downlink and 2 to 3 megabits per second for uplink. We expect this performance to improve as we bring four, five clusters on air and continue to tune the network. We’ve encouraged by this momentum as we enter into 2013 and are committed to deploying Network Vision as quickly as we can.

We are working hard with our vendors to make up for the delays they encountered in 2012. And with the additional financial flexibility in 2013, we are planning to enhance the Network Vision build adding more capacity and density to LTE. Included in this is more rapid deployment of LTE on 800 we now expect to launch this year. We expect to have LTE coverage for approximately 200 million pops by the end of 2013 depending upon backhaul availability which could push it into very early 2014.

If you could turn to Slide 15 please, in the fourth quarter, we continue to make strong progress on winding down the Nextel platform. At the end of 2012, we had approximately 2.1 million subs, remaining 1.6 million of which were postpaid. We’re on track to shutdown the Nextel platform by the end of the second quarter.

Our operational shutdown plans for the platform will be sooner to that of the spinning process we engaged in last year. The network will be shutdown at switch locations in rapid succession followed by powering down equipment and eliminating backhaul at each cell site, which we expect to substantially complete within 90 days.

The shutting down of the Nextel platform in the middle of this year is an important turning point for Sprint. It will enable us to remove the incremental expense and operating costs of running two separate networks. And it should enabled us improve our service to our customers on the Sprint platform by redeploying our 800 spectrum to CDMA voice and LTE. This is expected to enhance in-building coverage, the deployment of approximately 2.5 megahertz to 3 megahertz of 800 spectrum to CDMA voice has begun to be deployed. Also, LTE on 800 is now plan to commence in the fourth quarter of 2013.

Network Vision is now well underway and we’re pleased with the service improvements and financial benefits we're beginning to see. 2013 is expect to be an important year for Sprint with Nextel network shutting down and the modernization of the network expected to be substantially complete by the end of the year.

I'll now turn it over to Joe to take you through the financials.

Joseph J. Euteneuer

And thanks everyone for being here today. As Steve and Dan have discussed, 2012 was an important year for Sprint as we entered the investment phase of our turnaround and made major investments in the future growth and strength of our business. While maintaining a strong focus on profitability and improving our Sprint platform operations. Our results in the fourth quarter reflect that continued focus and we believe we are well positioned as we enter the biggest period of our investment phase in 2013.

Moving to slide 16, our Sprint platform postpaid business continued to show strong growth in both subscribers and revenues during the fourth quarter. Sprint platform postpaid net ads were 401,000 in the fourth quarter, while Sprint platform postpaid gross ads were down 10% year-over-year, they were up 17% sequentially and we estimate that we are able to roughly maintain our share of gross ads during the quarter even while continuing to balance more costly external acquisition with our focus on the Nextel recapture effort.

Our postpaid Nextel recapture rate remained strong in the fourth quarter at 51%. Giving the Nextel platform cleared and shutdown on time, while recapturing as many customers as possible is one of the most important things we can do for Sprint's future financial strength and I’m pleased to say we are well on our way to achieving these goals.

In 2012, our efforts contributed to 67% decrease in the Nextel platform subscribers and we recaptured 55% of Nextel postpaid deactivations, which is double our historical recapture rate. In a highly aggressive and competitive employment, our focus in 2012 on preserving value from the Nextel platform as we work to remove this major operational cost from our financials has really paid off.

As we discuss with you throughout the year, our postpaid Nextel recapture rate in Q4 declined from third quarter levels and we expect further declines as we approach complete shutdown, due to the fact that non-adjustable subscribers such as zero use and negative ROI customers remain in the base until shutdown. At the end of the fourth quarter, we had approximately 1.6 million postpaid customers remaining on the Nextel platform. Approximately 282,000 were retail customers and just under 1.4 million were business customers with almost two-thirds of these business customers having complex custom network solutions. Based on our current knowledge, the total postpaid Nextel recapture rate for the first half of 2013 is expected to be between 30% and 40%.

