Sprint Nextel Comments on Improving ARPU

Aug. 9.06 | About: Sprint Corporation (S)

On Sprint Nextel's (NYSE:S) Fiscal 2Q conference call,COO Len J. Lauer discussed problems with low ARPU:

Len J. Lauer, COO

... 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...

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. ..

Michael Rollins - Citigroup

...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

... 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.

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