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Sprint Nextel Corporation (NYSE:S)

Q4 2008 Earnings Call

February 19, 2009 8:00 am ET

Executives

Yijing Brentano - Vice President Investor Relations

Dan Hesse – CEO

Bob Brust – CFO

Keith Cowan - President, Strategy and Corporate Development, Acting President, CDMA Business Unit

Danny Bowman - President iDEN

Analysts

David Barden – Bank of America Securities

Phil Cusick – Macquarie Research Equities

Michael Rollins – Citi Investment Research

Simon Flannery - Morgan Stanley

John Hodulik - UBS

Rick Prentiss – Raymond James

Craig Moffett - Sanford Bernstein

Jason Armstrong – Goldman Sachs

Mike McCormack – JP Morgan

Walter Piecyk – Pali Research

Operator

(Operator Instructions) I would like to welcome everyone to the Fourth Quarter Sprint Nextel Earnings 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 Fourth 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 comments Dan will provide a few closing remarks. We will then 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 the Sprint 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, including our Form 10-K for the year ended 2007 and when filed our Form 10-K for the year ended 2008.

Turning to slide three, 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 fourth 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 four we provide the normalization of net income and earnings per share for the fourth quarter. We reported a net loss of $1.6 billion or $0.57 per share which compares with a loss of $29 billion or $10.31 per share in the year ago period. The company recorded a non-cash goodwill impairment charge of approximately $1 billion in the fourth quarter. The goodwill charge and other special items in the fourth quarter totaled $1.3 billion after tax or $0.46 per share.

Amortization expenses net of taxes were $295 million or $0.10 per share. Adjusting for these items yields and adjusted net loss before amortization of $19 million and adjusted loss per share before amortization of $0.01. This compares to adjusted earnings of $0.23 per share in the fourth quarter of 2007 and $0.00 per share in the third quarter of 2008.

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

Dan Hesse

As I have on previous earnings calls I will be discussing our focus on our top three priorities; improving the customer experience, strengthening the brand and enhancing profitability. Throughout 2008 we made progress on these priorities and we are operating better entering 2009 but we have yet to turn the corner and we are far from satisfied with our performance.

In the fourth quarter we delivered subscriber and financial results that met the outlook we provided. We generated free cash flow in excess of $500 million, we retired $1 billion in debt and we ended the quarter with $3.7 billion of cash in the bank, enough to meet our debt service requirements at least through the end of 2010. Additionally, we completed the Clearwire transaction and launched the first dual mode 3G/4G device in Baltimore.

During a challenging economic climate, so far we have seen some but minor financial impacts from the adverse economic conditions. We expect wireless communications to demonstrate greater resiliency then many other industries. As one of the largest providers of wireless to business we have experienced the impact of business customers downsizing.

In spite of Sprint’s high percentage of business customers, Sprint is nevertheless the only major carrier that achieved year over year post paid churn rate improvement in the fourth quarter and also is the only carrier that showed sequential albeit modest net add improvement in the quarter.

While the current economy presents challenges, it also presents opportunity as consumers are increasingly looking for greater value and a more predictable monthly bill. Sprint is well positioned with our focus on value, simplicity and productivity.

For our post paid customers we have an established portfolio of Everything plans including Simply Everything. Simply Everything is the ultimate in simplicity with unlimited data, text and voice. Simply Everything continues to sell well and customer churn and lifetime value have exceeded our expectations. More customers are buying up to Simply Everything then are buying down.

We relied on our brand attributes of value and simplicity once again in creating the National Boost Monthly Unlimited offer for the prepaid segment which we launched a few short weeks ago on our iDEN network. We are excited about our 2009 initiatives especially our upcoming exclusive launch of the Palm Pre device. Sprint also expects to launch additional dual mode 4G devices, services, and markets during 2009.We will continue to pursue opportunities for growth in the wholesale space by providing network services to innovative devices such as the new Amazon Kindle 2.

As slide seven demonstrates we made continued progress during the fourth quarter in our efforts to provide an improved customer experience at all customer touch points. Our success in making operational improvements in reducing the reasons for customers to call care is demonstrated by the fact that December calls per subscriber were down almost 25% from January levels.

As a result of the steps we have taken to reduce call volumes we were able to discontinue the use of 11 vendor call centers during 2008. As we continue to make operational improvements and reduce calls to care we should be able to close additional call centers in 2009.

Despite operating with fewer call centers customer care satisfaction surveys improved sequentially each and every month in 2008. Executive escalations were cut almost in half during 2008. Additionally, first call resolution survey performance also improved sequentially every month. These new highs were achieved in spite of reducing customer care credits significantly during the year.

An independent study on wireless customer care included that in the fourth quarter, Sprint ranked first in call response for the second straight quarter noting that Sprint answered more than 90% of calls from customers in 30 seconds or less.

