Sprint Nextel Corp. (NYSE:S)
Q1 2013 Earnings Call
April 24, 2013 8:00 a.m. ET
Brad Hampton – Vice President of Investor Relations
Dan Hesse – Chief Executive Officer
Joseph Euteneuer – Chief Financial Officer
Steve Elfman – President, Network Operations and Wholesale
Philip Cusick - JPMorgan
Jennifer Fritzsche - Wells Fargo
Brett Feldman - Deutsche Bank
Kevin Smithen - Macquarie
David Barden - Banc of America Securities-Merrill Lynch
Jonathan Chaplin – New Street Research
Jason Armstrong - Goldman Sachs
Mike McCormack – Nomura Securities International, Inc.
David Dixon - FBR Capital Markets
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 First Quarter 2013 Earnings Call. 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).
I would now like to turn the call over to Mr. Brad Hampton, Vice President of Investor Relations. Mr. Hampton, please go ahead.
Thank you, Laura. Good morning, everyone, and welcome to Sprint’s first quarter 2013 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 our financial results. After that we will open the call up to your questions.
Before we get underway, let me remind you that our release, quarterly investor update and presentation slides that accompany this call are available on the Investor Relations page of the Sprint website.
Slide 2 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 Annual Report on Form 10-K and when field, our Quarterly Report on Form 10-Q for the first quarter of 2013.
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 first 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 first quarter were $0.21, compared to $0.44 in the fourth quarter and $0.29 in the year ago period. The loss per share in the current period included accelerated depreciation of approximately $360 million or negative $0.12 per share on a pretax basis, primarily due to accelerated depreciation expense related to the shutdown of the Nextel platform.
We continue to expect similar levels of accelerated depreciation in the second quarter of 2013 as we expect to complete our shutdown of the Nextel platform on June 30. In the second half we will still have some accelerated depreciation related to legacy CDMA equipment deployed, with roughly $100 million of accelerated depreciation in the third quarter and $200 million in the fourth quarter. We expect total depreciation expense for the year to be approximately $5.3 billion, excluding the effects of strategic transactions.
Similar to last year’s [pending] [ph] project when we shut down approximately 9600 Nextel sites, we are now evaluating the expenses related to the Nextel platform shutdown and expect to recognize the cost associated with lease exit charges, backhaul access contracts, as well as any other cost associated with the platform of between $500 million and $600 million in the second quarter related to payments beyond June 30, 2013, for which the company will not receive any economic benefit.
Net tax expense was $38 million in the first quarter. We continued to expect net tax expense for 2013 excluding the impact of pending strategic transactions to be between $170 million and $220 million. I will now turn the call over to Sprint CEO, Dan Hesse.
Thanks, Brad, and good morning. Thank you for joining us and thank you for your interest. While the pending and potential strategic transactions make this an exciting time at Sprint, we haven’t taken our eye off of operations. Before I review our results today for ongoing areas of focus, which were cash, the customer experience in the Sprint brand, I will touch on some of the quarter's key highlights.
Turning to slide six, please. Our adjusted OIBDA performance of $1.52 billion marks the seventh consecutive quarter we have exceeded Street consensus expectations, and represents over 25% growth versus the first quarter of 2012 and over 75% growth sequentially. Wireless adjusted OIBDA margin also grew in the quarter, up almost 5 percentage points from last year and nearly 10 percentage points sequentially. Driven by continued strength in postpaid ARPU, total Q1 operating revenues of almost $9 billion are up year-over-year for the 11th consecutive quarter.
Q1 represents our 12th consecutive quarter of year-over-year growth in Sprint platform service revenues and our 13th consecutive quarter of sequential growth. We sold nearly 5 million smartphones in the quarter including over 1.5 million iPhones, with 43% of the iPhones going to new Sprint customers. Smartphones represented 75% of our retail Sprint platform handset sales and 86% of our postpaid Sprint platform handset sales in the quarter.
We again achieved a balanced sales mix between the two major OS platforms and we announced strong additions to our device portfolio that I will mention later. We made continued progress with our efforts to shut down the Nextel platform, shrinking the Nextel customer base by 771,000 subscribers in the quarter. Our profitability focused efforts to recapture Nextel subscribers continues to deliver better than expected results as we were able to recapture 46% of the postpaid Nextel deactivations in the quarter on the Sprint platform.
We remain on track to shut down the Nextel platform at the end of the second quarter. Finally, we made solid progress on our Network Vision deployment. We exceeded our 12,000 sites on air target for the end of the first quarter and to date we have over 13,500 Network Vision sites on air.
Please turn to slide seven. As I have explained previously, 2012 and 2013 represent the second phase or the investment phase of our multiyear turnaround effort. This phase of our turnaround is characterized by heightened capital investment as we upgrade our 3G platform and deploy 4G LTE, and by operating expense pressure associated with network deployment and the shutdown of the Nextel platform. I have consistently stated that our primary operating focus during the investment phase is OIBDA performance to ensure we are maximizing operational cash generation to support these substantial investments. In that regard it's fortuitous that in the first quarter we delivered our best quarterly adjusted OIBDA performance in almost four years.
