Good morning. My name is Judy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the second quarter 2006 Sprint Nextel earnings conference. (Operator Instructions) Thank you. Mr. Fawkes, you may begin your conference.
Thank you. Good morning, everyone, and thanks for joining us on our call.
Our President and CEO, Gary Forsee, is going to kick off our discussion this morning. He will be followed by Len Lauer, our Chief Operating Officer, and Paul Saleh, our Chief Financial Officer. We are going to finish the call with an extensive Q&A.
Turning to slide 3, 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 detailed discussion of various risk factors in our SEC filings and I strongly encourage you to thoroughly review our filings.
Throughout our call this morning, we will be referring to several non-GAAP metrics. Reconciliations of these metrics to the appropriate GAAP measures for the quarter and the year-to-date can be found on the attachments to our earnings release, and also at the end of today's presentation, which is going to be stored on our website.
I would also like to point out that year-over-year comparisons for our consolidated and wireless results will be discussed on a pro forma basis.
In the second quarter, the company completed the spin-off of its local operations, EMBARQ, and the results for each period reflect EMBARQ as discontinued operations. Effective with the date of the spin-off, certain revenues and profits associated with long-distance customers within the EMBARQ territories and general corporate overhead allocations have been revised from what you are used to seeing in previous reporting formats. I will tell you this had an immaterial impact on our reported results.
Now, we will turn to slide 4 to review the normalizing items for the quarter.
We reported all-in net income of $370 million, $0.12 per share, which compares with pro forma net income of $593 million or $0.20 per share in the year-ago period.
To get to the normalized EPS, we subtract the discontinued operations' contribution of $79 million, or $0.03 per share, we add back merger costs and other special items, which were also $79 million, or $0.03 per share, and then we add back the amortization expense, and that is $577 million or $0.19 per share.
Adjusting for these items, the net income is approximately $947 million. That is $0.32 per share for the quarter, compared to $0.30 per share in the year-ago period. That is up 7%.
With that, I am going to turn it over to Gary Forsee.
Gary D. Forsee
Thank you, Kurt. Good morning, everyone.
This month marks the one-year anniversary of Sprint's merger with Nextel and I would like to take a minute to commend our employees for their dedication in putting these two companies together.
Despite the challenges of integrating two large telecommunications companies, we have made tremendous progress through their dedicated efforts and some very long hours navigating a number of very complex issues.
As I reflect upon the past 12 months, I believe we have earned a solid grade on major merger integration activities and our strategic repositioning of the company. We are hitting all of our major milestones, from rationalizing our retail stores, streamlining our IT applications, and putting together our systems.
We have struck key agreements with our vendors in the areas of billing and customer care. We have made tremendous progress in aligning our marketing policies and right-sizing our operations. We are executing against the synergy plans but still have much more work to do.
On the strategic front, it has been a year of reposition our company to the design of the merger plan. We acquired six PCS affiliates and Nextel partners, which has increased the continuity of our services on both network platforms.
We now have direct control over the spectrum and network assets, covering 270 million POPs for iDEN and 258 million POPs for CDMA.
In May, as Kurt said, we successfully spun off our local phone business, a very healthy business, with our shareholders retaining 100% ownership.
Now, this may sound like a simple endeavor but it required thousands of man-hours to separate our systems, our logistics and our personnel, and to establish new agreements which will govern our business relationship going forward, including a new MVNO relationship.
We continue to extend our technology leadership and build upon a legacy of innovation in three major ways.
Sprint has staked out a leadership position in supporting the growth of cable telephony, and we have announced a five-year contract with Time Warner to provide interconnection services from the cable operator switch to the public switch telephone network.
Sprint's support of voiceover Internet protocol services for Time Warner Cable will now encompass 28 million homes passed.
We also announced Sprint will accelerate our EV-DO build to 200 million POPs by year-end, staying head and shoulders above the competition.
This quarter, our engineers demonstrated the first EV-DO Rev A over-the-air transmission, featuring average download speeds of 450 to 800 kilobits per second, and average upload speeds of 300 to 400 kilobits per second.
We are successfully demonstrating applications, such as all-IP video telephony, high-performance push-to-talk, multi-user videoconferencing, real-time gaming and video streaming -- new applications which are expected to unlock tremendous new growth opportunities for our company.
The success of our lab testing for EV-DO Rev A drove our decision to advance the deployment timeline, and I am pleased to report that we will make this exciting new service available to 40 million persons by the end of 2006.
Additionally, our Board of Directors has approved the business case for a 4G network and while we are not announcing a technology choice today, we ask that you stay tuned for this announcement that will be made in August.
Turning to slide 7, in a few minutes you will hear a detailed discussion of our second-quarter results from Len Lauer and then Paul Saleh, but let me kick off the discussion with a few introductory comments.
Wireless service revenues increased 9% in the quarter versus one year ago, while adjusted OIBDA growing 11%, as a result of service margins reaching 37.6%. While the margin and cash flows are solid, we are disappointed with our post-paid net ad subscriber additions and higher subscriber migration rates to lower price plans. These trends are expected to impact our wireless results for the balance of the year and are reflected in our revised guidance.
For the long distance business, we delivered somewhat better-than-expected revenues of 5% gain in OIBDA to $275 million, and strong margins of 16.8%.
On a consolidated basis, you can see that a revenue of $10 billion was 5% higher than last year and our adjusted OIBDA of $3.2 billion was a 10% improvement. Our adjusted OIBDA margin increased by 133 basis points annually and 280 basis points sequentially to 34.7%.
Turning to slide 8, since the wireless segment comprises approximately 85% of company revenues and more than 90% of our adjusted OIBDA, the performance of this segment is critical to our overall company's performance.
In our core post-paid business, we expected a reduced number of customer decisions as our competitors have increased their retention rates. For the quarter, gross add share of approximately 20% was in line with recent performance, and we were pleased with the improving credit mix of our post-paid gross adds.
However, flat churn of 2.1% impeded our net add growth as we delivered 210,000 net subscribers.
We reported very good prepaid subscriber growth of 498,000 at Boost Mobile. Prepaid ARPUs were low in the quarter, primarily due to a change of our walkie-talkie pricing.
As stated earlier, we experienced an accelerated number of post-paid subscriber migrations to lower price plans. While the high number of migrations will benefit Sprint in the form of extended subscriber contracts and reduced churn, this trend is expected to affect our ARPU for the balance of the year.
We are addressing high post-paid churn on multiple fronts -- improvements at the point-of-sale, evolving our marketing message around the power of our networks and services, and refreshing our handset portfolio with innovative and feature-rich handsets.
To slide 9, as we approach the one-year mark of the merger, we are still in transition in many operational areas. This fact, and our results, are prompting several key additional actions which we are disclosing today.
Let me zero in on our plans for restructuring operations, and Len will elaborate on the other actions during his remarks.
Sprint's sales and distribution services will be restructured in order to create a single organization that focuses on selling wireless and wireline services within specific regions of the country. This restructuring is designed to simplify reporting, eliminating bureaucracy along the way, and help us make steady progress toward increasing sales productivity.
We are also separating the responsibilities for the cable and MVNO relationships, as well as our new 4G broadband business unit. In each case, I will name a senior executive reporting directly to me.
I am pleased to announce that Barry West will lead the 4G wireless broadband unit, in addition to continuing as our Chief Technology Officer, reporting to me.
We are also targeting $400 million in incremental annual cost-savings, due to several new initiatives: reducing contractor and consultant spending; lower customer care costs, resulting from improved credit mix of customers; and streamlining operations not related directly to the customer experience.