Our retail stores and our service and repair teams are also ensuring that our customers are satisfied with their Sprint experience. Our steadily improving retail customer satisfaction results reached an all time high of 90% in December. Our ready now customer satisfaction score for retail customers that have experienced the program were even higher. The ready now program is now available in 1,200 Sprint locations and close to 800 Sprint exclusive third party locations.

In the arena of service and repair satisfaction an independent market research report from KS&R recently concluded that Sprint has now passed two of its national competitors to reach second place in service and repair satisfaction. Sprint showed the most improvement of any carrier in 2008. An outside firm conducts non-transactional customer surveys for us as well and the overall satisfaction levels of customers on both our CDMA and on our iDEN networks also reached their highest levels ever in the fourth quarter.

As part of our efforts to improve the customer experience and decrease costs we have achieved significant improvement in our web based sales in customer self service performance at Sprint.com. A third party web research firm recently noted that our year over year percentage growth in web based gross adds and upgrades was the best in the industry.

According to the third party benchmarking data Sprint.com outperformed the competition in year over year growth of web based sales at a multiple of two and a half times the industry average. Online upgrades grew at a pace three times higher then the industry average and paperless billing enrollment also grew at two and a half times the industry average.

Network performance is key to the customer experience and Sprint’s wireless networks continue to perform at their best ever levels. Independent third party reports and awards confirm that Sprint’s networks are performing well. In addition to value and simplicity, Sprint’s Now network offers the productivity that can only be delivered by the nation’s most dependable 3G network.

Network performance which has been confirmed by nationwide third party drive tests. In addition, Gizmodo a well respected technology blog announced that testing of Sprint’s 3G network in eight major cities showed Sprint beating both AT&T and Verizon in download speed performance.

Our wireline with an uncongested IP core continues to perform well both operationally and financially. Full year IP revenue grew by 36% and OIBDA grew by 9% driven by cable and MPLS growth. At the end of the fourth quarter Sprint supported nearly 4.4 million customers of our cable partners VoIP services. During the fourth quarter Forester Research named Sprint a leader in the category of domestic North American managed MPLS services and Sprint recently received another global wholesale best in class award for data product quality.

Let’s move to slide eight. The improvements we have made with the customer experience are the foundation for driving further improvement in the perception of our brand. By focusing on value, simplicity and the productivity enhancing capabilities of the Now network like 3G data and sub-second push to talk we have made progress among Sprint customer in metrics like brand awareness and most want to investigate.

In December of 2008 the measure of most want to investigate among our customers doubled from year ago and according to a third party Sprint adds consistently ranked among the top 10 wireless adds each week in terms of breakthrough and brand recall. Additionally, our handset offerings have been an important part of rebuilding the brand. Our CDMA handset portfolio appeals to customers who want to do more then talk and several of our devices have received acclaim in the fourth quarter from third parties such as NPR, infoSync, Forbes, Laptop Magazine and even Teen Vogue.

With strong sellers like the Instinct and the HTC Touch Pro during the fourth quarter the SmartPhone and touch categories represented 30% of our handheld device sales. We also have a robust lineup of QWERTY keyboard devices that help us take advantage of the growing popularity of text messaging. During the fourth quarter QWERTY devices represented 41% of fourth quarter handheld sales.

We’ve been pleased with the improvement in data plan attach rates associated with the combination of our data centric handsets, our Simply Everything plans and our ready now program. Our customers enjoy unique applications like NFL Mobile Live which have had over one million unique users. We also currently have over 260 open devices certified on our network which do not carry our brand including the Amazon Kindle.

During the upcoming year we plan to launch a number of new handsets. The Palm Pre has already received resounding praise from a variety of third party evaluations and we are bullish about the potential of this outstanding device for both business and consumer applications. We previously announced that we intend to retain and rejuvenate the iDEN network and we have taken a number of steps to improve the customer experience and perception of our Nextel Direct Connect business.

In the later part of the fourth quarter we launched the first ever BlackBerry Curve with Nextel Direct Connect and WiFi capability, the 8350i has already been a big hit with Direct Connect customers. During 2009 we plan to launch several new Direct Connect handsets including the thin and sleek Motorola Stature i9.

In order to bring greater focus and awareness to the buttons capabilities we recently launched Nextel Direct custom plans. We believe these unique plans have the potential to change the way customers use their phones. The Nextel Direct custom plans are unique because they start with the foundation of unlimited direct connect, mobile to mobile and text. Customers can then add a variety of additional services and business applications to improve productivity in this tough economy.

As I mentioned previously we are also using our iDEN network as the platform for our refocused Boost prepaid offering. The initial response to our Boost monthly unlimited national offers is exceeding what we had anticipated with six times more customers porting into Boost iDEN then porting out since the launch. Fewer than 1% of our new customers are coming from other Sprint CDMA or iDEN post paid plans.

Boost Unlimited is the right product at the right time. When many Americans are facing economic adversity and searching for robust but affordable options Boost Unlimited is a simple, no strings attached solution with a monthly rate of $50 without the add on fees imposed by some other prepaid providers. We will not report specific numbers until our first quarter earnings report but this is another area in which we have momentum.