Please turn to slide eight. Regarding cash, Q1 adjusted OIBDA of $1.52 billion is up over $300 million compared to the year ago period. Our largest year-over-year percentage increase in 6.5 years. The largest driver of this improvement is postpaid ARPU. This result also exceeded our plan for the first quarter with the greatest operational execution favorability being driven by managing upgrades, with upgrades being only 6.9% of our postpaid subscriber base, our lowest percentage on record. Even so, we now have the highest percentage of our postpaid customers on contract in 5.5 years.
We also mitigated higher dilution from the Network Vision program and higher device subsidy rates with cost improvements across the business, including notable year over year reductions in customer care expense as call to care again achieved best ever performance levels and from lower device service and repair costs and bad debt expense.
We had solid revenue performance across all three of our Sprint platform wireless businesses, which resulted in year over year service revenue growth of almost 9%. The Q1 Sprint platform postpaid ARPU rate of $63.67 is our highest level ever, up 2% compared to last year and represents our tenth consecutive quarter of year over year growth.
Postpaid wireless service revenue on the Sprint platform increased almost 7% year over year. Prepaid wireless service revenue increased over 17% and wholesale and other revenues increased 29%. In our prepaid brands, both Boost and Virgin reached their best ever ARPU levels in the first quarter.
Our capital investment in the quarter was relatively flat sequentially, consistent with the guidance we provided last quarter. We ended the quarter with cash, cash equivalents and short term investments of $7.8 billion, up from $7.6 billion a year ago, which includes the benefit of $3.1 billion of cash received from Softbank in the fourth quarter of 2012.
Turning to Slide 9 and the customer experience. We continue to set records in customer care. As I mentioned, we set an all-time record for lowest calls to care per customer and expenses associated with customer care credits which remained at all-time low levels. Both metrics have improved year over year for 17 consecutive quarters. We continue to garner third party recognition for our industry leading customer experience. J.D. Powers & Associates recognized the Sprint brand in the first quarter as highest in satisfaction with the purchase experience among full service wireless providers for the fourth time in a row and our Boost brand was recognized for highest satisfaction with the purchase experience among non-contract wireless providers.
Finally, Atlantic ACM recognized our excellence in the wholesale arena, granting Sprint the U.S Long Haul Wholesale Carrier Excellence Awards for customer service, network performance, brand and voice quality.
We believe the improvements in our customer experience, along with significant upgrades to our network that’s underway will provide a foundation for future churn improvement. As I indicated on recent calls, we were experiencing pressure on the Sprint platform in the form of postpaid churn as we progressed through Network Vision’s ‘pardon our dust’ impacts from the conversion of our network infrastructure, the loss of Sprint platform customers when we lose an entire business account due to our Nextel platform shutdown and pressure in the enterprise account market segment associated with our smaller, LTE footprint relative to our larger competitors. We believe that as we progress with Network Vision, these issues will be rectified and our churn performance will improve.
In markets where Network Vision deployment is more fully complete, we are seeing much improved network performance and we are beginning to observe improvements in churn. Although still higher than we’d like to see it, our Q1 Sprint platform postpaid churn rates of 1.84% is down both year over year and sequentially 16 basis points better than last year and 14 basis points better than last quarter. Prepaid churn has improved year over year for 17 consecutive quarters. Prepaid churn set another all-time best record of 3.26%.
Turning to slide 10 and the Sprint brand, total customers served on the Sprint platform again reached a new record of just under $54 million. In an important third party brand study, the Sprint net promoter score showed both sequential and year over year improvement. We estimate that we were able to maintain our share of industry postpaid gross ads on the Sprint platform in the first quarter. We will remain focused on recapturing as many of the 1.3 million Nextel subscribers that we know will deact in this quarter.
Our prepaid brands are also performing well in a very competitive industry environment. In the first quarter we recorded the best ever number of Boost gross ads on the Sprint platform and the highest Virgin Mobile net ads since the acquisition of that brand in 2009.
Please turn to Slide 11. In the first quarter we launched 10 new devices across our postpaid and prepaid brands and we announced the upcoming availability of new iconic devices, including the HTC One, Samsung Galaxy S4, the BlackBerry Q10 and multiple Windows 8 devices. We continued to innovate in service and product offerings such as, the Sprint As You Go, a Sprint branded non-contract service offering available in our company-owned retail stores. Plus an industry first custom branded device program for wholesale customers. So in conclusion, the people Sprint delivered a strong earnings quarter with adjusted OIBDA up over 25% year-over-year, in spite of higher Network Vision dilution.
This performance was driven by record Sprint postpaid ARPU, record low upgrades, record Virgin and Boost ARPU, record low prepaid churn, record low calls to care and maintaining record low care credit levels. The last three, all coming as a result of 17 consecutive quarters of year-over-year improvement in each of these three metrics. The network team and our three network partners also delivered a solid network vision deployment quarter.