As we have worked strategically in 2012 to move customers off the Nextel platform and thus remove a major duplicative cost driver of our business. Total postpaid net ads have been negative during the year and we expect them to continue to be negative in the first half of 2013 as we approach complete shutdown of the platform.

However, while we have worked through this important step for future improved profitability, we have managed it in a way that has preserved revenue. Total postpaid service revenue was up approximately 5% in 2012 and total wireless service revenue was up 6% during the year.

As we work our way through the knothole of getting the Nextel platform shutdown, we expect to exit the year with a strong postpaid revenues and higher margins. Out of this transition, we expect a much improved financially stronger Sprint.

Sprint platform postpaid churn of 1.98% in the fourth quarter improved slightly from the prior year quarter. While churn did improve from last year, it is currently higher than our desired levels largely due to network impacts as we continue to go through the Network Vision deployment process. While we expect these impacts to be temporary in nature, churn is likely to remain at elevated levels for the next few quarters before we start to see gradual benefits from the Network Vision deployment.

Sprint platform postpaid ARPU of $63.04 for the fourth quarter was down on a sequential basis due to an approximate $0.18 impact from customer credits related to Hurricane Sandy. Excluding the impact from Sandy, Sprint platform postpaid ARPU would have been up slightly sequentially due to the continued penetration of our Premium Data add-on charge, offset by dilution from the continued higher than expected recapture of Nextel platform subscribers.

As we discussed previously, higher recapture rates cause ARPU dilution on the Sprint platform. But our accretive to the total postpaid ARPU, which at $61.47 was our highest in over six years, and was up $0.29 sequentially. Sprint platform ARPU remains near historic highs and grew 3% year-over-year in the fourth quarter. With continued penetration of our Premium Data add-on charge expected in our base, we expect that ARPU on the Sprint platform will continue to grow in 2013, but at a slower rate than in 2012.

Moving to Slide 17; our Sprint platform prepaid business also continues to grow. We added 525,000 customers in the quarter, including a 188,000 customers recaptured from the Nextel platform and our Virgin mobile brand posted its best ever net ads since we acquired it in 2009.

While the fourth quarter Sprint platform prepaid net ads were down 42% from last year, the primary driver was related to impacts on the Assurance brand from regulatory changes in the lifeline industry. As Virgin mobile and Boost net ads on the Sprint platform actually grew 37% year-over-year and contributed to 26% year-over-year growth in Sprint platform prepaid revenues.

Both Virgin Mobile and Boost has their highest ever ARPU in the fourth quarter, so both of these brands are performing extremely well.

As I discussed with you on last quarter's call, the lifeline industry regulatory changes are expected to have a significant one-time impact to our Assurance subscribers in the second quarter of 2013 as we implement a mandated recertification process of our Assurance base. And I want to go into some more detail on this with you now. The recertification process will impact customer accounts throughout the lifeline industry and while we expect the negative impact to our total prepaid base to be significant, we believe that the impact to us will be smaller than to other carriers who did not already have a recertification process in place.

Because we launched the Assurance program with an annual recertification process in place from the beginning, we have some experience in this process and its results. However, the impact to our subscriber base will be much bigger in this case because we are recertifying the entire base at one-time rather than normal rolling 12 month cycle. A normal annual recertification rate is approximately 70% with about 90% of those who recertify qualifying for service.

Despite challenges from the complexity of new applications, we expect to achieve about this rate of recertification for the entire Assurance base. We expect this result in a one-time net subscriber loss of approximately 1.3 million to 1.4 million to our prepaid base in the second quarter of 2013. While the subscriber impact is significant, revenue losses limited as these are among the lowest ARPU subscribers in our prepaid base and we continue to expect growth in Sprint platform prepaid service revenues in 2013.

The lifeline regulatory changes have also had some temporary impacts on our wholesale and affiliate business as we saw net customer losses in the fourth quarter for the first time in three years. This is primarily the result of a targeted effort by our wholesale customers to eliminate inactive accounts in the base.