Turning to slide 10, I would like to close my remarks with a subject that has been a key topic since our merger was announced -- our overall cash distribution policy.
Sprint Nextel is generating substantial free cash flow from operations. In the first-half of 2006, we delivered approximately $1.6 billion of free cash flow from continuing operations. Our impressive cash flows include significant investments in CDMA, iDEN and the MPLS networks, approximately $2.9 billion in cash cap-ex for the first half of this year.
At the time of the merger, we identified an opportunity to close the gap in network coverage between Sprint and our peers, and we are delivering against that plan. We continue to invest in our core businesses and other new growth opportunities with compelling returns.
With our strategic repositioning largely complete, we are now in a position to focus on more direct returns for shareholders.
I am pleased to announce that our Board has taken action to return cash to shareholders in the form of a share buyback program, which will utilize up to $6 billion over the next 18 months. Based on the current run-rate of business, this reflects a substantial portion of our free cash flow.
We also expect to continue to pay a dividend of approximately $300 million per year.
On the one-year anniversary of the merger, our strategic repositioning is now nearly complete and we are making progress with the integration of our companies and the affiliate companies that we have purchased.
We are building our technology leadership position through investments in MPLS, 3G, and now 4G networks, and we are returning cash to shareholders. These are all very positive developments for the company, but we do have much work to do to improve the recent performance of the wireless business and we are focusing on that core execution. I am convinced that our continued progress of the merger transition and the course corrections we are taking will deliver solid results, and that we will be on the right path for long-term shareholder value creation.
Len, you are up.
Len J. Lauer
I would like to start off with a brief review of the many important initiatives and strategies. We are very pleased to say that we are on track, or ahead of our expectations.
- We had strong wireless margin expansion in the quarter;
- The CDMA platform posted solid gross add performance;
- Sprint Nextel has the largest wireless broadband network in the U.S., and we are going to continue to aggressively expand it;
- We continue to lead the industry in wireless data results;
- Our long distance business is tracking ahead of plan in both revenue and OIBDA;
- Our wireline cable partnership is posting strong results;
- We continue to make very good progress on realizing the synergies from this merger; and
- We are making excellent progress on integrating the affiliates. We closed the Nextel Partners acquisition late June and integration planning is underway.
Turning to slide 13, I would like to outline our key areas of focus for the balance of the year. There are several areas listed on the left portion of this slide where performance needs to improve. We have aggressive action plans in these areas, and we anticipate better results.
These action plans will be outlined further during my discussion:
- Our post-paid churn performance has not met expectations;
- We saw ARPU slippage in the quarter;
- There is a continued focus on improving profitability through cost management, and;
- The brand we introduced at the start of our new company positioned us for choice and flexibility.
However, we will evolve our branding to be more focused and more action-oriented. We will leverage the power of our network and the power Sprint Nextel gives our customers to use their phone how and when they want.
Over the past several quarters, Boost Mobile subscriber and financial results have generally met or exceeded expectations.
In the second quarter, Boost again had strong subscriber growth. However, this favorable performance was offset by lower ARPU and an up-tick in churn. We believe the economy and increased competition in select markets were the primary drivers of churn. We are anticipating these trends will continue to impact Boost’s results in the second-half of 2006.
As a result, we are implementing selective pricing actions and adopting more selective marketing efforts as we focus on profitability.
The four areas on the right side of this slide are areas where we will continue to build upon our leadership position, driving further growth and differentiation from our competitors.
They are in the areas of:
- Expanding our wireless data leadership;
- Continuing to differentiate with an innovative handset portfolio;
- Continuing our technology evolution to support our long-term strategies; and
- Continuing to execute on our wireline-wireless cable relationships to provide profitable growth.
I will discuss each of these areas in more detail in the next few minutes.
I would like to now turn to slide 14 to discuss churn performance.
In the quarter, our overall churn was flat sequentially at 2.1%. If we look back over the past 12 months, CDMA churn has been fairly consistent, iDEN churn increased, mainly due to higher consumer exposure, and somewhat higher voluntary churn due to capacity constraints in selected markets due to our rebanding process.
There are numerous programs in place that are targeted to improve overall churn and I will cover a few of these details next on our credit policy changes.
There are two major areas where we are making major changes to our credit policy. The first is around our acquisition strategy. Overall, we are tightening credit policies to be more in line with our largest competitors. Deposits on average will increase. We are further tightening credit in a number of markets where we are managing iDEN acquisitions more closely due to rebanding.
Additionally, using risk-based segmentation, we will be minimizing our exposure to the lowest credit segments.
The second area of credit policy changes is in how we manage our base. First, we are changing some of the customer treatment policies to give account spending limit, or ASL program customers, a better experience. We are graduating off of the ASL program customers that have had and shown a minimum of two years of very positive payment history.
We believe these combinations of changes will, over time, significantly lower our expense -- excuse me, lower our exposure to low credit quality customer segment and improve the ASL customer experience, therefore lowering churn and reducing costs.
Turning to slide 16, I will discuss the customer experience initiatives that are designed to improve voluntary churn rates over time.
We have invested a considerable amount of effort to improve the point-of-sale experience, including reducing the overall number of plans, redesigned store layout and signage, simplified paperwork to open an account, and improved bill formats. We will be launching street-level network maps, to ensure that customers know the signal strength at their house, their business and where they travel.
These initiatives are designed to provide a customer with an exceptional, early-life experience.
We simplified plans around three categories -- fair and flexible, free incoming, and business essentials. From a pricing perspective, our plans will be easy to compare to our competitors, while we differentiate with the benefits of fair and flexible, 7:00 p.m. calling, and superior wireless data services.
We have made significant network investments in both CDMA and iDEN, to give the customer not only the best possible experience but, in many cases, second to none.
There are also numerous customer care enhancements that will give the customers shorter wait times, fast and accurate problem resolution, and valuable retention programs.
We expect these customer experience initiatives will provide a strong foundation to lower churn in 2007.
Let's move forward to slide 17 for some detail on postpaid ARPU. On a year-over-year basis, we reported a 6% decline of ARPU. The decline was due to lower monthly recurring charge and lower overage revenue.
ARPU was also impacted by elimination of affiliate travel revenues and the inclusion of lower average ARPU affiliate customers. In total, affiliate acquisitions accounted for roughly one-third of the annual decline.
MRC was influenced by both gross add mix enrolments and customer migrations to lower price plans.
Earlier this year, we introduced more competitive business plan pricing for our iDEN platform, which was the first rate refresh in 18 months.
We experienced migration to these plans that were significantly above anticipated levels and we did not experience the desired gross add lift. Those subscribers that migrated, on average, had a materially lower MRC. Somewhat offsetting the lower MRC was an increase in the contract life of those that migrated.
To improve performance going forward, we are increasing pricing on selected services. We have simplified rate plans and pricing and, as of August 1st, adjusted iDEN business plans' pricing to mitigate the migration challenge
Turning to slide 18, I would like to give some detail on our wireless cost structure.
Sequentially, we saw effective cost management, especially of SG&A, which helped drive sequential improvement in wireless adjusted OIBDA margin.
In addition to improving our cost structure through cost management, we are also targeting, by the end of the first quarter of 2007, to realize $400 million in incremental annual cost savings due to several new initiatives. This will be sourced from contractor and consultant spending, care cost reductions resulting from the new ASL treatment, and from non-customer-facing positions.
With the progress to date, and the plans in place, we are on track to achieve our $14.5 billion of net synergies from this merger. We are realizing synergies from the closing of 168 retail stores, and we have also identified an additional 100 stores for closing by year-end. At the end the quarter, we had 1,675 stores and kiosks.