We remain on schedule to close all three of our pending transactions with U.S. Cellular, with Clearwire, and with SoftBank by July 1. We will not discuss these pending or any proposed transactions on today's call. As our announcement on Monday said, the Sprint board of directors have formed a special committee of independent directors to review and carefully evaluate the proposal received from Dish with its financial and legal advisors. The special committee plans to evaluate the proposal and additional information that the committee has requested from Dish and provide its assessment to the full board in due course. Whether the proposal is or is reasonably likely to read to a superior offer as defined in the agreement and plan of merger with SoftBank.
In the meantime, rest assured, that Sprint management will not take its eye off of operational performance. I will now turn the call over to Steve Elfman, who will provide you with more detail on our Network Vision progress.
Thanks, Dan. I am pleased to discuss our continued progress on Network Vision during the quarter. Please turn to slide 13. As Dan mentioned, we continue to make strong progress in the first quarter with the Network Vision pipeline and our sites on air count increasing significantly. While the build in the first quarter was impacted by inclement weather across the country, we were able to achieve over 12,000 sites on air by the end of the quarter.
We now have zoning complete on over 32,000 sites and leasing complete on over 31,000 sites. More than 25,000 sites already or have already begun construction. Our weekly construction starts are now at a level to achieve our goals for the year. There are over 600 cities under construction and we have now launched 4G LTE in 88 cities with over 170 expected to launch in the months to come. We are pleased with the momentum of our build as we now have over 13,500 sites on air. Additionally, we are also very pleased to the performance we are seeing in the Network Vision sites we have on air. We continue to see LTE speeds that are competitive in the range of 6 to 8 megabytes per second for downlink and 2 to 3 per second for uplink. And in the markets where we have the majority of the sites complete, we are seeing significant improvement in blocked and dropped calls.
We expect this performance to continue to improve as bring full site clusters on air and continue to tune the network. As we said last quarter, we continue to expect to have LTE coverage for approximately 200 million pops by the end of 2013, dependent on backhaul availability. Please turn to slide 14.
In the first quarter we continued to make strong progress in winding down the Nextel platform. At the end of the quarter we had approximately 1.3 million subscribers remaining, of which over 1 million were postpaid. We remain on track to shutdown the Nextel platform by the end of the second quarter. As a reminder, our operation to shut down plans for the platform will be similar to that of the [spinning] process we engaged in last year. The network will be shut down on June 30 at switch locations in rapid succession. Following the shutdown, we will begin powering down equipment and eliminating [T1s] at each cell site, which we expect to be substantially complete with 90 to 120 days.
We began the deployment of CDMA voice on 800 MHz in the first quarter and we expect to deploy LTE on 800 megahertz in the fourth quarter.
Network Vision has reached a good pace and we’re pleased with the service improvements we’re seeing. We expect this to be an important year for Sprint with the 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.
Thank you Steve and thanks everyone for being here today. As I’ve discussed with you in the past, 2013 is a heavy investment year for Sprint as we aggressively expand our LTE footprint, enhance our 3G network and shut down the Nextel network as Steve just discussed, all of which is necessary to drive future growth. During this investment phase of our turnaround, we remain very focused on profitability and I’m particularly pleased with our adjusted OIBDA results this quarter. We continue to make improvements to the Sprint platform operations as a result of employing a strategy of disciplined growth.
Moving to Slide 16. Our Sprint platform postpaid business continued to show growth in both subscribers and revenues during the first quarter. Sprint platform postpaid net ads were 12,000 in the first quarter, including 264,000 recaptures from the postpaid Nextel platform. While net ads were positive, Sprint platform postpaid gross ads were down 20% year-over-year as a result of our continued focus on Nextel conversions and slowing industry decisions after an extremely strong fourth quarter. Even with our focus to balance more costly external acquisition with our Nextel recapture efforts, we are still able to maintain our share of gross ads.
During the last quarter, we continued to make progress on getting subscribers cleared from the Nextel platform and that as of the end of the first quarter, we had just over 1 million postpaid subscribers remaining, almost all of which are business customers. As we have discussed over the last several quarters, our postpaid Nextel recapture rate will continue to decline as we approach complete shutdown on June 30. Due to the fact that zero use and negative return on investment customers remain in the base until the end. As a result, we expect postpaid recapture rate to decline from 46% in the first quarter to 230% to 40% of the remaining postpaid subscribers in this last quarter of operation.
Sprint platform postpaid churn of 1.84% in the first quarter improved 16 basis points year over year. This improvement was driven by involuntary churn returning to more normal levels. Almost all the subscribers remaining on the Nextel platform are business customers, we anticipate some pressure in the second quarter to Sprint platform postpaid churn from business accounts with lines of service on both Sprint and Nextel platforms that decide to terminate all lines as a result of not continuing service on the Nextel platform. As we have discussed previously, we’re also experiencing some adverse impacts to voluntary churn which we expect are temporary related to our network vision deployment and therefore we continue to expect elevated churn for the next few quarters before we start to see gradual improvements from better network performance and expanded LTE coverage.