Moving to the next slide, the quarter came in largely as we expected although we still have not turned the corner our post paid gross add trend did stabilize resulting in Sprint’s best fourth quarter sequential trend since 2005. Additionally, our share of post paid gross adds among the top four national carriers remain sequentially flat for the first time since the first quarter of 2007.

Our fourth quarter post paid churn of 2.16% was consistent with the third quarter results and 13 basis points better then the fourth quarter 2007, driven by an improvement in CDMA churn. As mentioned earlier Sprint is the only major carrier that achieved a year over year post paid churn improvement in the fourth quarter.

While the post paid subscriber base declined by 1.1 million Sprint is the only major carrier that did not have sequential deterioration in net adds during the fourth quarter. Looking ahead, Sprint Nextel expects that both post paid and total subscriber losses will improve in 2009 as compared to 2008.

In our wireless wholesale operations we generated positive net adds for the quarter and for the year in spite of an acceleration in the fourth quarter net add losses related to one particular MVNO. Our continued growth in wholesale has been fueled by Sprint’s continued leadership in providing data centric services to the consumer electronics, healthcare, trucking and auto related industries.

On slide 10, fourth quarter data subscribers excluding text only subs grew by 45% on a year over year basis and the total number of CDMA subscribers with PDA and Touch devices grew by 125% on a year over year basis. The PDA and Touch device category continued to generate ARPU that exceeds $80. Our post paid ARPU continued to remain stable at $56. Our data ARPU results have improved throughout 2008 helping to offset declines in voice. Our industry leading CDMA data ARPU of $17.75 has grown by 21% year over year. Data is now 31% of post paid CDMA ARPU.

As you know, prime customers tend to have lower ARPU so the solid ARPU performance is even more meaningful given the fact that our prime customers have increased year over year from 79% to 84% of the base.

After Bob Brust’s comments about the fourth quarter financial results I’ll make closing comments.

Bob Brust

As we discussed on the third quarter call we continue to focus on three key financial areas; improving our cash position, reducing long term debt and controlling costs. Similar to Sprint’s overall priorities these focus areas have not changed. With the current economic environment we are dedicated to maintaining a solid cash position to ensure that we can meet all of our obligations and do not need to borrow.

As Dan mentioned, we had another strong quarter in terms of free cash flow by generating $536 million. The close of the Clearwire transaction provided $213 million in cash where the remainder was due to persistent rigor around both capital and operating expenses. During the fourth quarter we spent $548 million in capital compared to $485 million in the third quarter and $2 billion in the year ago period. During the quarter capital spend was primarily related to network maintenance and capacity enhancements as well as customer specific capital for business customers.

We continue to monitor network performance very closely and will always improve the required spending to ensure the highest levels of quality. We expect full year capital expenditures in 2009 to be consistent with 2008 levels excluding WiMAX which consisted of approximately $560 million last year.

We had no specific debt maturities due in the fourth quarter but repaid $1 billion as part of the amendment to our revolving credit facility which we discussed on the third quarter call. We maintained a strong financial position ending the quarter with $3.7 billion in cash and $5.1 billion in liquidity. Free cash flow for 2008 was $1.8 billion.

In 2009 our only debt maturity is $600 million due in May. As you can see from the lower graph on slide 12 we only need to generate $900 million in free cash flow over the next 12 quarters to cover our scheduled debt maturities. We expect to generate positive free cash flow in 2009. It’s our view that we can pay maturities when due and maintain a strong cash position even with the current economic times.

Moving now to the fourth quarter on slide 13, consolidated OIBDA for the fourth quarter was $1.7 billion compared to $1.8 billion in the third quarter and $2.5 billion in the year ago period. The chart on slide 13 outlines the sequential change. During the fourth quarter revenue declines were more than offset by cost improvement initiatives. We made the decision to reinvest some of the cost savings into incremental marketing efforts causing the small decline in OIBDA.

We are pleased with our sequentially flat post paid ARPU performance during 2008. Specifically, post paid data ARPU is at its highest level ever with a sequential improvement of about 9% from the third quarter while voice ARPU declined at similar levels. Despite the positive trends in ARPU the subscriber losses that we have reported were the main driver behind a loss in revenues of 4% sequentially.

We saw many areas of cost improvement during the third quarter. From an operational perspective bad debt expense reached another low point since the merger in 2005. The credit quality of our base saw sequential improvement exiting 2008 with a post paid prime mix of 84%. Improving credit quality in addition to enhanced collection efforts such as programs to address customers with high balances drove direct improvement to bad debt metrics.

With the current economic climate we diligently monitor payment and collection trends to ensure that we address any issues as quickly as possible. In addition to bad debt expense other improvements were seen with SG&A during the fourth quarter including selling expenses that decreased due to focus cost management. In addition, operational expense decreases were seen related to lower call volume and improved call handling efficiency.