We expect impacts from the same recertification phenomenon that will affect assurance and inactive account cleanup activity to contribute to wholesale net customer losses in the range of 500,000 to 600,000 in the first half of 2013, but we fully expect to return to positive net ads in the second half of the year. Even with the net losses in the fourth quarter, we grew wholesale affiliate and other revenue by 82% from the prior year quarter and 12% sequentially.

Let’s move on to our wireless operating expenses on Slide 18. Total wireless cost of service in the fourth quarter was $2.2 billion or 30% of wireless service revenues, which was our best level since the second quarter of 2008. This reflects a 2 percentage point gross margin improvement year-over-year even with estimated net increase in Network Vision dilution, which primarily impacts cost of service.

We continue to see benefits in the service and repair expense which are down year-over-year due to lower transaction volumes and higher refurbish replacement rates. We are also seeing lower rent utility expense on the Nextel network primarily related to lease exit charges taken earlier this year associated with the accelerated winning project. 4G roaming expenses are also lower year-over-year due to our flat rate with Clearwire. Total wireless cost of service margin has also improved sequentially as lower service and repair and 3G roaming cost more than offset additional Network Vision dilution.

Total wireless net subsidy expense for the fourth quarter was approximately $2 billion, an increase of $342 million sequentially and $262 million year-over-year. The sequential increase was due to an 17% increase in postpaid gross ads and higher levels of Sprint platform upgrades, resulting from not only the new iPhone, but also discounted older iPhone models, high Nextel platform recaptures and the popular Samsung Galaxy S3.

While subsidy rates continue to have an impact on the entire industry, Sprint had a balanced smartphone sales mix with the highest ratio of iPhone sales going to new customers in the industry.

Total fourth quarter wireless selling, general and administrative cost of $2.4 billion were up year-over-year, but essentially flat as a percentage of total wireless service revenues. Part of the year-over-year increase was related to the additional selling expense associated with direct sourced iPhones, and wireless SG&A as a percentage of service revenue would have been lower without it. Year-over-year sales expenses were also affected by higher mix of postpaid sales versus prepaid sales.

Please turn to Slide 19. Our disciplined approach to grow throughout the year has led to strong adjusted OIBDA results and this continued in the fourth quarter. Consolidated adjusted OIBDA of $860 million the consensus estimates, again and was up 2% from the year ago period. We were able to grow adjusted OIBDA even while absorbing additional impacts from the Network Vision project reflecting our strong focus on cost discipline.

Total estimated Network Vision net impact to adjusted OIBDA was approximately $130 million during the quarter, compared to approximately $185 million in the third quarter, and approximately $50 million in the year ago period. While we continue to spend more each quarter as the build ramps, the sequential decline in Network Vision net dilution was partly related to an OEM credit based on purchase levels for the entire year. In addition as discussed on the third quarter call, we expect some dilutive impacts from the Network Vision to shift into 2013, due to bill timing and therefore expect Network Vision dilution to adjusted OIBDA will increase sequentially for the next two quarters.

Wirelines adjusted OIBDA for the fourth quarter of 181 million was essentially flat for the year ago period and up 15% sequentially. The sequential growth was primarily related to delayed IP disconnect activity and a one time tax refund.

Looking ahead, we expect wireless adjusted OIBDA for 2013 to be down approximately 200 million from 2012, similar to previous years. The resetting of our inter-company transfer rates to reflect current market prices, which is neutral to consolidated adjusted OIBDA is expected to pressure wireline margins along with continued cable, voice over IP migrations.

Moving to cash and liquidity on Slide 20, we continue to make improvements to our liquidity and capital structure this quarter. We received 3.1 billion from Softbank related to the issuance of a seven-year 1% convertible bond. We also raised approximately 2.3 billion in the debt markets and used the proceeds to retire the final Nextel Communication debt maturities nearly 1.2 billion in 2014 and more than 1.1 billion in 2015.

This leaves us with no significant maturities between now and December of 2016. We ended the fourth quarter with total liquidity position of 9.45 billion including cash, cash equivalents, and short-term investments of 8.2 billion and 1.3 billion of an undrawn borrowing capacity under our revolving bank credit facility, which expires in October of 2013.