Moving to the rate component of revenue growth, Sprint platform postpaid ARPU of $63.67 for the first quarter was a new record as Dan mentioned and grew nearly 2% year over year due to continued penetration of our $10 Premium Data add on charge and ongoing initiatives aimed at reducing customer discounts and credits. Sequential growth also resumed this quarter as the fourth quarter of 2012 was negatively impacted by one time customer credits related to Hurricane Sandy. With continued smartphone penetration, we continue to expect ARPU on the Sprint platform to grow throughout 2013 but at slower rates than in 2012.
Moving to Slide 17; our Sprint platform prepaid business also continues to grow. We added 568,000 net prepaid customers in the quarter, including 67,000 recaptured from the Nextel platform driven by strong performance in our Virgin mobile and Boost brands. All three prepaid brands had positive net ads in the first quarter and Sprint platform Boost net ads have been positive for 13 consecutive quarters. Both brands are also experiencing ARPU growth and improvements in churn.
As I discussed with you last quarter, the regulatory changes in the lifeline industry, have impacted our Assurance subscribers for the last few quarters and will culminate in the second quarter within expected net subscriber loss of approximately 1.3 million to 1.4 million to our prepaid base. While this subscriber impact is significant, I want to remind you that the revenue loss is limited as these are among the lowest ARPU subscribers in our prepaid base. In accordance with our normal prepaid churn rules, we are now working to reengage the customers who do not recertify as of December 31 on a different offer and billing has been suspended on these subscribers. So the revenue loss is already reflected in the first quarter results and partially explained through sequential decline in total prepaid ARPU.
Even this lost revenue, Sprint platform prepaid revenue still grew 18% year-over-year. We have also been working on adapting to this new competitive environment by developing innovative sales tactics that have helped grow Assurance gross adds sequential for the last two quarters. The lifeline regulatory changes also had some temporary impacts on our wholesale and affiliate business. As we previously discussed, in the first quarter we saw net customer losses of 224,000 primarily due to lifeline recertification. We expect similar impacts in the second quarter from a targeted effort by our wholesale customers to eliminate inactive accounts in their base, but we fully expect to return to positive net adds in the back half of the year.
Even with the net subscriber losses in the first quarter, we grew wholesale, affiliate and other revenue 29% year-over-year. Let's move on to our wireless operating expenses on slide 18. Total wireless cost to service declined for the sixth consecutive quarter to $2.17 billion in the first quarter, or 30% of wireless service revenues which was our best level since the first quarter of 2008. This represents an improvement of nearly 2% sequentially and 5% year-over-year, even with the estimated net increase in network vision dilution which primarily impacts cost of service.
We also see benefits in other expense areas such as service and repair, which are down year-over-year primarily due to lower transaction volumes. In addition, our rent and utility expenses are lower on the Nextel network, primarily related to lease exit charges taken last year associated with the accelerated (inaudible) project. Moving to subsidy expense. Total wireless net subsidy for the first quarter was approximately $1.5 billion, a decrease of $503 million sequentially and $83 million year-over-year. This sequential decrease was primarily due to seasonally lower upgrade and gross add volumes. While postpaid upgrades in the quarter were 6.9% of the base which is a record low, we do expect this rate to pickup in the second quarter as we launch more devices such as the Samsung Galaxy S4 and the HTC One.
Additionally, the first customers who upgraded under the 3Q '11 implementation of our 20-month policy, will start becoming upgrade eligible in the second quarter. This is why we believe upgrades will be heavier in the coming months and the last half of the year. Switching to SG&A expense. Total first quarter wireless selling, general and administrative cost of $2.2 billion were down $81 million year-over-year and $206 million sequentially. While the sequential decline was largely driven by seasonally lower sales volume, the year-over-year improvement was also impacted by lower volumes as well as lower bad debt and customer care expense.
As I mentioned previously, we are seeing lower involuntary churn and this is leading to lower bad debt expenses, as the bad debt percent of service revenue drops 74 basis points year-over-year. Customer care expenses area also down due to lower call volumes as a result of our simple rate plans and increased customer familiarity with smartphones. Please turn to slide 19.
Consolidated adjusted OIBDA of $1.5 billion was up 77% sequentially and 26% from the year ago period. Our highest year-over-year percentage increase since 3Q '06. Wireless adjusted OIBDA of $1.4 billion more than doubled from the last quarter and wireless OIBDA margin of 19.2% was the highest since 2Q '09. Our strong focus on efficiency and taking cost out of the operating model has allowed us to achieve this growth while absorbing the additional impacts from the Network Vision project.
Total estimated Network Vision net dilution to adjusted OIBDA was approximately $145 million during the quarter, compared to approximately $130 million in the fourth quarter, and approximately $100 million in the year ago period. The project is really hitting its stride and we continue to expect dilution in the second quarter that could be up to $100 million more sequentially before becoming more neutral in the second half. This increased dilution in addition to the higher sequential upgrades and the loss of the remaining Nextel customer base that we do not expect to recapture will likely cause adjusted OIBDA to decline sequentially from our first quarter results.