We have made solid progress on a unified billing platform with Amdocs and customer conversions will begin this year. Over the next few years, this initiative is expected to save several hundred million dollars.
Finally, we are on target with staffing plans.
Turning to the next slide is highlights of our evolved brand positioning. Sprint Nextel is evolving the brand positioning to highlight our network's robust capabilities and show how we differentiate from other competitors. This includes:
- The largest coverage with roaming;
- The possibility for a redundant network capability with a dual-mode phone;
- The largest broadband network in the U.S.; and
- The best-positioned company to capitalize on true broadband mobility with a 4G network.
These attributes mean that Sprint Nextel customers can power up on the nation's most powerful network.
Additionally, Sprint's fair and flexible plans are the best value in the industry, with plans as good as our competitors, but with two additional hours of free calling beginning at 7:00 p.m., and overage protection.
We give customers the nation's most powerful network, allowing you to use your phone how and when you want, with a 30-day risk-free guarantee. From a business standpoint, anyplace can be a workplace using the nation's best performing walkie-talkie service, Sprint Power Vision, and the nation's largest wireless broadband data network.
Beginning in June, we launched a national campaign around this theme of power and the “Power Up” campaign will begin shortly. Examples of upcoming “Power Up” advertising are found in the lower right portion of the slide.
Along with the national advertising emphasizing the brand, we augmented it with local advertising focused on the power of the network.
We are also retuning the message around the Nextel brand, targeting businesses, NASCAR, and Hispanic segments that will maintain the connection with the Sprint master brand.
Finally, there is also strong advertising around 7:00 p.m. night calling and free incoming, and these features will be incorporated into the “Power Up” theme.
We are very excited about this evolution of the brand positioning.
Turning to our wireless mobility leadership on slide 20, in the second quarter, Sprint Nextel posted industry-leading wireless data ARPU of $7.25. This is nearly 12% of reported ARPU. CDMA data ARPU is over $9.00. Wireless data revenue was nearly $850 million, an increase of nearly 70% year over year.
Additionally, Sprint Nextel has the largest broadband work with our EV-DO rev 0 network, now covering over 153 million POPs.
Overall, we are very excited about our data results. Our Aircard business is posting robust growth, with Aircard revenue increasing 77% year over year. We have reached nearly 1.2 million Sprint Power Vision subscribers, up 57% sequentially. Our Sprint Music Store is approaching 5 million songs downloaded.
We are going to continue growing our wireless data leadership by increasing our targeted 2006 EV-DO rev 0 build-out to 200 million POPs with mobile broadband data services. In addition, we expect to roll out EV-DO rev A during the fourth quarter of this year, with coverage expected to reach more than 40 million people by year-end.
Turning to slide 21, along with our very strong data leadership, we also have a leadership position in innovative handsets and wireless devices. We are very proud of our handset lineup, which includes many handsets that lead in their respective categories. The Sanyo Katana handset may end up being one of our best-selling handsets.
I am also pleased to report we will have several hundred thousand dual-mode handsets in time for the holidays. They will have an attractive form factor and this slide has a peek of what one model will like.
Initial deliveries of dual-mode handsets will be targeted at our existing iDEN base. We expect to have several million of these handsets in 2007.
We are also pleased to announce that Motorola will be added to our CDMA lineup in the fourth quarter of this year, with devices such as the Sliver, the Q, and follow-on to the RAZR.
As mentioned, EV-DO rev A will be up and running in select markets by year-end and the first devices that will be available to this network will be Aircards.
Turning to slide 22, let's talk about the next steps in our technology evolution.
Sprint Nextel will continue to maintain our push-to-talk leadership position. This includes continued investment in the iDEN network to strengthen quality and capabilities.
We will drive penetration of the dual-mode phone, beginning late in this quarter, and we will continue progress on rebanding.
The CDMA network will be our core network long-term and we are making significant investments to expand the footprint and increase capacity.
We are very satisfied with the development and status of Q-chat. Lab testing of the Q-chat application on EV-DO rev A indicates that we are well on the way to achieving iDEN parity performance on the CDMA network.
Finally, as Gary mentioned, the Board has approved the 4G business case. With our spectrum in place in 80 of the top 100 markets, we enjoy a significant time-to-market advantage that we intend to fully capitalize upon, with innovative broadband wireless services.
I now would like to turn to slide 23, and conclude my remarks with discussion about our growing wireline cable business.
We are pleased with the performance of our wireline business with the cable companies. We continue to experience very strong growth in both wireline cable subscribers and revenue.
At the end of the second quarter, we supported nearly 1.2 million VoIP wireline cable subscribers, an increase of 16% sequentially. In total, our cable telephony business is now at a $0.25 billion annual run-rate.
We are excited with this morning's announcement of the significant expansion of our relationship with Time Warner Cable. This new, five-year agreement brings the total homes passed to approximately 28 million within Time Warner's territory. As a result of this agreement, we now expect to serve cable companies with a total of at least 2.5 million cable telephony subscribers within 12 months.
I would like to conclude by reiterating that we understand the areas where we have to improve performance. Hopefully, I have given you an understanding of the specific plans in place to improve performance.
We are also very excited about the “Power Up” brand positioning, how it will differentiate us, and we look forward to the upcoming holiday season with this brand leading the company.
Now I will turn the call over to Paul Saleh, our CFO.
Paul N. Saleh
Thank you, Len, and good morning, everyone. Let's turn to slide 25.
As you already heard from Gary and Len, we have made significant progress on the merger. We are delivering on our stated synergies. We are integrating the former PCS affiliates that we have acquired, and Nextel Partners. We have successfully spun off our local phone business to shareholders and realized $6.6 billion of proceeds.
We are improving adjusted OIBDA margins, both in the wireless and long distance. We are generating solid free cash flow from operations. We are maintaining a strong balance sheet and financial flexibility.
We have announced that we will be returning significant cash to our shareholders, in the form of a $6 billion share buyback, over the next 18 months.
On slide 26, for the second quarter of 2006, we reported revenues of $10 billion, with wireless service revenues up 9% year over year, and long distance revenues outperforming the industry.
Adjusted OIBDA was $3.2 billion in the quarter, or 10% higher than one year ago, and we posted strong sequential and year-over-year improvements to our adjusted OIBDA margins for both the wireless and wireline businesses.
On slide 27, Sprint Nextel continues to generate strong free cash flow from operations. Wireless generated $1.9 billion of adjusted OIBDA in excess of capital spending. In the long distance business, adjusted OIBDA exceeded capital expenditures by $75 million, despite higher investment in support of our growing IP and MPLS services.
For the quarter, consolidated adjusted OIBDA exceeded capital spending by $1.9 billion, a year-over-year increase of 53% and a sequential increase of approximately 9%.
Slide 28 -- we ended the quarter with a very strong balance sheet. Total debt was $23.3 billion, and our cash and marketable securities was $5.4 billion, giving us a net debt of $17.9 billion. These figures reflect the spin-off of EMBARQ and the acquisition of Nextel Partners. As you know, we closed the UbiquiTel transaction on July 1st.
On a pro forma basis, our net debt is approximately $19.2 billion and our net debt to annualized adjusted OIBDA is approximately 1.5 times, in line with our objective of maintaining an investment grade rating. The average cost of our debt is now approximately 7%.
Slide 29 -- as Len mentioned, we are taking several actions to address the challenges in our wireless business. These actions should improve our long-term profitability but in the near-term, we anticipate pressure on our net adds as we tighten our credit policies.