We have started discussions with our banks to amend and extend the credit facility, including for the SoftBank transaction and we expect the process to be completed in the second quarter. We also have approximately 704 million of expected future liquidity from our secured equipment credit facility as we borrowed an additional 219 million during the fourth quarter. We continue to expect to full utilize the secured equipment credit facility as we progress through the Network Vision project.

Capital expenditures for the quarter were just over $1.9 billion and included approximately $1.3 billion of Network Vision capital. Network Vision capital was up 24% sequentially as the bill continues to gain momentum. Rebanding expenditures, which are not included in capital expenditures were approximately $46 million for the fourth quarter and we expect $200 million to $300 million of spend in 2013, depending on the timing of the Mexican border rebanding program.

Free cash flow for the fourth quarter was negative $1.3 billion, compared to negative $487 million in the third quarter and positive $257 million a year ago. The sequential decrease was impacted by the seasonally high selling quarter and continued ramp of the Network Vision project. As we are now in the middle of the investment phase of our turnaround, we continue to expect free cash flow to be negative for the next several quarters.

Finally, I want to outline some expectations for 2013. 2012 has been a year of significant progress for Sprint, in which we increased the growth trends of the company. We were able to grow total net operating revenues by nearly 5% and produced adjusted OIBDA growth for the first time in six years, excluding estimated net dilution from Network Vision.

The investments that we are making in Network Vision are expected to bring major benefit to the future help and financial strength of the company. And the growth of our core Sprint platform business and our Network Vision strategy helps Sprint enter into a $20 billion transaction with SoftBank and we expect will give us the balance sheet flexibility to become a much stronger competitor.

I'm proud of the accomplishments we've made in 2012, and I'm excited about the future. 2013 is a major investment year for Sprint in which we expect to make even greater progress on our Network Vision plans while continuing to show growth in our core Sprint platform revenues and adjusted OIBDA. We have a lot of moving parts with the pending SoftBank and Clearwire transactions, but our core business is growing well and we’ll continue with our balanced approach to customer acquisition and profitability as we go through the Network Vision build.

Consolidated adjusted OIBDA for the full year 2013 is expected to be between $5.2 billion and $5.5 billion. From a capital point of view, now that we have some of the capital from SoftBank, we have some additional flexibility. We are adding capacity to our legacy network to support the growing usage trends that are affecting the entire industry, and we want to push our Network Vision build. We want to catch up on any delays and build on the momentum we're seeing as best we can. And with the additional financial flexibility, we also expect to spend some additional capital on improving density and adding incremental capacity to the future state network as we go through the build.

We believe that the faster we can deploy the capital and higher standards we can deploy in the network architecture the better off we will be. Including some delays spend from 2012 coming into 2013, these areas will contribute to heightened capital spend in 2013 while we believe will help us move more quickly towards becoming a stronger and more competitive company.

In the first two quarters of 2013, we expect total capital expenditures to be at a similar to slightly higher levels to the fourth quarter of 2012. Giving all the moving pieces with our pending transactions, we will provide an update on the second half of the year as we approach the closing of the SoftBank transaction. In closing, I’m very pleased with a strong steady results that we continue to produce as we execute on Network Vision and move to our investment phase.

This year should be an important turning point for our company as we expect to close the two pending mergers, shutdown the Nextel network, aggressively expand our LTE footprint and continue to make smart investments that should set us up for future growth. Our focused on disciplined profitable growth will continue as we work to build a stronger, more competitive Sprint.

I will turn the call back over to Brad for Q&A. Thank you.

Brad Hampton

Thanks, Joe. In just a minute Laura wants to talk to our listeners on how to queue up for the question-and-answer session. I want to point out that you may access an audio replay or a webcast of our presentation on www.sprint.com/investors. we will now open the line for your questions. Laura, please instruct our participants.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Jonathan Chaplin.