Wireline adjusted OIBDA for the first quarter of $128 million was down $33 million from the year ago period and $53 million sequentially. Both declines were impacted by the annual resetting of our intercompany transfer rates to reflect current market prices which was approximately $30 million and is neutral to consolidated adjusted OIBDA.
Moving to cash and liquidity on Slide 20, we continue to make improvements to our liquidity and capital structure this quarter. We replaced our existing $2.2 billion revolving bank credit facility with a new five year, $2.8 billion facility which was subsequently increased to $3 billion in April. This new facility is a demonstration of the confidence our bank compares in strength along with a positive market environment. Over the last year, we have managed our debt portfolio such that we have no significant debt maturities between now and December of 2016. In addition, we ended the first quarter with cash, cash equivalents and short term investments of $7.8 billion.
Switching our discussion to capital expenditures. We spent $1.8 billion in the first quarter, which included $1.4 billion of Network Vision capital. While total capital expenditures were down slightly from last quarter due to lower legacy capital spend, Network Vision capital continues to increase as it should and we expect total CapEx to continue at similar to slightly higher levels throughout 2013. Rebanding expenditures, which are not included in capital expenditures, were approximately $45 million for the first quarter.
Free cash flow for the first quarter was negative $493 million, compared to negative $1.3 billion in the fourth quarter and positive $138 million a year ago. The sequential increase was primarily impacted by a seasonally low selling quarter while the year over year decline was mostly related to higher CapEx spend from 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.
Regarding guidance for 2013, we expect 2013 consolidated adjusted OIBDA to be closer to the high end of our previous guidance of $5.2 billion to $5.5 billion, excluding any impact from our pending transactions. However, we do not expect to see the same seasonal trend as in recent years with this year having a sequential decline in the second quarter as previously discussed as well as less of a decline from third to fourth quarter as we begin to see some cost improvements partially offsetting the usually high selling costs of the fourth quarter. We expect CapEx to continue at around our current run rate for the remainder of the year. Also as Brad mentioned, we will have the charges associated with retirement of the Nextel platform leases and excess charges coming in the second quarter.
In closing, I am very pleased with the momentum we’re building in our results and the improvement in the pacing of Network Vision while we move through our investment phase. This quarter we are focused on the good execution of the shutdown of the Nextel network, continuing the aggressive expansion of our LTE footprint and maintaining our discipline of having a balanced approach to customer acquisition and profitability as we go through the Network Vision build.
Finally, and most importantly, I want to thank our workforce for their continued focus on executing and delivering quality results during a time of increased potential for distraction given the pending transactions. As Dan mentioned in his opening remarks, we have not taken our eye off operations. And we have our dedicated employees to thank for their continued focus. I will now turn the call back over to Brad for Q&A.
Thank you, Joe. In just a minute, Laura will instruct 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.
(Operator Instructions) Our first question comes from Philip Cusick of JPMorgan.
Philip Cusick - JPMorgan
I wondered if you can expand a little bit on the CDMA churn commentary. Can you help us think about what share of churn right now is being driven by those iDEN account departures. And in the last year we saw a nice decline in CDMA churn from 1Q to 2Q, is that sort of still possible or does that higher level of iDEN departures sort of offset it? Thanks.
Hey, Phil, it's Brad. We are not splitting out the specific components of the drivers of churn. I would tell you, as we have commented over the last couple of quarters, the most significant issue we face right now is the temporary network related pressures associated with our build and being slightly behind on LTE from a coverage perspective. We expect that to moderate overtime as we progress with the build. In terms of 1Q to 2Q, we are not giving specific guidance but I would tell you that we will see some pressures that will likely offset some of the normal seasonal benefits. But we are going to continue to manage that the best we can overtime.
Philip Cusick - JPMorgan
I guess if I can try another tact maybe, you have talked about gross add share which maintained pretty well this quarter. At what point do you start reallocating sort of marketing dollars back to CDMA and away from iDEN retention?
We would expect to see that in Q3. You know Q2 is going to still be very -- actually it's a very large and important capture quarter. It will be more challenging for us on the recapture side, on the iDEN side, because you had so many business accounts. And also another item that will drive churn in the quarter is, we mentioned it briefly on the call, what we call mixed accounts. Where if we lose the iDEN business, we basically lose the entire account which hits on CDMA. So you will began to see more of that focus at least on overall SoGA in Q3. I think though, kind of the way we look at it is really that ratio of share of voice to share of gross adds. And in the first quarter, at least based upon our metrics, our share of gross adds is significantly higher than our share of voice in terms of advertising spending.
So it's still pretty effective. But we will have to change our tactics in the second half of the year and as I also mentioned on the call, we are on schedule to turn the iDEN network off at the end of the second quarter. So we will be finished with the recapture process at the end of this quarter.
Our next question comes from Jennifer Fritzsche of Wells Fargo.