Our revised 2006 guidance reflects current business trends and the anticipated effects of our action plans. For the full year, we expect to deliver consolidated operating revenues of $41 billion to $41.5 billion.
Wireless revenues are expected to be $35.3 billion to $35.7 billion, including approximately $900 million to $1 billion from the partners and UbiquiTel acquisitions.
Long distance revenues are expected to be $6.4 billion to $6.5 billion, and our consolidated revenue guidance is net of intra-company eliminations of approximately $700 million.
Our revised outlook for 2006 adjusted OIBDA is now $12.6 billion to $12.9 billion. The wireless segment is expected to generate $11.7 billion to $12 billion, including approximately $400 million from Nextel partners and UbiquiTel.
Long distance is expected to deliver approximately $900 million in adjusted OIBDA for the full year.
We still expect merger integration costs of about $600 million in 2006. These costs exclude asset impairment charges.
Finally, we expect to spend $7 billion to $7.1 billion in capital, which is right in line with our previous guidance. This estimate includes approximately $600 million of rebanding capital, and also includes $800 million of other costs that primarily will be recorded as spectrum assets.
Slide 30 -- our prior guidance for full-year net operating revenues was $41 billion plus, which included our wireless operations, long distance business, and 11 months from the acquisition of Alamosa and Enterprise.
Lower-than-expected ARPU and net post-paid adds are impacting the prior outlook by approximately $600 million to $1 billion for the full year. About half of this shortfall is from ARPU, the other half is from lower post-paid subscriber additions.
The ARPU miss is a combination of higher rate plan migrations and lower access loading. The pricing actions we are taking should result in moderating ARPU declines on a year-over-year basis for the second half of 2006.
Offsetting the decline is revenue contributed from Nextel partners and UbiquiTel of $900 million to $1 billion. The total company revised revenue outlook for 2006, as I mentioned earlier, is $41 billion to $41.5 billion.
Slide 31 -- Sprint Nextel also previously guided to approximately $13 billion of adjusted OIBDA for 2006. Post-paid subscribers and ARPU trends have reduced these estimates by approximately $500 million to $800 million. Offsetting this decline is approximately $400 million of adjusted OIBDA from the Nextel partners and UbiquiTel transactions.
Sprint Nextel's revised estimates for 2006 adjusted OIBDA is now $12.6 billion to $12.9 billion.
Slide 32 -- as Gary stated earlier, our strategic reposition is largely complete. We are now able to clarify our cash distribution plans. Sprint Nextel has a strong liquidity position and generates solid cash flow from operations, even after accounting for mandatory financing requirements.
Our excess cash enables us to invest in our core business and other growth opportunities, with an objective of realizing returns that are well above our cost of capital. We seek to maintain an investment grade rating and strong balance sheet, and we view dividends and share buyback as an opportunity to return cash to shareholders and enhance overall returns.
Slide 33 -- our focus is clearly on creating value for our shareholders. Operationally, we are uniquely positioned to lead in mobility services. We are making the right investments in our core business and we are pursuing new, value-creating growth opportunities such as our 4G broadband services, which should further enhance our competitive advantage.
We are maintaining financial flexibility in an investment grade balance sheet. We have announced that our Board of Directors has authorized a return of up to $6 billion to our shareholders in the form of open market purchases over the next 18 months.
With the buyback, we are addressing the current gap in value that exists between Sprint Nextel and its peers. We are also preserving the tax-free nature of the EMBARQ spin-off, having recently received an IRS private ruling in support of our open market purchases.
Slide 34 -- long-term, our objectives are to grow revenues faster than other large-cap telcom peers, and to improve core adjusted OIBDA margins year over year.
Another objective is to create and deploy innovative 4G wireless broadband services which should allow us to capture significant new growth opportunities. We expect OIBDA dilution from 4G to be less than 5% at its peak in 2008.
Finally, we expect to generate strong cash flow from operations, with an overarching goal of realizing high returns on invested capital.
I will now turn the call back to Kurt.
Thank you, Paul. In a just a minute, we will take your questions. The audio only and webcast replay of this presentation will be available on our website. That is at www.sprint.com. The audio rebroadcast can be accessed at 1-800-642-1687, or 706-645-9291 if you are dialing from an international location. The conference code is 7606407.
We will now open the line for your questions. Operator, if you can please instruct the participants on how to submit their questions.
Your first question comes from the line of Jason Armstrong with Goldman Sachs.
Jason Armstrong - Goldman Sachs
Thank you. A couple of questions. The second quarter, which really does not include partners or UbiquiTel, you did $3.22 billion in EBITDA. If you annualize this, it suggests $12.9 billion. This is at the high-end of the year-end guidance range at this point, so you are basically implying no sequential EBITDA improvements from here. I am just wondering, as you look into 2006, is this still an EBITDA growth company?
Then, second question -- Len, last quarter you talked about general wireless sub add trends, and you talked about a normal acceleration towards the end of 2Q, with graduations and certain other holidays. I am just wondering, can you talk to us about trends in the quarter? Did you actually see this occur? What can you talk to us about in terms of 3Q and 4Q and beyond in terms of sub add trends, mostly on the post-paid side?
Paul N. Saleh
I will take the first question. The second quarter was indeed $3.2 billion. The first quarter, if you recall, was 2.9, so the first half of the year was, when you look at the guidance that we have given you and the range of it, we expect the contribution again of Nextel partners and UbiquiTel to be about $400 million. It would be slight -- a flat-to-slightly-up OIBDA from the core business, based on the second-quarter results.
I think we are positioning, all the actions that we are taking is to position us to return back to faster growth in 2007.
Len J. Lauer
Jason, this is Len. In response to your second part of your question, we did see up-ticks from the holidays, the graduations and Father's Day, Mother's Day, et cetera, but when you look at the industry overall, we have to wait for more of our competitors to announce, but we held share in the second quarter on gross adds. It is whether if you look at just post-paid, if you include affiliates that are still out there, if you also include with prepaid, you include them -- we held share in the quarter on gross adds. Before the second quarter, industry gross adds were down on postpaid about 6%. We are probably seeing that.
Our issue is not so much on the gross add side. Obviously we would like to perform better. We think the brand positioning will help us there. We think the lineup we talked about in handsets will help us in the third and especially into the fourth quarter.
That being said, our story is really about getting churn down. As our competitors, as we mentioned, have lowered churn, we have not. That shows up in our net adds, so it is really not so much a gross add story as it is we have to get this churn number down to really get better net adds.
Your next question comes from the line of Phil Cusick with Bear Stearns.
Phil Cusick - Bear, Stearns & Co.
I wonder if we could talk about the buyback a little bit. Is the $6 billion, will that essentially get us to the 1.5 times our '07 estimates?
Then also, on the 4G plans, you have not talked about technology but you did talk about 5% in max dilution in '08. Any thoughts on how spending, how cap-ex will be affected by this in probably '07 and '08? Thank you.
Paul N. Saleh
On the capital spending on the 4G, we will mention that at the time we make the announcement about 4G. We were trying to give you some guidance on the OIBDA dilution, that it will not -- it will not -- exceed 5%. It will actually be below 5%, and the peak would be sometime in 2008.
As far as the $6 billion, that $6 billion will remain within the 1.5 times debt to OIBDA, net debt to OIBDA.
Phil Cusick - Bear, Stearns & Co.
That will remain -- what I am trying to get at is, do you think there is room to reload once this is done? Who has discretion on the buyback? Or is there a plan in place at this point?
Paul N. Saleh
The $6 billion is what our Board has authorized us to do. We take it one step at a time. Over the next 18 months, that is what we are going to be spending.