Jonathan Chaplin – New Street Research

Thanks so much for taking the question. And I’m wondering if you could give us a little bit of context around the projections that were provided in the proxy particularly the shift in your EBITDA expectations between the first case you presented in August and the second case you presented in September, it seems like the material down shift in EBITDA for 2014? And then I’m wondering, you sort of tally our long in the [prospect] of closing the deal at this point SoftBank, I’m sure you’ve been exchanging best practices, I mean if you can give us some insight to where the upside to that forecast and the proxy comes from? What kind of value you think Softbank could bring?

And then finally on the higher numbers, I’m wondering if you could give us some context on how many additional cell sites you will be deploying for Network Vision and how quickly you can start deploying the 2.5 gigahertz spectrum and whether that’s part of the first half of the year CapEx? Thanks.

Joseph J. Euteneuer

Hey, Jonathan, could you please repeat the first part of your question. We were having some audio trouble in the room, we couldn’t hear you very well.

Jonathan Schildkraut – Evercore Partners

I’m sorry. So the first part of the question was just context around the shift in the cases that were provided in the proxy, the sort of $1.2 billion downshift between case 1 and case 2 for 2014 EBITDA?

Joseph J. Euteneuer

Yeah, sure. Jonathan, remember the difference, those cases that we put in the proxy are totally related to supporting someone making a decision about whether they wanted to make an investment in Sprint. And not really the sort of business case that we are putting together as a result of changes in the business. You are talking about two different points in time.

So, when we run sensitivities in the proxy, it’s just to get people comfortable with what the company could do. But since those numbers will run, obviously there is a lot of progress we’ve made in obviously delivering the OIBDA results we’ve delivered including the fourth quarter.

Jonathan Schildkraut – Evercore Partners

So you regard those as every conservative forecast there in the proxy and there is upside to those based on the results that you delivered?

Joseph J. Euteneuer

We are pretty confident in the future growth of Sprint as a result of the things we are doing with Network Vision to continued cost, we continue to take out of the model. And I think with the fourth quarter OIBDA, you can see that we’ve continued to demonstrate our focus on profitability.

Jonathan Schildkraut – Evercore Partners

Thanks, Joe. And any context around the CapEx in terms of the additional cell sites that you guys will be deploying and how soon you can get the 2.5 into the network?

Steve Elfman

Hi, Jonathan, this is Steve. I think from a 2.5 at this point in time, it would be the Clearwire plants as they laid out. There is nothing that we can discuss on 2.5 until that transaction would close, number one.

Number two, in terms of the investment that gives us flexibility, this year is really to focus more on bringing up 800 site capability earlier. We really weren’t going to be able to do 800 LTE until very early 2014. We’re bringing that up into the fourth quarter, 2013, and that should provide us more density, better coverage this year. So that’s one of the few things that we’ve been able to benefit from with both sharing in best practices as well with SoftBank.

Jonathan Schildkraut – Evercore Partners

So no increase in the total site comp from 38,000 then?

Steve Elfman

No, not at this point in time, no. Our plan is at this point in time is 38,000 as we go into the year.

Jonathan Schildkraut – Evercore Partners

Okay. Thank you very much.

Steve Elfman

Okay.

Operator

The next question comes from Kevin Smithen.

Kevin Smithen – Macquarie Research

Do you currently expect to step up CDMA LTE marketing spend in Q3 and Q4 to drive net ads, once the iDEN decommissioning is totally completed in June?

Dan Hesse

This is Dan. Basically what we will do in the second half of the year is change our focus. In our advertising spend from, if you will Nextel recapture an internal movements more toward if you will the customers that are out there in the market in general. So we’re not providing, expense guidance with respect to particular areas yet for the second half. But generally what you'll see is a refocusing or change in the targeting of our marketing spend in the second half of the year once basically the Nextel customers are no longer there.

Kevin Smithen – Macquarie Research

Great. And Joe can you give us some color on your item lease termination schedule? When do the cash payments stop, that’s going to be a drag on free cash flow at some point I image that will disappear?