Jennifer Fritzsche - Wells Fargo
Question. Joe, I just wanted drill down, in the past you have talked about, I believe about $350 million a quarter in iDEN savings with your cost associated with iDEN. To me that number seems low as they run at about 16% of your cost of services. Is there any additional savings you think that could be seen with that and is that still the right way to think about it?
Jennifer, it's Brad. Part of the 350 per quarter or so that we quoted a few quarters ago have already been realized from the sites that we spinned out last year. So on a go forward basis, that quarterly pickup from the Nextel platform shutdown will be less than that. But that’s essentially the main components of the pickup that we referenced in the script as we talked about Network Vision overall becoming relatively neutral in the second half, you’ll see a ramp up in savings as we take the write down in Q2 for a lease exit costs and access costs and begin to see those savings flow through from an adjusted OIBDA perspective.
Our next question comes from Jonathan Chaplin of New Street Research.
Jonathan Chaplin – New Street Research
Two quick questions if I may. So firstly just a little bit more color on the EBITDA trends for the rest of the year would be helpful. My understanding was all of the residual iDEN expenses will be reclassified out of adjusted EBITDA following the shutdown. So I would have expected a fairly significant step up in EBITDA in 3Q and then a much better year over year trend in 4Q which I would have thought would put you decently above the EBITDA guidance range that you put out there given this quarter’s bid. And secondly, I guess a question for Dan. If you could give us some idea of assuming the Clearwire deal closed on July 1, how quickly you can deploy that spectrum into your network and get devices into the base that can utilize TD-LTE on all that spectrum that would be helpful. Thanks.
Jonathan, so let me take them in reverse. Assuming the transaction with Clearwire closes, we will begin deploying our first devices later this year, probably late third quarter that would have TD-LTE capabilities, multi band capabilities in those devices and of course it will take some time to put a lot of devices in our base. But we would begin that process this year. With respect to OIBDA and OIBDA guidance, there’s a few things to keep in mind. Number one, you clearly have seasonality in terms of both upgrades and gross ads and those expenses will be higher going forward than they were in the first quarter. Second, as we indicated there will be higher dilution from Network Vision in the second quarter than there was in the first quarter so that is still ahead of us. Of course we’ll lose the revenues on the Nextel platform which are still enough to matter after the second quarter. So those are the reasons that the guidance of course went up for the year, but perhaps not as up for the year as much as you might have expected. There are some differences if you will in future quarters than what we experienced in Q1.
Our next question comes from Jason Armstrong of Goldman Sachs.
Jason Armstrong - Goldman Sachs
Maybe just one follow up another crack at I think at Phil’s question. When you think about the Sprint platform subscribers that are attached to mixed use account, is there any way you can just size that base for us. You talked about elevated 2Q (Inaudible). Wondering if you could frame the risk for us as to what’s the magnitude of Sprint platforms attached to this. And then Dan, maybe a bigger picture question just on upgrades. I think across the industry we’ve seen much lower than expected upgrade activity this quarter. I guess I’m just wondering, to what extent is this policy changes where you and others have really shifted and termed out a lot of the upgrade eligibility or do you think consumers to some extent are just reacting to really a slowing in the rate on change in innovation on the handset side.
Well, Jason first of all I wish it were true that your last comment was the case. Actually there will be pressure in the second half. Part of it has to do with when are great new iconic devices launched, but we have ahead of us is you have the HTC One that went out in the first quarter. You have the Galaxy IV. You have at least there could be a new iPhone refresh later this year. those things really do drive upgrades. I think the policy shifting is important in the industry because subsidies just keep going up. And I think from the economic model perspective of the carriers, we just can’t afford to upgrade as often. So those upgrade policies I think will help to mitigate that somewhat. But we’re not seeing any evidence yet that customers are interested in upgrading less offering if they see, if you will, less difference or less improvement year-over-year in terms of what's going on with these devices. In fact perhaps the opposite might be true which means these policies are really quite important for the industry.
Jason Armstrong - Goldman Sachs
Great. And then on the mixed use space?
We haven’t provided specific breakdowns of, if you will, accounts and what the impact is. Obviously there is a big postpaid impact on the Nextel side this quarter with over a million postpaid subs, that on the Nextel brand we know will be deacting this quarter. So there is a particularly large impact, and again they are largely business accounts so a lot of these are higher percentage than normal if you will, because they are business accounts versus consumers have. And they tend to be a lot of time large business accounts, they do have a number of Sprint branded or CDMA devices. So it's kind of a onetime hit that we could take on churn side this quarter with respect to the Sprint platform, based upon knowing we have over a million Nextel postpaid customers that have to come off this quarter.
Our next question comes from Brett Feldman of Deutsche Bank.
Brett Feldman - Deutsche Bank
If we look across the industry at the postpaid results we saw from all the carriers this quarter, and to the extent we can, we sort of back out the impacted data devices. It looks like postpaid phone customers industry-wide declined pretty meaningfully. And this is actually, I think, the second or third year it's happened and the losses in the first quarter continue to get worse. Just curious why you think that’s happening? And the reason I am asking you guys is because you have a pretty big prepaid base including some of the more premium prepaid offers. And so are you increasingly seeing that customers are viewing prepaid as an acceptable substitute for postpaid. And if not, what else do you think is going on?