Phil Cusick - Bear, Stearns & Co.
Who has authorization, or has discretion on the buyback on timing?
Paul N. Saleh
On timing, we do, management does. So we will be -- as soon as possible, we will be able to begin that program.
Phil Cusick - Bear, Stearns & Co.
Is that today or is it some point in the future? I mean, the stock is down…
Paul N. Saleh
Phil Cusick - Bear, Stearns & Co.
The stock is down 10% in pre-market. I am just trying to get an idea of whether you guys can be out in the near-term. Thank you.
Your next question comes from the line of David Barden with Banc of America.
David Barden - Banc of America Securities
As I look at it, obviously the market share, as you guys pointed out, the gross add market share has not really been necessarily the big issue. Getting churn down has been the issue in terms of the sub numbers, but in any given quarter, plus or minus 100,000 subs is really not going to be the key driver of any kind of major financial change like you guys have done in the guidance for the back-half of this year.
What really seems to be the issue is that, to an earlier point, the half-on-half revenue growth is stripping out Nextel partners, and Alamosa is flat, and the margin is flat and EBITDA growth is flat.
What it seems to be saying is that, despite the huge cost improvement you had in the second quarter, all the incremental cost improvements in the back-half of the year are going to be eaten up by some other thing in the second half.
My inkling is what is maybe going on is the legacy Nextel subscriber base is just simply going away and it is not the ASL base that would be causing the ARPU pressure we are seeing, but it is the legacy Nextel customers that would be leaving the system. That would actually explain why ARPU is down and why margin pressure will continue in the back half of the year.
The question really is, now that we are looking at RAZR phones being the killer app in terms of getting subscribers on the base, and your network is what it is and everything being equal, what do you do to arrest whatever seems to be going on in the Nextel base for the second half of the year so that you can believe that '07, Nextel is kind of resurging in growth from being flat at least, can actually be a growth year [inaudible]?
Len J. Lauer
Let me answer your question. If you take a look at your question in terms of why we are not showing organic improvements in the second half, a lot of this revenue shortfall was coming from ARPU and also the lower net adds that we have. I think we explained about half of that shortfall was coming from ARPU.
With that, within the ARPU, about half was from migrations and half is -- and this is happening with a lot of folks in the industry -- is just having more family plans in the base, especially on CDMA.
The other half is having lower net adds, which gets to your question on Nextel and where are we with the iDEN base. To your comment, is it going away -- no, it is not going away. We have a very, very healthy base. We have over 16 million post-paid customers. Our Boost business is close to 4 million on iDEN, and a very, very good, satisfied customer base.
That being said, we are not growing it as much as we should be and as much as we would like to grow that.
We also had quite a bit of exposure on the iDEN side in the past to beyond business, which has been our strength, also in the consumer segment which gives us more exposure to sell prime.
You can see the actions we are taking is to really manage the iDEN business going from where it is has core value, which is in the business segment, and also where it has strong brand affinity, to our loyal NASCAR fans and also in the Hispanic segment.
We are not going to be pushing Nextel as aggressively in the overall consumer market as we have attempted to do in the past couple of years, so that will bring us down a little bit in terms of gross adds, but it will bring on better quality customers.
We also mentioned in some of the markets where we are going through rebanding, we are managing capacity. That is why in terms of going forward, the Boost growth may not be quite as high. We are going to focus very, very strongly on the prime credit quality customers coming primarily out of that business market.
The iDEN business is healthy. We have great leadership on push-to-talk. We have not been hurt by any competitor's entrees, to any material amount, on push-to-talk. We are very confident about Q-chat going forward. It is an excellent offering for us with a good customer base.
We also are very, very excited about the introduction of dual-mode that we said will start later this quarter which, when you really think about it, brings redundant network capability, the concept of that, for both CDMA and iDEN.
We think our large base of 16 million iDEN post-paid subscribers will be very attracted to this handset, to give them the best performing push-to-talk with great voice service and also very good CDMA data services and that will start the migration.
We feel good about the plans we are putting in place, but again, we are changing. We are making a shift in terms of the acquisition business on Nextel to focus a little bit more for the profitable growth and not just trying to get all growth, which has exposed us a little bit on the involuntary churn side.
David Barden - Banc of America Securities
If I could follow up, Len, in terms of the six-month view, six months ago to now, you guys talked about being on a course correction now. Presumably, you did not plan to manage yourselves to this point in time, so presumably something external to your business occurred between six months ago and now that did not really gel with the plan.
Could you pinpoint what exactly that thing was that you are going have to address in the next six months? Have you been out-foxed by Verizon? Is there something going on out there? What was the key to why we are in a different situation for the next six months than we were six months ago?
Len J. Lauer
I would say the changes, David, in the last six months have been we are now getting much more aggressive in our credit tightening, and much more aggressive in not having the iDEN base as marketed to or as exposed to the general consumer segments. I think that is a key change from six months ago.
Also, much more aggressive in a number of markets where we have let Boost just kind of run, and it has done very, very well. On Boost, we are really pulling back the reigns a little bit on the acquisition side so that we do get a higher ARPU customer from Boost, and we can also manage some of our capacity issues in some of our rebanding markets.
I think those are the two key pieces. When you put those together, it means that we will focus again on more profitable customers. It will hit our gross adds a little bit on this and a little bit on net add short-term, but for the long-term, we think it is the right position to be in.
Your next question comes from the line of Colette Fleming with UBS.
Colette Fleming - UBS
I just wondered if you could comment on the $23 billion over in ’06 to ’08? Where do you think that would come out, given the changes to the EBITDA guidance and also expected 4G spending? I believe that number did include Nextel Partners in it.
Also, if I look at the cap-ex guidance, I believe the original guidance is 5.7 excluding the $600 million, which would be about $6.3 billion, and it is going to 7, to 7.1. I was wondering how much of that is Nextel Partners, if you assume that is $200 million to $300 million? How is the split? Is it just an acceleration of the EV-DO from ’07 into ’06, and maybe a little bit of extra long distance?
Lastly, could you also comment on how on-track are you to spend the 1.4 in total rebanding?
Actually, I have one last question, on bad debt expense. You talked about tightening the credit. I was wondering if there was any up-tick in bad debt expense this quarter.
Paul N. Saleh
Let’s start with the last one. There was an up-tick in bad debt in the quarter. Our tightening has not to do with the bad debt as much as it had to do with some of the issue that Len mentioned, so there is very purposeful to make sure that we are attracting the right kinds of customers through to the base and going back to more prime and to relieve some pressure in certain key markets for the iDEN network.
In terms of the cap-ex, let me take you there. The 7.1 is very much in line, 7 to 7.1 is very much in line with what we said before. Your math was correct but the piece that you were missing was the $800 million of other costs, other rebanding costs that are usually recorded as spectrum assets.
Colette Fleming - UBS
Okay, so the 7 to 7.1 includes the whole 1.4?
Paul N. Saleh
It does. I think in terms of the rebanding cost, there would be just a little bit -- continues to be on plan and more spending, basically in the second half of the year.
As far as the $23 billion, we will be updating that, those guidance at the appropriate time, probably some time later this year or probably early next year, as we look at the actions we are taking, and then we will also be providing you by that time also the 4G capital spending, when we make the announcement on 4G.
Your next question comes from Michael Rollins with Citigroup.
Michael Rollins - Citigroup
Good morning. I wanted to ask you about, if you go back in time, it seems like some of the shadows of some of the issues you are dealing with now are similar to some of the issues, Len, that you dealt with in the clear-pay days. Some of the same things that you are talking about in terms of credit quality and trying to shift the business in terms of marketing. I am curious if you agree or disagree, but [SENIF] cast their shadow again.