Overall, cost of service was down $159 million and 5% during the fourth quarter. Seasonally we saw reductions in roaming expense and the rate associated with handsets used for service and repair exchanges, both part of the cost of service. We did see incremental spend related to premium services but this category has been an offsetting revenue component and supports our strength in data.

Moving now to the restructuring chart, number 14. In late January we announced a restructuring that will save approximately $1.2 billion in annualized costs from the reduction of internal and external labor. In regards to the 8,000 internal reductions we expect to begin to see savings in the second quarter of the year. Due to the timing of the reductions in the early part of 2009 we should see a neutral impact to cash in the second quarter and a net positive impact to cash for the full year.

The 2009 impact to unadjusted earnings is neutral. Additional savings from internal headcount will be seen from the suspension of some employee benefits. We expect to see our greatest external labor savings from closing additional call centers in 2009. This is a direct result of our ongoing improvements in customer care by addressing the root cause of why people are calling and ultimately reducing calls. When considering the full year impact of labor reductions costs will be down more than 20% on an annualized basis.

In summary, Sprint is in a strong financial position. We have $3.7 billion of cash in the bank. We are able to fund additional marketing efforts while feeling confident that we can pay maturities when due and maintain a strong cash position during these economic times.

Now back to Dan for closing remarks.

Dan Hesse

It’s been a little over a year since I took the job of CEO at Sprint. During my first call with you about a year ago I stated that the issues facing Sprint were more difficult then I had expected to find and that we would have a difficult 2008 as we worked to get Sprint back on course. The challenges to the country’s economy have not made the job easier.

I am pleased with the overall progress we’ve made in improving the customer experience and improving cash though. During a challenging economic time Sprint delivered on our fourth quarter subscriber and financial guidance. Subscriber losses and revenue declines are still unacceptably high. Turning this trend around in a recurring revenue business takes time especially when the brands reputation for customer service was tarnished back in 2007 and uncertainty about the company’s financial position has unfortunately been written about way too often.

It takes time for market perception about the company’s actions in both of these areas; the customer experience and financial stability, to catch up to reality. We are trying hard to shorten this natural lag in perception by communicating our brand messages of value, simplicity and productivity and by creating a strong financial foundation.

In 2009 we expect both post paid and total subscriber losses to improve when compared to ’08. We expect to continue to generate positive free cash flow. While we expect the economic conditions in 2009 to be challenging we still believe that the wireless industry is relatively well positioned in this tough economy. I can assure you that I and my entire leadership team understand the urgency of improving our relative performance in this industry.

Now we’ll take your 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

(Operator Instructions) Your first question comes from David Barden – Bank of America Securities

David Barden – Bank of America Securities

You talked about a 20% year over year annualized costs savings by year end that would be around $2 billion, $1.2 billion from the labor and presumably $800 million from incremental customer care and other efforts. I was wondering if outsourcing network management was part of that puzzle.

Second, related question is with those $2 billion of run rate annualized savings you seem increasingly comfortable with the cash versus debt situation. Do you deploy the cost savings to a combination of more aggressive pricing and marketing efforts to get back on the market share footing or do you continue to put that money in the bank to continue to build cushion on financial security.

Bob Brust

The 20% reduction in costs referred to our labor costs. That’s approximately $1.2 billion on an annualized basis for the year. What was the second part of your question?

David Barden – Bank of America Securities

It would be helpful to understand do you anticipate outsourcing network management to be an incremental cost savings and as you deploy cost savings to debt maintenance pricing and marketing efforts how do you prioritize those?

Bob Brust

We’re looking at every available way to reduce costs and have made no decision in that area yet. When and if we do we will inform you. We do constantly look at outsourcing and during the fourth quarter we did do a small outsourcing in real estate and things like that and we will do that as appropriate when it makes sense. The other ones we have not made a decision on.

David Barden – Bank of America Securities

On allocating those savings to debt price and marketing?

Bob Brust

Our first priority is to not have any problems with our debt as you know and we will constantly make sure that we can make our maturities. We look at that on a three year period and do our planning. Our number one priority as Dan mentioned is getting our subscriber losses down during this year and will allocate all of the funding that’s required to do that. We did do that, you saw in the fourth quarter we allocated a lot of money to increasing our marketing efforts which you’re probably seeing in ads. We’ll do that as required.

Operator

Your next question comes from Phil Cusick – Macquarie Research Equities

Phil Cusick – Macquarie Research Equities

Last quarter you gave some commentary on sequential gross add trends. I wonder if you can help us out in the first quarter, I know there’s some seasonally down typically but if you could help us out in terms of how the business is trending and whether we’re seeing any up tick and traction on the advertising has it been all over the place.