You know, this is one of the reasons we, if you will, double-downed on prepaid back in 2009 when we acquired Virgin. And as we mentioned, we just recently launched Sprint As You Go which we had customers in our stores that are really interested in Sprint, Sprint brand. They are in a Sprint store and we didn’t have an, if you will, a no contract options. We are seeing it increasingly, if you will, [user] acceptable. And really, it comes down to not only better, increasingly competitive offers in the prepaid space, but more and more high end devices being offered in prepaid. You know the iPhone, you can get a lot high end smartphones in prepaid.
So I think what you are seeing is just a stronger, more robust set of prepaid offers that one might say does compete with postpaid to a certain extent. And that’s why we continue to believe having a balanced portfolio between postpaid and prepaid. And also why the wholesale business is important to us because that is largely driven by prepaid MVNOs that effectively can market prepaid offers and no contract to specific market segments very effectively and more effectively than we can. So I think what you are seeing is maturing of the U.S. markets beginning. I think it's still different than most other international markets. There are unique things about the U.S. But the U.S. has always been or traditionally been almost exclusively postpaid and it's beginning to look a little bit more like other markets that have a higher prepaid mix in terms of the number or percentage of customers.
Our next question comes from Kevin Smithen of Macquarie.
Kevin Smithen - Macquarie
Your CapEx guidance implies about a $7.2 billion or $7.3 billion for the year. I guess my question is, why not spend more? Could you spend more, assuming all your deals close in the next couple of months and you have improved liquidity? Why wouldn’t you try to accelerate even more your LTE rollout? And I guess the other question is, CapEx coming in below budget for any reason i.e. equipment vendor negotiations or otherwise?
I think, Kevin, you've got to segregate the capital comment before and after a close the transaction. Us as a standalone will continue to have that balanced approach and we believe that the guidance we’ve given you is a pretty good standalone view of what one would spend on capital expenditures. We’ve not provided any guidance of what we would do operationally post the close of any of the pending transactions.
Kevin Smithen - Macquarie
Got it. But it says in the slide deck that the Q1 run rate will continue for the rest of the year. so I guess there seems to be new guidance for the second half.
Yeah, but we’re giving you guidance so you’d have some idea what we would spend as a standalone entity for the full year. it wasn’t implied that we are giving you guidance in regards to a closed transaction.
Your next question comes from Mike McCormack of Nomura
Mike McCormack – Nomura Securities International, Inc.
Dan, I think you talked about voluntary churn with your ‘pardon our dust’ issue. Did you also see some impact from more widespread carrier having availability of the iPhone? And then secondly, any commentary regarding tablet demand in the quarter would be great. Thanks.
First I’d say that being able to roughly maintain our share of gross ads without significant help from tablets. We did not sell a lot of tablets in the first quarter. We just began really to carry tablets right at the end of last year and we’re still developing and learning how to do that effectively as well as getting the awareness out there in the market that Sprint is the place to go for tablets. So that has not been significant. The iPhone with respect to I think you’re talking about T-Mobile having it, is really more of a Q2 phenomenon and we will monitor that obviously very, very closely. There always is a temporary impact in terms of net ports when a device as iconic as the iPhone is picked up by a competitor. So we did see what we are hoping is a temporary impact of the new iPhone device being carried by T-Mobile.
Mike McCormack – Nomura Securities International, Inc.
Dan, you mentioned briefly about the upgrade policy change that’s taking place. Is there something that you guys can do there or exploit other carriers behaviors from them?
We think we have as you know it was roughly a year ago, a little more that we actually extended our upgrade eligibility to 20 months and did away with if you will a program that allowed customers to upgrade more often. We think it’s very rational. We like where we are right now. We will evaluate the changes to upgrade policy over time as I said very much like a lot of things we might be able to do in the market in terms of let’s say be more profitability focused. It depends upon how quickly and how effectively we continue to roll out Network Vision and of course this was a good quarter in the first quarter. But we right now don’t have plans to I think your question might be do we want to really focus on the factor that we have a 20 month upgrade versus let’s say Verizon it might be 24. That’s not a big piece of our marketing plans right now.
Our next question comes from David Dixon of FBR Capital Markets.
David Dixon - FBR Capital Markets
Wanted to ask a high level question first of all with respect to Softbank. It seems that the team spent a lot of time in Japan of late and I just wondered if Dan you could share some high level takeaways from that interaction, something perhaps on the network transformation. Really encouraging to see that Softbank has taken their company from the worst to the best data network in Japan is fully something we’re trying to do here and it’s clearly more than just bringing additional spectrum into the mix.
David, our conversations with Softbank are confidential. I think you’re right that there are some things that we can learn from each other in that they do utilize high frequency spectrum effectively in Japan. We have a lot of meetings in terms of where we share best practices, in terms of things we are doing here and things that they are doing in Japan that we can learn from. And those discussions continue. But the specific nature of those discussions are still confidential.