Can you talk about how we should think about the solution in terms of could things be more challenging on an ARPU front in the near-term? As long as you are trying to right-size the base of customers in terms of what they are spending, and getting them on the right plans, and pushing more towards family, or do you think that we have seen the worst of the ARPU declines in the second quarter of ’06? Thank you.
Len J. Lauer
Two pieces -- one is, is it similar to the challenge we had back in 2002? I think you have two differences. In 2002, the credit policies we had in place, we were exposed. We did not have deposits, and we had some real bad debt exposure and we had a lot of fraud. That is not the case here.
This is really a case of where, from an acquisition standpoint, we just need to change the acquisition model and not really use credit as a differentiator. We were not intentionally trying to use credit as a differentiator, but it did help on the gross add piece over the last year or two.
So we are now changing that. It is tough love. It will hurt us a little bit on the gross add and net adds here over the short term, but we believe over the long term, it is the right move to make.
The ARPU piece, as Paul guided, you are going to see ARPU, where forecasters go into the second-half, at the year-over-year declines would be moderating, so if you look at our year-over-year decline Q2 to Q2, you will see the gap in the high $3 range. You are going to see that moderate, that gap, going in to the second half. The reason for that is we have taken a number of actions. We have taken selective price increases, not in the MRC minutes in the bundle area, but really outside of that, we will be taking selective price increases, both on our iDEN platform and in our CDMA platform.
We are revising, as we talked about, the business pricing, what we call business essentials, where we had most of the migration in our iDEN base. We have changed that pricing starting on August the 1st, so that will help mitigate some of the ARPU decline.
We are fairly confident that those gaps on a year-over-year basis will not be as large as it was in the second quarter, but at the same time, as you saw the guidance we are giving, that migration piece that happened to us started in that second quarter, and we will get a full six-month affect of it, so that is one of the reasons the revenue guidance is down.
Your next question comes from Chris Larsen with Credit Suisse.
Christopher Larsen - Credit Suisse First Boston
A couple of questions. If you look at the churn reduction, the two areas to focus on historically, customer service, network issues -- are you happy with where the customer service levels are now? If not, do you have a sense of a path where that is going? Then, are you happy with where the network is now, or do you need more spend there?
Then, a question on wholesale. You had a sequential decline in subs there. Anything going on that we should -- how should we look at that?
Len J. Lauer
Chris, on customer service, network, and then wholesale. On the customer service levels, we are seeing good improvements when you look at a couple of things. One is what percent of the calls are answered in a 30-second timeframe. We perform consistently well in our iDEN base. We have not on the CDMA side. We had some challenges where we were not staffed appropriately. We fixed that, and starting early in the second quarter, we have been running fairly consistently with hitting the metric we want to hit on CDMA and pretty close to matching where we are on iDEN, so I think that is good news.
Very focused on first call response, and that is handling the customer’s issue, question, problem on the first call, not transferring. We have had good progress there. We are not where we need to be, but we are pretty encouraged by the trends that we are seeing.
At our store level, in terms of customer satisfaction at our stores, with the redesign, putting the greeter in place, having express lanes for people that have accessories or handset repair, that is also showing improvements for us.
We also have a host of new systems that we have put in place in terms of back-office systems to help our over 20,000 customer care reps, and then with the unified billing platform that we have that we will be putting in place, that Amdocs is working with us on. We start the conversion of our CDMA customers in the October timeframe, and we finish that about a year later. That will help us because it gets us to an integrated care platform, where an agent will not have to toggle between four or five different systems. There is one password sign-on, they get to see a lot of customer profile history, when they contact us, et cetera.
We have a lot of those capabilities in iDEN. We do not have them on CDMA, so I think that will make our reps more productive and just come across as more responsive to our customers.
We also have focused very much too in terms of shifting towards prime customers coming on. As we do that, a lot of calls get generated by our sub-prime base. They tend to call us twice as high as our prime customers. So as we talk about both the acquisition side in terms of changing, but also the treatment policies, we did not go into detail on, but we made a number of changes in how we treat our base customers to still protect us in terms of bad debt, but to cut down on forcing the number of calls that come into our call centers. That will help us very much, as we have a lower mix of ASL going forward, a lower acquisition ASL, but also the treatment options. That will help us in customer service.
On the network side, [we added on] a very focused strategy to improve our networks. Our Board approved us spending an incremental over $2 billion compared to the standalone iDEN and CDMA plans to improve the quality of our networks. That is both improved expansion for our iDEN network to get out to the reaches of the suburbs, and also for better capacity, more capacity at our iDEN network. Also, on CDMA, so we can improve the coverage and also improve expansion of that. When you take a look at our performance on drops, on blocks, on signal density, we are very, very proud of these networks. In a number of markets, we are number one. Where we are not, we are very close to the number one provider.
That is the reason we are very encouraged out there with our campaign to talk about the most powerful network. We have been hurt that in the past we have not advertised about the strength of our network. As our competitors have, people assume if you do not talk about it then you must have an inferior network. That is not the case.
We feel very good about this. Our expansion with DO and then with 4G, we have a great story to tell. It is time to go tell it and that is what we are going to do.
Your last question on the wholesale side, on wholesale, a predominant piece of our wholesale is Virgin Mobile, as the other MVNO’s are still coming through. Virgin Mobile, as you saw with Boost results, I think pre-paid in general, just because of macroeconomic conditions, is going to be a little bit challenged in the short-term.
You see in the results there in terms of probably a little bit higher churn coming in, and that is why you see flat growth on wholesale. It will probably stay that way while we still have these macroeconomic conditions in front of us.
Gary D. Forsee
I would add one point -- both in my comments and Len's, we talked about the new organization model. I think if there was any question about the customer service and focus on churn in the organization model, with Mark Angelino heading Sales & Distribution, Tim Kelly in essence being the Chief Service Officer across all platforms and across all businesses, I think this is a natural evolution from the time of the merger. Obviously we have continued to dial in on the focus across the platforms and marketing message, but all this conveys now with this organization model, with Mark and Tim and Mark Schweitzer focused again on delivering products and services and capability with the focus on that customer experience and reducing churn.
I think this model will nail that issue.
Christopher Larsen - Credit Suisse First Boston
There has also been some market chatter that some of those second-level managers at Nextel have been -- the former Nextel -- had been departing. Is there anything that you can tell us that no, that is not the case, yes, that is the case? Is there any way you can address that, and maybe either allay or confirm our fears on that?
Gary D. Forsee
We merged two big companies with, at the starting point, over 85,000 people. Obviously we spun out about 25,000 of those, and if you look at our top 200 officers in the company, we are within plus or minus five or so from where we started within the last year of where the merger was. We have trimmed out of the organization over 4500 positions, which we announced as we came into this year.
Sure there has been churn, there has been downsizing, rightsizing, as we have rationalized our operations, but the core competency, the talent, the reason we have kept our headquarters bifurcated between Reston and Kansas City was to protect our talent. I think we have done, by and large, a great at doing during that.
Our people are our most valuable asset. We have taken that very seriously and will continue to do that. It has been focused on the talent, focused on the areas of expertise in both businesses, and certainly while you would expect churn to occur in any kind of business combination, we merged as equals. We took that very seriously and continue to do so.
Your next question comes from Richard Klugman with Prudential.
Richard Klugman - Prudential
Thank you. Good morning. Could you just expand a little bit on the talk of rebanding? How is that going?