Joseph J. Euteneuer

Sure. On those remember, we have some of the leases that we've been able to negotiate out of others. We’ll have to continue to pay. So, what you see is the difference in OIBDA, you'll have the total shutdown of the leases and we shut down the networks, so you’ll have the right-offs, you'll get an OIBDA benefit, but you'll see in the statement of cash flows, the continued cash payment associated with those leases that would remain.

Kevin Smithen – Macquarie Research

But our understanding is that over 2014 to 2015 that will phase out gradually, those cash payments. Is it completed by the end of 2015 or there is still some residual?

Joseph J. Euteneuer

There might be some small residual, I can get you more specifics, but it pretty much tails off by then.

Kevin Smithen – Macquarie Research

Okay, great. That's very helpful.

Operator

Our next question comes from Phil Cusick.

Phil Cusick – J.P. Morgan Securities Inc.

I guys, thanks. Thinking about CapEx in the first half, you gave some good details there, and I know you don't want to give a lot of second half color until the SoftBank and Clearwire deals are done, but can you help us think about it excluding Clearwire for now, do you think CapEx and once you have the SoftBank money would be higher or lower in the second half from the first?

Joseph J. Euteneuer

Listen, we are in the process of continuing to work with these guys and once we close the transactions we’ll come back and give you an updated. Look, we've been trying to be as open as we can, but we don't want to get ahead of ourselves and so with respect to [Matt], we want to make sure he can complete his plans with us and then go out and properly announce them.

Phil Cusick – J.P. Morgan Securities Inc.

Got it. I appreciate it. And second, on the iDEN network, what was the run rate of cost there? I think, a year ago, you told us that it was running about $1.4 billion before the spending began. What's the run rate of Nextel cost today, and what could we expect to be, pretty much – can we expect that to be pretty much gone at least on a reported basis a year from now?

Joseph J. Euteneuer

On iDEN or Nextel?

Phil Cusick – J.P. Morgan Securities Inc.

On iDEN and I'm sorry.

Joseph J. Euteneuer

Yeah. so the thing is, think about iDEN is that basically when we shut it down you will eliminate the rent other than the cash payments we talked about, utilities will come off when the first, 90, 120 days, and you get about $30 million of property taxes that will come off going into 2014, because you have to pull the equipments physically off the tower, so that's about the timing of it.

Phil Cusick – J.P. Morgan Securities Inc.

And what was the run rate in the fourth quarter? Cost come with that talk about detail.

Joseph J. Euteneuer

Yeah, we haven't said that, but you will see the benefit in the OIBDA results in the improved margin as you get into the second half of the year.

Phil Cusick – J.P. Morgan Securities Inc.

Thanks, Joe.

Joseph J. Euteneuer

Yeah.

Operator

Our next question comes from David Dixon.

David Dixon – Friedman, Billings, Ramsey & Co. Inc.

Thanks very much and good morning. Couple of questions, if I may, on the zoning front, Steve, I was wondering what changes would hypothetically be needed if you are layering into that far and whether that could affect the pricing of the build again just hypothetically if, just talking to flexibility there.

And then secondly, just on the backhaul, could you just remind us how much you’ve got locked in, in terms of capacity and how important do you think our economics are there given your differentiation focuses built around unlimited. And then lastly, just on the pricing that would – since the latest week-to-week pricing, how are you seeing – what’s the current pricing of LTE upgrades for week and if you could provide an update on perhaps any insights on churn maybe too early, but insights on churn that you’re seeing inside of upgraded markets versus non-upgraded markets, we did see a bit of a step up in the quarter?

Steve Elfman

Is that all, David? Let’s through your hypothetical first and actually it’s not hypothetical when we renegotiated the various tower deal, because with through large relationship to us, we’re able to put 2.5 on the towers.

David Dixon – Friedman, Billings, Ramsey & Co. Inc.

Sure.

Steve Elfman

I think the transaction were not, so in the both….

Dan Hesse

In both of the sites we can put 2.5 when we need to. I’m going to try and go back, in terms of the backhaul, your question was about owners economics, while for backhaul other than a percentage of them that we will be doing in microwave as fairly low percent, the rest are indeed leasing through the various AAVs. And so we don’t have the opportunity to have owners economic on that. And so Ben, I’m not sure if the rest of the questions are…

David Dixon – Friedman, Billings, Ramsey & Co. Inc.