David Dixon - FBR Capital Markets
In general, Dan, would you say that the markets are very different, there is reasons specific to Japan that may define how they achieve that? Or do you think just in general there would be some portability here without going into specifics?
There are some sides that are clearly applicable. Now the differences in geography in that we have more rural areas and they tend to have more highly concentrated urban areas. For example, the technical things or network things that they are doing in their metropolitan areas, there is a lot of applicability or learning with respect to how those might be applied in our metropolitan areas. There are some, on the marketing side, there are clearly differences in the customer bases, in cultures and what have you. But if you take a look at things like smartphone penetration and the attractiveness of devices, an awful lot of similarity.
So it's very much a -- there are a lot of things that are similar and there are also things that are different. And I think the important thing, David, is understanding, when we do talk to them is, what are areas that are similar that we can learn from and what are things that are different. And why something that might work in Japan would not work in United States and vice versa.
Operator, we have time for one final question, please.
Our next question comes from David Barden of Banc of America.
David Barden - Banc of America Securities-Merrill Lynch
Thanks so much for squeezing me in, I appreciate it. Joe, just a question on CapEx. First, we heard kind of rising chatter, or maybe Steve, the notion of a Network Vision 2.0 game plan to kind of really flesh out the network capabilities. LTE as you pointed out is going to be hugely important competitively. And as a result there has been some pretty divergent expectations for standalone CapEx, coming out for the 2014 year. Could you weigh in on what the right thinking is, Joe, for a standalone Sprint CapEx picture in 2014, given how wide the spread is on the street right now? And then second if I could, maybe Dan, just kind of trying to synthesize some of the questions that we heard about the state of the market. You know T-Mobile with negative net adds and Sprint and even AT&T negative phone subscribers. Verizon's 166,000 phone subscribers probably came from the iDEN network. Without them they might be negative too.
So as you look at kind of wrapping up the iDEN shutdown and focusing back on the gross add market, what is the goal, is the goal to really grow or is it to hold share and focus on prepay. Like what is the go to market strategy when the market really doesn’t seem to be growing at this stage of the game. Thanks.
So let me take on your capital question for 2014. I mean Steve will give you the specifics of what we have done in regards to the added capital we are spending in 2013. And in regards to 2014, we haven’t really given any guidance on that. We are still trying to figure out these transactions. We have tried to give you in our full year guidance of what we think we are going to spend as standalone. And I think you got to wait later in the year before we start really discussing 2014. But Steve can give you the specific things that we have accelerated from what we were going to do into 2013 as a result of our plan.
Yeah, Dave, couple of things. And we talked about Network Vision 2.0, I think there is a probably a couple of things out to think about. Number one, we didn’t initially contemplate 800 LTE when we were initially doing Network Vision and we got the standard band 26 into the standards last year. So this year we are going to actually put LTE in the 800 and help our inbuilding. So this is kind of one of the Network Vision 2.0. Additionally, and to an earlier question about the bands, for band 41, for 2.5 and being able to utilize and work with Clearwire. That was not initially contemplated in the Network Vision 1.0 in this way. And we will be, as Dan said, introducing devices this year that will be able to fall back from 2.5 to 800 to 1.9 and that’s required us to put them both the new standards in but also ECSFD for fallback. So those are just two of the things in the Network Vision 2.0 and there are others when I presume you guys come out and visit we can get into more detail about the specifics. But that’s what 2.0 is all about.
Dave, this is Dan. On your other question, we still think that wireless industry is a great industry to be in, but it will evolve and this is why it was important that I mentioned earlier that we invested in prepaid, why the wholesale business is important because those are areas of growth. And with respect to postpaid, I think our focus will be primarily on share, but particularly on profitability. I think in the industry as a whole is going to focus on profitability. So even though the growth may not go down or may not be increasing as it has in past years, perhaps the profitability of the industry could increase because think of usage going up which is an opportunity for ARPU. If the question earlier with respect to how often people can upgrade devices, if upgrades begin to reduce if you will, if you are eligible for upgrade if that gets longer that could improve. You’ve seen churn in the industry begin to improve. So less switching between carriers that improves profitability. More devices on the account which is an opportunity for ARPU.
So yeah, as you know churn and ARPU are the two financial metrics that are the most important to profitability. So as we look at it that’s why it’s important for us to have if you will a broad portfolio of postpaid, prepaid and wholesale and wholesale is not only prepaid but things like machine and machine and all sorts of wireless devices. I think there’s some good revenue opportunities there. And I also believe that in the industry as a whole as churn improves and ARPU improves the customer lifetime value to each customer can improve over time because wireless is becoming a more and more important part of everyone’s life and there will be more and more devices connected as well. So we still are bullish on the potential of the industry although the model will change. The economic model will change and if you will the postpaid phone will not be as dominant in terms of what drives success in the wireless industry as it has for the past decade.
Thanks everyone for your participation today. If you have additional questions, please contact Sprint Investor Relations department. This concludes our call.
This concludes today's conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!