Len, I thought I heard in your comments that was a significant factor on the subs, because of capacity constraints, you are pulling back on some of the marketing, particularly on prepaid in iDEN resulting from rebanding. Where can we expect that going forward? Thank you.
Len J. Lauer
We are proceeding well on the rebanding in terms of we are on track with the markets. We break it up into four different regions geographically, then we have a couple of different phases, as we have to move around in the spectrum bands of 800 MHz to open this up for public safety segments. As we do that though, we do take what are called channels out of the network, or it takes capacity out of the network.
In those markets, as we go into the different phases and capacity comes out as we go through the rebanding, we have to be smart about how we manage our acquisitions because we want to make sure that our large base of iDEN customers continue to have a very, very positive experience with our iDEN network.
That is the area where, I do not think I said it was a significant factor but it is a contributing factor to us as to why we have decided, in those markets as we reband, that we are going to be pulling back on the reins of Boost. Boost is a great franchise for us, but the subscriber value of a Boost subscriber obviously is not as high as a postpaid iDEN subscriber, so that is where we are going to put the priority in our rebanding markets.
Also, as we talked about in acquisition, we talked about tightening credits. We will tighten much more in the rebanding markets because again, the customers we want to acquire in the rebanding, we want to be very, very high quality.
That will effect us a little bit on gross adds. It will affect us in terms of a higher prime mix, but lower sub-prime or ASL mix.
Rebanding is coming along fine. We just need to be smart about how we manage the acquisition base, so we preserve a very good experience for our basic customers as we go through this.
Gary D. Forsee
Points I made earlier about the importance of the dual-mode devices and cranking those numbers up fourth quarter and into 2007, is a very important aspect of managing through that, and actually accelerating momentum through that.
Also, we talked about introducing EV-DO rev A earlier than we probably would have otherwise thought about, just because the technology is now ready and available. In the fourth quarter this year, we will hit 40 million customers coverage with EV-DO A, which sets up a path obviously for Q-chat to be deployed as we go into 2008.
The strategy of iDEN and CDMA, the networks coming together, creating a great experience for our customers, and iDEN being again preserved in the future for those customers that need push-to-talk for that capability, that plan and that technology path is intact.
I think you can expect, as we talk about our 4G technology announcement, us to confirm for everyone the iDEN and CDMA technology roadmap, and we will do that in a very thoughtful and careful way.
Richard Klugman - Prudential
One quick follow-up, if I could. Gary, I think you said in your initial comments, after your talk about the buyback, plans to just keep the dividend at $300 million a year. Is that for the foreseeable future, or is that potentially a decision later in the year?
Gary D. Forsee
It is always contemporary with our Board of Directors in terms of the cash distribution policy. I think as Paul indicated, we have approval now to go forward beginning immediately for the share buyback plan. We thought keeping the minimum dividend preserved our flexibility for continuing to review that policy, as our cash needs continue to develop, so there is no change in that as we speak.
We will obviously continue to look at that along with our Board as we move into next year and in the future but there is no change to that guidance on $300 million at this time.
Your next question comes from Simon Flannery with Morgan Stanley.
Simon Flannery - Morgan Stanley Dean Witter
Thank you. Could I turn to the cable relationship? First, you did not talk about the AWS auctions at all. I know you cannot talk about your intentions, but could you help us understand the ownership structure of the joint venture? If the consortium bids X-billion dollars, what percentage would you be required to contribute to that? What is the rationale behind getting that spectrum, given your 2.5G position?
Secondly, update us on the timing of rolling out CDMA service branded by the cable companies. Thank you.
Gary D. Forsee
I will take those. First of all, we did in fact file an application with our four cable partners. We filed that application, at that point in time anticipating the auctions were starting end of June, and obviously that has slipped. We have made our deposits and at this point in time, I cannot disclose any of the strategy of the ownership. That is all public information at this stage in terms of what the companies at that stage thought was in our collective strategic interest. With the auctions starting next week, we are virtually in a quiet period in terms of talking any more about what our plans may or may not be, related to the AWS auctions.
Certainly related to the existing joint venture structure, we have talked about Sprint providing wireless services with the cable MSOs, not just being a matter of stapling wireless on the bill. We have talked about the reason to do this, is to create a new and different experience.
The teams have been working very hard to create, on an EV-DO device, an experience that would be unique because we are taking advantage of the cable MSO and the Sprint wireless platforms to create applications and make the services work across both platforms.
At this point in time, we do have plans to launch trial markets in the third and fourth quarter. We have not announced where those markets are or which MSO’s are involved, but that remains our plan. We would look for a more full rollout, assuming those trials go well, into 2007.
With the cable companies, things are on track, obviously. In that relationship, they had a path to look at 4G services, so suffice to say, as we have evolved our planning with them, they have been very privy to our technology discussions and our technology choices.
I would say your question of ownership, when we made our filings, Sprint was filed as a 5% participant. You asked the question, well, if you have 2.5, why would you need that? Certainly as the companies may have looked at that opportunity, it could be one of opportunistic spectrum is always considered to be a valuable asset -- beachfront property, if you will. We are very comfortable with our 2.5 spectrum position that give us speed-to-market advantage, and we think gives us the best opportunity to deploy a 4G mobile broadband service.
Your next question comes from Tim Horan with CIBC.
Timothy Horan - CIBC World Markets
Thank you. Back on the sub guidance a little bit more, do you think this is the peak churn rate? When do you think the post-paid market share losses will peak out? Related to that, what percentage of your base do you think really is sub-prime at this point? How long will it take to work through the process that we are at? Thank you.
Len J. Lauer
In terms of churn, we will see churn, a slight up-tick in the third quarter. That is mainly due to seasonality, as we have seen over the years, we have talked about this a number of times. That second quarter tends to the best payment quarter for sub-prime customers. That will hurt us a little bit, just a touch towards the third quarter, and then we expect to see it coming down after that.
To your question about how big is the base, how long does this take, you are going to see, obviously we have a higher percent of our base on CDMA at sub-prime. CDMA and the former Sprint legacy was bringing that on for a number of years. On the Nextel side, we just did that in the last couple years, so it is a higher percent on CDMA.
I think the main piece going forward is not, it is a little bit of churn coming off that base but the main thing we are focused on is how do we put in much better treatment options into that base, just so that we can get a better customer experience?
Because some of the involuntary churn is actually protests of folks who just do not like the fact that we are hot-lining them so many times and how we treat them, that they are leaving on us. We have done some things in terms of improving the treatment, that could give out a better experience with ASL customers and we think will help us in terms of bringing down the churn. We just put those in place in the last 30 days and we need time to have them come into the base and see how that helps us out overall.
Your next question comes from Saba [Hickmatt] with New York Life.
Mr. Hickmatt, your line is open. Okay, that question has been withdrawn.
Your next question comes from the line of Chris Bonavico with Delaware Investments.
Chris Bonavico - Delaware Investments
You mentioned earlier that you think you retained a lot of the key management on the Nextel side, but in terms of not having a RAZR phone product that was very popular, now advertising network quality while your competitors have already done it -- can you just respond to what is going on in terms of not being reactive, but proactive? Maybe there is too much of a bureaucratic management structure. Is there a mea culpa in terms of management in saying that you have really been too reactive?
Gary D. Forsee
I would say that we have our strengths, and we continue to talk about and reinforce our strengths.
We have two very robust platforms, CDMA and iDEN. In the past year, we have worked very hard to bring those platforms together in a cohesive marketing message. I think with what you are going to see us talking about, the power of the network, and “Power Up” campaign, that we do have a compelling proposition for customers to understand why choose Sprint.