Really, yeah, just on backhaul Steve to clarify – yeah, just to how much capacity you have locked in?

Steve Elfman

How much, we’ve got a scalable to…

David Dixon – Friedman, Billings, Ramsey & Co. Inc.

Okay.

Steve Elfman

…to lock in and it’s my guess. So that’s – that will not be a problem for us at all. And then in terms of the week-over-week growth and where we are, I think I kind of gave that where we have the growth from last time in terms of weekly starts complete and on areas the growth that we had in that I gave in the discussion, in my talking point. And the other one and what do things can happen with churn, I hope it improves.

David Dixon – Friedman, Billings, Ramsey & Co. Inc.

All right. Thanks very much.

Dan Hesse

Yeah.

Operator

Our next question comes from Mike McCormack.

Mike McCormack – Nomura Securities International, Inc.

Hi guys, thanks. Can you just talk a little bit about what you see as far as pricing trends as we go through 2013? What might be baked into your expectations? I know the smartphones surcharge should I assume sort of tail-off at some point during the year. Just some thoughts on industrial pricing particularly around AT&T and Verizon the pool data plans as people move up the stack into higher data tiers obviously your Delta or discount becomes a little bit wider there. And then just lastly on the tablet strategy, can you just give us an update on your thoughts regarding the substance tablets and what you are trying to drive there? Thanks.

Dan Hesse

Mike, Dan here. Our assumptions for the year are that we won't see any significant changes in pricing in the industry. Both AT&T and Verizon’s new rate plan structures are fairly new. T-Mobile announced what their plans are not that we of course always reserve the right to make pricing changes but we aren’t anticipating any currently. And you are right, I believe as usage begins to increase that our value proposition of unlimited will just begin to look more attractive. And we still do have some tailwinds if you will with respect to customers who either don't have smartphones or got smartphones before we put in the additional $10 surcharge.

Secondly, with respect to tablets, what we like about tablets is we generally see them as a no to very low subsidy device and even through they bring in less incremental revenue, let’s say then a first line or smartphone accretive. Our issue with tablets is of course, we got the iPad for the first time pretty late in the year and of course, Apple to actually to their credit, they protect their brand very well, but it takes sometime to get advertising in the market that meets Apple’s approval.

So we really didn’t have much of a marketing quarter in the fourth quarter with respect to tablets. And we hope that that will improve, we need to increase awareness out there in the marketplace that Sprint carries the iPad and we intend to work on that in 2013.

So, tablet sales were a significant piece of the net ads of both AT&T and Verizon. In this past quarter, they were not a significant piece of our net ad performance in the fourth quarter and we hope to improve that in 2013.

Mike McCormack – Nomura Securities International, Inc.

All right. I understood the clarity on the pricing issue. I guess I was more taking the other way as those price start to increase more dramatically, do you guys think you have an opportunity to price op instead of flat to down?

Dan Hesse

Well, we are not currently planning to change our prices, so we think we are priced at a good competitive level right now. And we probably would not consider a price increase until we felt that we had a very strong network position and we of course are closing the LTE gap rapidly. We think we will be in a much more competitive if you will network situation compared to Verizon and AT&T in the second half of the year. We’ll always continue to evaluate the opportunity to raise prices, and I’m not saying that we wouldn’t do that, but we’re not currently contemplating raising prices.

Mike McCormack – Nomura Securities International, Inc.

Great. Thanks, Dan.

Operator

Our next question comes from Ric Prentiss.

Ric Prentiss – Raymond James & Associates, Inc.

Yeah, good morning, guys. Couple of quick ones; first, you mentioned pricing, what are your thoughts as far as the U.S. industry with installment pricing or financing of the handsets? What do you think the U.S. appetite will be and have you guys thought about that as well?