Dan Hesse

We’re not providing any guidance in that regard with respect to Q1. That being said, we did increase advertising in the fourth quarter versus our historic levels of advertising. We would expect to see the benefits of that in both, we’re obviously talking not only to non-Sprint customers on the gross add side but also our existing customers and hoping that it has impacts on churn as well. We will talk more about 2009 and the first quarter at the appropriate time but I understand why you’re interested.

Phil Cusick – Macquarie Research Equities

Could you give us a split between CDMA and iDEN losses during the quarter and any kind of gross add trends in iDEN whether that got better in the fourth quarter?

Yijing Brentano

Your question is around the net add or gross add really on the CDMA and iDEN split?

Phil Cusick – Macquarie Research Equities

The net adds would be great and if you have the gross adds and churn that’s be even better.

Yijing Brentano

We normally don’t have those net numbers in the K but we have not published our K yet. Can I follow up with you next week after we file the K?

Phil Cusick – Macquarie Research Equities

That’s fine, thank you.

Operator

Your next question comes from Michael Rollins – Citi Investment Research

Michael Rollins – Citi Investment Research

I was wondering when you’re talking about flat CapEx between ’08 and ’09, if I look at table four in the press release it says that CapEx is about $3 billion for ’08. If I look at it on the cash basis in table eight it’s almost $3.9 billion with another $800 million spent related to the FCC licenses which I presume is the public safety spectrum swap. Could you talk about what the flat CapEx guidance is that on an accrual basis or on a cash basis and how should we also think about the money spent on re-banding during 2009?

Bob Brust

The cash is going to be flat on an accrual basis. We can never predict the timing of the outflows in the cash. On an accrual basis flat adjusting for the WiMAX capital around $560 million. The re-banding effort continues. That runs about $200 or $300 million a quarter but that’s variable and will depend on what’s required.

Michael Rollins – Citi Investment Research

That’s separate from the CapEx guidance so its CapEx plus re-banding is the way to think about it?

Bob Brust

That would be the total cash outflow.

Michael Rollins – Citi Investment Research

Can you give us an update related to the last question on the CDMA side in the fourth quarter if you can’t give the specific numbers maybe can you directionally give an update on how the CDMA post paid business is doing and maybe some of the incremental investments you’re making in that business quarter to date.

Keith Cowan

We’re pleased in the fourth quarter on the CDMA post paid business that churn did come down significantly quarter over quarter. Gross adds have improved but we’re looking for more improvement going into the first quarter. As Dan suggested we increased our advertising in the fourth quarter and really focused on the value message and productivity and we expect that that will along with our focus on family plans will really drive improved gross adds as we come into this year.

Operator

Your next question comes from Simon Flannery - Morgan Stanley

Simon Flannery - Morgan Stanley

On Boost Unlimited perhaps you could help us understand the economics a little bit more what should we be thinking about in terms of CPGA and also churn characteristics we’re obviously seeing pretty high prepaid churn at the moment, do you think you can get this down to the 4%, 5% levels that we’ve seen elsewhere.

In terms of promoting it are you really doing this on a full nationwide basis or are you really targeting it in those neighborhoods and those cities where your spectrum position and where the customer demographic is most appropriate?

Dan Hesse

Some of that information we don’t disclose at that level but think about it as the economics are attractive, because we have spare capacity on the iDEN network that we are using to provide this service. Unfortunately as you know we’ve lost a number of subscribers over the last few years on the iDEN network. We are watching the quality of the iDEN network which is now performing at its best levels ever, very closely.

One of the benefits of an offer like Boost is that we can, because it is, even though it’s a nationwide offer customer usage and marketing tends to be very local that we can do disproportionate marketing, i.e. market more heavily in markets where we have more spare capacity then those where we have less. We are launching it nationally, we are launching this across the iDEN footprint but the relative amount of investment in marketing will depend upon how much capacity that we have on the network. We will not let service levels for our iDEN customers be impacted in any way.

Operator

Your next question comes from John Hodulik - UBS

John Hodulik - UBS

When you did the unlimited Boost product on the CDMA side last year you had 340,000 or so net adds in the first quarter. Obviously that was only being marketed across 100 million pops. I know really don’t want to give guidance but considering that now you’re marketing it across most of the country is it safe to say that we should expect net adds or growth at that level or does the tweaks on the marketing side change things dramatically.

As it relates to ARPU it looks like ARPU held up a little better then we thought. Can you talk about the trends potentially going forward especially as we anniversary the Simply Everything plan and what that might do in terms of easier comps given the lower churn in the high end of the market?

Dan Hesse

On iDEN and the launch I wouldn’t draw many parallels at all. As I mentioned we’re going to give you the results and tell you a lot more about Boost Unlimited after the first quarter because we launched it, as you know, with a soft launch in late January just recently have done the national launch. Very early after we launched Boost Unlimited on CDMA we made the decision to not go after that aggressively and market it aggressively. We’re taking a very different stance with respect to the Boost offer on iDEN. I wouldn’t try to draw any correlations or comparisons between the two; they’re really apples and oranges.