We have historically, between the two companies, led in innovation. We have led in data services and data adoption rates. Our data ARPU remains far and away the highest in the industry.
Our intent is not to be “me, too” or fast followers -- our intent is to lead and we certainly pick our spots, obviously as our competitors do, to do that.
Our innovation, our line-up of handset devices, we have had some firsts. Others obviously had firsts as well. Len talked about moving the Motorola handset line-up fully into CDMA, which is our plan to do that.
I do not think bureaucracy is something that is any time a flattering comment that we make about how we operate. We have to be sure that we have speed to market. We have continued to reorganize, and organize in a way that we think gets bureaucracy out. We constantly worry about, in a big company -- particularly a big company going through a merger -- how do we have the best decision-making and how do we streamline our operations to do that? Stamping out bureaucracy is part of the MO that we have to be about as a company. I think our plans that we talked about today certainly should give you an indication that is the course we are on.
Len J. Lauer
Just to give you a little bit, you had mentioned about the RAZR. It may appear to you that is a one-week decision, you put the RAZR out, but we actually made the decision to bring Motorola in over six months ago. It is about a 12-month effort working with Motorola to bring it on to our systems and make it compatible with Vision and Power Vision. We made that decision over six months ago. We are excited to be bringing them on.
We are also proud of the handsets we have had out there, with the a900 with Samsung, the new Katana from Sanyo, and now we will be even better with Motorola coming on.
That decision was made six months ago which, I know would not appear to you without seeing the inner workings, but there is a lot we had to do and we are making good progress on that.
Operator, we will take one more call.
Chris Bonavico - Delaware Investments
…on the buyback, as someone mentioned it earlier. I hope it is not a plodding buyback over a year-and-a-half, but if you are very aggressive when your shares are very out of favor, obviously that adds value.
Gary D. Forsee
Operator, we will take one more call.
Okay. Your final question comes from Thomas Lee with JPMorgan.
Thomas Lee - JPMorgan Chase & Co.
This is going to sound like sort of a motley question, but really I am just trying to get a better understanding of what is happening within this pro forma organization. The first thing is, when you think about the customer experience, and I have heard a lot of investors just talk about how they feel there is not really a cohesive marketing message for Sprint. I know this "Power Up" is really going to address that, but when you look at it from a customer's experience, what specifically do you think is happening that is not -- that is causing them to make a decision to go to Verizon or Cingular?
I know your gross add share overall has been fine, but I think it is on some of that higher end-user. I just do not really see how the RAZR is the issue, and is it maybe the integration that needs to be done on the Nextel provisioning, et cetera?
Then, the second is as you kind of look at the marketplace, I have not really heard any other wireless companies talk about high energy prices. I know some of the retailers have really taken it in the gut in terms of same-store sales and what their stocks are doing, but I have not heard any wireless companies talk about energy prices. Is this something you might need to think about incrementally as risk to your EBITDA guidance, or is that fully baked in?
As we think about this pro forma company, in the past the real strength that we saw was the differentiation, both on the iDEN side and having this broadband, the Sprint broadband platform and somehow finding a way to synergize that.
How confident are you guys that this is still, this a strategy that we are going to see in '07, but there is just a delay in the realization this year, and so we are going to start to see some of the effects? I am just trying to get a better sense for what has changed from your perspective. Thank you.
Gary D. Forsee
Let me start, and then I will pass off to Len.
Without question, I think we have the right strategy and have been executing and implementing the plan of the merger, and have taken on a lot as we have done that. I will not go through the litany of what has been achieved and what has been accomplished, but it has been part of the design to go through, whether it has been partners and affiliates, the spin of EMBARQ, the repositioning and understanding of the best use of these two platforms, so that has required a lot.
Certainly, and I use the term that we are still in transition. We are still dialing in on how to take advantage of these two great customer bases that are now part of one company.
So, you know, pick the term, whether it is dialing in or honing in on the message, honing in on the channel distribution strategy, honing in on how to use the power of these two great networks -- that is work that we have obviously paid an incredible amount of attention to coming into the merger, and since the merger have continued to fine-tune that.
We have a set of assets that are very unique. We have structured these assets, both on the wireless as well as the wireline side, to be built for data, which is going to be our differentiation going forward. The issues that we talked about this morning are issues that are part of a transition that you go through when you deal with integration and you deal with mergers.
How do you get credit policies? How do you get the platforms to adjust? How do you get the marketing message to be tuned in for what you want to stand for going forward? Yes, those are considered transition issues.
You could critique us. Have we been slow on some of those or have we taken actions that did not hit the mark that we are now coming back and looking at again? Some of those would be fair criticisms.
We have I think managed this collectively, in a manner that is going to create shareholder value and do that for the long-term, and do that I think better than any large-cap telcom. That is the strategy. That is part of what we have been about and these actions that we have taken are very supportive of that.
Len J. Lauer
In terms of your question about customers leaving us, remember that one of the main issues is the mix. We talked about the multiple actions we are taking in acquisition changes and also treatment of the base of our sub-prime customers, that will help us in churn.
Then, the second piece too is just on where we are with the real and perceived challenges. In terms of the network, we are going to change that by talking about the most powerful network. In terms of price values, simplifying the pricing, amplifying the focus, or really targeting the focus on iDEN to its strength, in really the business markets, NASCAR fans and Hispanic segments.
I think your challenge us about no one else is talking about macroeconomic conditions, remember that was in regard to Boost, and Boost is prepaid. Our competitors, I do not remember in their calls or announcements really talking a lot about prepaid. Boost obviously is the best performing prepaid platform out there. We set expectations for this and that is why we wanted to give you feedback on that. Post-paid tends to -- excuse me, prepaid tends to go after customers that tend to be struggling a little bit more on the economic side that would get hurt by any change in gas prices, et cetera.
Let’s see where some other prepaid companies come out and report, but again, that was really related to Boost and not to our overall post-paid business.
Thomas Lee - JPMorgan Chase & Co.
If I could just [throw out] some comments I heard. Are we through a lot of the heavy lifting? How much more challenging is it to execute this repositioning, rather than compared to the first 12 months of this merger?
The first 12 months of this merger, at least from our outside perspective, looked like a very tough merger because you were dealing with two technologies, a lot of management changes and reorganization, a lot of cultures, distribution, marketing message, et cetera.
Is the next 12 months an easier process, or is just as difficult?
Gary D. Forsee
I think we have been through a lot, and you did a good job there ticking through that. The EMBARQ spin, which we spent precious little time talking about the volume of activity, but it cut across all of our businesses, whether it was IT and systems, operations, getting agreements in place to spin them off, and do that in a very constructive manner. That is behind us now, and that affected every operation in the company as we did that.
As you said, a lot of the heavy lifting is behind us. A lot of the integration, whether it is across the billing platform, starting to integrate the two networks, including at the cell site level and take advantage of the platforms that we have -- a lot of that planning, a lot of that work has now been executed.
A lot of it is behind us, and now what you are seeing is -- we use the term transition the operations to the right model and transitioning of the brand message to the right compelling message in the marketplace. That is now what we have a chance to do. With our organization alignment and Len focusing on the core operations, having the 4G, broadband and cable pieces report to me, it is going to allow the core operations to be very focused on execution, very focused on the priority action plans that we laid out.
Again, we are going to be best-positioned to deliver the shareholder value that we and you and our customers and our Board expect us to deliver.
Thanks, everybody. That will be the last question. If you have any follow-on, please give us call at Investor Relations. Thanks, everybody.
This concludes today's conference call. You may disconnect at this time.
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