Dan Hesse

This is Dan again. We have thought about it and we are going to take a – kind of a wait and see approach. We are going to watch what happens in the market, how customers respond to it and we evaluate options and alternatives going forward. But I think, right now if you just look at the preponderance of the gross ads in the industry in the postpaid business, customers still like the, if you will, the subsidized devices that are part of a rate plan in a contract. So we’ll, as the industry evolves, we’ll evolve with it.

Ric Prentiss – Raymond James & Associates, Inc.

And so it’s safe to say that, that you can implement something quickly if you wanted to, if it felt like the industry was moving that way?

Dan Hesse

Yes. We can move quickly if needed.

Ric Prentiss – Raymond James & Associates, Inc.

Okay. And second question, the U.S. Cellular deal, you mentioned a little bit about it. What was attractive about that transaction? Is there any others out there that might be of interest. Just kind of what attracted you to the U.S. Cellular Midwest markets?

Dan Hesse

Well, we certainly won’t speculate on any future potential transactions. But with respect to U.S. Cellular, it gives us a much stronger spectrum position particularly in terms of PCS spectrum in dense markets like Chicago and St. Louis, and particularly in Chicago as you may remember. We’ve had quite frankly more network issues in Chicago than we had in other major markets. And we needed to enhance our spectrum position. So that was the real driver, it will help us improve network performance. We are also picking up additional customers or subscribers in both of those markets from U.S. Cellular. So we think it’s going to be a very good transaction for Sprint and it helps us provide a better network performance in Chicago and St. Louis to Sprint customers.

Ric Prentiss – Raymond James & Associates, Inc.

Great. Thanks, Dan.

Brad Hampton

Operator, we have time for one final question please.

Operator

Our next question comes from David Barden.

David Barden – Banc of America Securities-Merrill Lynch (BAS-ML)

Hi guys, thanks for taking my question. I guess two if I could please. Just one, you guys have been I think Steve you are kind of clear about some of the priorities for deploying the incremental flexibility you have with respect to capital liquidity on the capital side of the network. I was wondering maybe Joe, is there anything that you’re doing with this new flexibility from a funds perspective on the operating side? I know Bob for instance has talked about maybe expanding the retail platform presence, other things that you kind of have maybe teed up for the first half of the year on the operating side?

And then second, just with respect to the expected T-Mobile launch of the iPhone. You guys these results are showing us that there are plenty of new people that want a new experience with the iPhone, T-Mobile has got lower prices. They’ve been very successful with Android devices. As you kind of look into that launch, what do you do to prepare the business forward? What have you assumed about it? Thanks.

Joseph J. Euteneuer

So I’ll take your first one in regard to the operating. Yeah I mean things like new stores, we continue to look at replacing our old [sea] stores with better markets in the A&B type thing. So that is one thing we are looking at and have started in 2012, but have a little more flexibility as we move into 2013 and 2014.

Dan Hesse

David, Dan here for the second part, we have in our, if you will, in our forecast assumed that the T-Mobile will be getting the iPhone in 2013. We have competitive plans around that, we of course take that seriously. T-Mobile has a competitor and the iPhone is a very competitive device and we have plans in place, but I am not going to disclose what they are?

David Barden – Banc of America Securities-Merrill Lynch (BAS-ML)

If I could just follow-up with one last one I’m sorry. But just on the wireline side, I think Joe at the beginning of last year, the expectation was at wireline was going to be down $350 million year-over-year, and it didn't really do as badly as that. I think you are expecting $200 million down next year including the transfer pricing shifts. Could you talk a little bit about what was different than expected in 2012 for the wireline business relative to the expectations?

Joseph J. Euteneuer

Yeah, it was just really the slower role off of the cable guys. The cable companies didn't role off as we thought. So that was really it.

David Barden – Banc of America Securities-Merrill Lynch (BAS-ML)

Got it. All right. Thanks guys. Congrats.

Joseph J. Euteneuer

Okay, thanks.

Brad Hampton

Thanks everyone for your participation today. If you have additional questions, please contact the Sprint Investor Relations team. This concludes our call.

Operator

This concludes today's conference call. You may now disconnect.

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