With respect to ARPU, CDMA ARPU has been and continues to be driven by strong efforts and success in the area of data. You referenced Simply Everything as well. Not only are more customers buying up but they’ve been buying down. You noticed in CDMA ARPU we had had some negative trends they really were rested in the second quarter when we launched Simply Everything. It was less for that then it was that we had disproportionately high churn among high value customers and what it has done now we have our best churn characteristics among high value customers.

When you look at churn over time you look at which customers are you bringing in as new gross adds and which customers are leaving you. Now our best churn, in essence there’s an inverse relationship, I should say a positive one from our point of view between low churn and high ARPU among our customer base.

That being said, the other thing we did in the fourth quarter because we can’t be a one trick pony is that we launched new family plans. Family plans are profitable in that they have good churn characteristics when you have multiple users, add a line and what have you but tend to have low ARPU. The affect of being successful with family plans is it’ll decrease ARPU but at the same time decrease churn and net net you’re better off. We have a few counter veiling pressures on ARPU but they both are positive from the point of view of customer lifetime value and profitability on the platform.

Operator

Your next question comes from Rick Prentiss – Raymond James

Rick Prentiss – Raymond James

I want to follow on the lines of some of those Boost questions. In the past you had talked also about push to talk centric people are the power button users where do you think that base is at as far as how many people are in the iDEN base that really, really desire that service set a floor for the post paid side. On the Boost Unlimited marketing I haven’t noticed it down here in Tampa area yet, you said you’ve gone nationwide. How will you be marketing that is it more in bus bench, train station kind of areas and will the Boost Unlimited plan be in all the Sprint stores and how will it be displayed.

Danny Bowman

On the post paid business for iDEN push to talk over 70% of our post paid customer continue to use the button moderately to heavily and the average CLV on those customers tend to continue to be higher than average which is great as we focus on the business side of what we do. As it relates to Boost Unlimited we are doing national media but most importantly it’s all about being local. We do lots of local treatments with our distribution as well as our national retail and we also sell the Boost Unlimited in our stores as well.

Rick Prentiss – Raymond James

As far as how you put them in the store, how do you keep from cannibalizing you mentioned less than 1% were moving over from a post paid CDMA or item plan so far to the Boost Unlimited plan? In this tough economy how do you keep somebody from moving off say the $100 plan CDMA to the $50 plan if they’re getting tight in the pocketbook.

Dan Hesse

Number one they’re apples and oranges in terms of the kinds of features and capabilities. We’ll continue to watch it closely but right now what we’re finding is we’re attracting a lot of customers that just weren’t being attracted to Sprint and to our offers. Right now based upon results the impact on post paid has been negligible and we’ll continue to monitor it closely and if we see those trends change we will let you know when we have the call after the first quarter.

Operator

Your next question comes from Craig Moffett - Sanford Bernstein

Craig Moffett - Sanford Bernstein

Your guidance called for just a positive number, most of us are expecting fairly significant free cash flow in ’09 and your run rate is quite high. I wonder if you could give a little bit more directional guidance about your free cash flow. There are a couple of cash items that I wanted to inquire about, the changes to the MVNO pricing arrangement with Virgin Mobile whether we saw an impact of that in ’04 whether that’s really an ’09 event.

The potential for true up payment as early as July with the FCC is that from what I understand could be as much as $1.2 billion is that anticipated in your free cash flow projections. If you did have to make a payment like that are there any special contingencies that that would entail.

Bob Brust

In answer to your first question on the guidance for the year we are not giving any specific guidance because of the economic uncertainties and all the issues in the marketplace that could happen. We do expect the free cash flow for the year but we’ll report that each quarter as we move along.

From Virgin there’s a small very minor impact and I wouldn’t consider that as moving anything. The SEC thing is not a consideration in our cash flow, any settlement there.

Craig Moffett - Sanford Bernstein

The IPCS issue, same thing any update on resolution of that in time for next January.

Bob Brust

I don’t have any specific update. It’s still going through the legal process and we’ll forecast that as it has more certainty.

Dan Hesse

Its business as usual for our customers there and we’re taking all the actions or alternatives with respect to complying with whatever happens in the courts.

Operator

Your next question comes from Jason Armstrong – Goldman Sachs

Jason Armstrong – Goldman Sachs

On network utilization I’m trying to foot the message of unused capacity which allows you to launch some of these new platforms versus a branding message which has really been in the market for at least the past year around unlimited post paid voice now unlimited prepaid voice, unlimited data access, you’re sort of becoming the unlimited firm which points to in usage. I’m wondering if you can talk to has network utilization actually decreased in the past couple quarters to fit what you’ve been saying.

Handset upgrades we saw 10% in the post paid sub base upgrade this quarter that’s an unusually high percentage if you can comment on what contributed to that.

Dan Hesse

We have watched and we continue to watch, as I mentioned earlier, both our networks the iDEN and the CDMA networks are performing at their best levels ever on voice and data. That is not only based upon our internal metrics but our external metrics as well. We do continue to spend capital on a site by site because you can get easily lost in averages.

We look at it city by city, parts of city where there are areas where we do need to add voice capacity there are areas that we may have to add data capacity but as you indicated unfortunately we’ve also seen a decrease in the number of subscribers at Sprint and that opens up capacity. I look forward to spending more success based capital going forward.

We have a very rigorous process around capital spending where we are trying to simultaneously bring our networks up to best possible levels but also have an intense focus on free cash flow. I think we’re doing that very effectively. As we turn the subscriber numbers around you would expect to see a similar up tick in success based capital spending. That’s something that we look forward to doing. Voice and data are different from a capacity perspective.

Jason Armstrong – Goldman Sachs

The percentage of handset upgrades.

Dan Hesse

Ask the question again, I’m sorry.

Jason Armstrong – Goldman Sachs

You put in the release that 10% of the base on the post paid side upgraded handsets this year. We’ve seen trend rates in more of the 6% to 8% range so just wondering what contributed to the up tick this quarter.

Dan Hesse

We do have, in terms of churn reduction, an active program in getting customers to upgrade when they get near the end of their contract. We have also focused on building a stronger loyalty program. Without providing any guidance with respect to 2009 you are going to see some variation and up tick from time to time based upon the success we’re having in having customers sign up for new contracts in order to get a phone upgrade.

Operator

Your next question comes from Mike McCormack – JP Morgan

Mike McCormack – JP Morgan

On the sub losses I know you mentioned some economic weakness in the business side can you give us a sense for the magnitude of loss in business versus consumer. Secondly, on the wireline profitability better than we expected is there anything that you guys are thinking about in terms of a de-levering event to try to monetize that asset.

Dan Hesse

On subscriber losses and churn as I mentioned earlier Sprint does have, its always been a real advantage of the company and we still think it’s a great advantage of the company moving forward we’ll call it a disproportionately high percentage of our customer that are business customers. Without providing specific numbers we have seen a very sizeable increase in churn among what we call corporate liable customers year over year more then we would expect to see. That disproportionately affects iDEN versus CDMA because you have a lot more business.

As you think about what’s contributing to churn its corporate liable was really the driver and then of course that has a disproportionate impact on iDEN versus CDMA. That’s just quite frankly what you’re reading in the papers, companies are cutting back not only in certain sectors of the economy; construction and what have you that tend to use our devices are impacted but when companies like in New York on Wall Street you have fewer people carrying devices it impacts the wireless companies and we’re working very hard to see what we can do to convert employees who lose their jobs to bring them in on the consumer side.

Mike McCormack – JP Morgan

I assume those are probably the higher end BlackBerry type QWERTY devices as well.

Dan Hesse

In New York that would be the case and of course the easy answer would be company ‘A’ why don’t you just let the employee keep the handset and we’ll give them a consumer plan. Fortunately a lot of businesses want the handsets back because of the information and data and what have you that are on the devices so that makes it a little more complicated. It’s a combination of that you would call blue collar and white collar.

You see a lot of iDEN devices which are not generally BlackBerry that we just recently launched. In the white collar sector particularly financial services yes you see a lot of SmartPhones that are being impacted as well.

Your second question had to do with wireline. The wireline business is absolutely crucial and essential to our company especially more now then ever as we move into 3G then we’re going to be moving into 4G where you have an uncongested IP backbone, lots of capacity becomes even more important. The MVNO relationships that we have engaged in and signed MVNO deals for 3G and 4G with the cable companies so it becomes much more important to their VoIP offers as well as their 3G and 4G offers.

The complexity associated with ripping out the wireline business would be substantial so it would have to be an extremely attractive de-leveraging opportunity for us because there’s a lot of downside to moving out of really what is our core. Think of our company as one small portion of the company that’s wireless in terms of what we provide to a customer and that’s the air between the handset and the very first tower then its wires the rest of the way.

The goal of the game is to get the traffic on your wires. AT&T understands that, Verizon understands that and we do as well. It’s also crucial to our business marketing efforts who are looking for a single source solution. Of our top 50 wireless customers 48 are wireline customers. There’s a strong correlation between the two. It’s possible but it’s not high on our agenda list.

Mike McCormack – JP Morgan

Is there an alternative there that maybe more capital should be spent to get the wireline network deeper and to connect more cell sets.

Dan Hesse

We use our wireline network wherever possible as backbone network. Unfortunately this is another subject we need to use the local exchange carriers for local access, the wireline between our network and the cell sight a lot of that is local, its T1 and other kinds of services and those right now carry disproportionately high prices and have very high rates and profit margins associated with them and we think that’s an opportunity for us with the new Obama administration, the new FCC to perhaps make some headway in the area of special access to reduce the cost of our backhaul.

Mike McCormack – JP Morgan

You’re not considering doing that yourself.

Dan Hesse

We continue to look at the most effective means and alternatives to using the local exchange carrier. The cable companies are an alternative they also provide wireline facilities and cable companies provide us with some local access. It’s still almost a monopoly game. Its also possible that we might be able to use 4G or WiMAX more significantly i.e. extend our network out further to provide access in T1 so we’ll continue to look at alternatives but right now it is still largely a monopoly game from the large local exchange carriers but we would like to change that.

Operator

Your next question comes from Walter Piecyk – Pali Research

Walter Piecyk – Pali Research

Gross margin has been declining sequentially for three years then it reversed this quarter, it was also down sequentially so it’s probably the biggest surprise at least for me given the CapEx being as low as it is and ARPU flattening out. Is this going to be a sustainable number at this point? Is this basically a trend that gross margin will stop declining now because this is basically the first time its occurred in three years.

Bob Brust

That’s one of the heavy cost reduction efforts that we’ve been trying to launch and the reason restructuring we just announced all efforts to stabilize the business until we get the subscriber losses in a better position. That would be the hopeful result going forward but we’ll have to wait and see how the economy plays out. In my view, that was a good sign in the fourth quarter, I agree with you.

Walter Piecyk – Pali Research

In the past you’ve mentioned that advertising typically takes about two months to kick in. I think you’ve had two months, are you getting the results that you want as far as the impact on gross adds. I know that the advertisements themselves have been ranking very highly and you’re obviously running a ton of them. Is it getting that two month kick in that you’ve talked about in the past?

Dan Hesse

I can’t talk about Q1 yet but the ads continue to get scored or rated very highly. An independent firm that everybody knows in terms of things like breakthrough and brand recall and what have you and you’re right, there’s typically a two to three month lag between when you change your advertising investment and when you’d hope to see that in share of adds. We hope it has a positive impact on both gross adds as well. We’ll tell you more after the first quarter.

Obviously it’s difficult even for us to tell completely now as we look at the numbers what’s going on in the economy and how we’re doing relative to other carriers that’s still a bit of an unknown. A lot of us will know a lot more about the first quarter when all of us report our results.

Walter Piecyk – Pali Research

Let’s just assume for sake of argument that you run a certain ad campaign, two to three months pass, it doesn’t get the response that you want relative to your peers and the economy and everything else. Would you quickly change the style of the advertisements if you didn’t see that type of response in that two to three month timeframe?

Dan Hesse

I mentioned earlier how we score each week. We look at these every week. Its pretty scientific in terms, obviously there are lots of other elements then just advertising that affect how you’re doing in the market. As a matter of fact, I alluded to this in my comments, the uber issuers for us; this is why it’s so important for the ads to try to break through the big headwinds with respect to perception of the Sprint brand that was earned about two years ago on customer service. Concerns that I think are unfounded but there are still a lot out there and still a lot being written about Sprint’s financial capabilities and its financial strength.

I can tell you that I spend an incredible amount of my time week after week after week talking specifically to business customers who all the messages we’re talking about in terms of our advertising, our value, and our offers make sense but they’re reading in some publication they’re seeing some headline or what have you with respect to Sprint. Those are the two, if you will, uber issues that we’re working through.

Also how effective are your offers, how effective are your handsets. Advertising is just only one element and you can’t expect having a good ad campaign on its own to be what moves the needle or what doesn’t move the needle. We look at it, holistically and a fairly complex and multi faceted way in terms of what’s contributing and what’s not contributing. It could be the message it could be where it is online versus newspapers versus magazines versus radio versus out of home etc. We do watch what is working and what’s not working.

That being said, we’re not wed to anything. I would love, personally, nothing more then if I didn’t have to go and film another ad. One reason, by the way, you don’t make rapid changes is you do build brand equity over a period of time with a consistent look and feel because brand recall is so important its not just the message but will they remember who it is. You do try to keep some consistency.

For example, in the fourth quarter the look and feel of the ads didn’t change so brand recall remained very, very high. As the economy started to deteriorate you saw the messages, like for Simply Everything would be an example. They focused very heavily on the hassle free, the simplicity and value early in the year but late in the year when there was more focus on the economy we started doing the math and putting it on the ads at the end to make it an even more focused economic message.

We can also tweak ads based upon the element that seems to be resonating. If you see our ads now they have much more of a value emphasis based upon what we believe is working. Rest assured we are watching it very, very closely and we’ll do what works.

Walter Piecyk – Pali Research

I would guess that the ads for Boost and the Palm and things like that are going to get people in the stores as well.

Operator

This concludes the Q&A session. I will now turn the call back to Ms. Yijing Brentano for closing remarks.

Yijing Brentano

Thanks for your participation today. If you have any additional question please feel free to contact investor relations at 1-800-259-3755. This concludes our call. Thanks again.

Operator

Thank you for joining the fourth quarter Sprint Nextel earnings call. You may now disconnect.

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Source: Sprint Nextel Corporation Q4 2008 Earnings Call Transcript
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