Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Yijing Brentano - Investor Relations

Daniel R. Hesse - President, Chief Executive Officer, Director

Robert H. Brust - Chief Financial Officer

Keith O. Cowan - President of Strategic Planning and Corporate Initiatives

Paget Leonard Alves - President - Sales & Distribution

Danny Bowman - President, Sprint Nextel iDEN

Steven L. Elfman - President - Network Operations and Wholesale

Robert H. Johnson - President of CDMA Business Unit

Analysts

John Hodulik - UBS

Phil Cusick - MacQuarrie Research Equities

David Barden - Banc of America

Simon Flannery - Morgan Stanley

Michael Rollins - Citigroup

Jason Armstrong - Goldman Sachs

David Dixon - Friedman Billings Ramsey

Craig Moffett - Sanford C. Bernstein

Timothy Horan - Oppenheimer

Christopher Larsen - Piper Jaffray

Walter Piecyk - Pali Research

Sprint Nextel Corporation (S) Q2 2009 Earnings Call July 29, 2009 8:00 AM ET

Operator

Yijing Brentano

Good morning and thanks for joining Sprint Nextel’s second quarter earnings call. Dan Hesse, our CEO, will discuss operational performance and notable events in the quarter, and then our CFO Bob Burst will cover the financial aspects of the quarter.

Before we get underway, let me remind you that our release and the presentation slides that accompany this call are both available on the investor relations page of the Sprint website.

Slide 2 is our cautionary statement. I want to point out that in our remarks this morning we will be discussing forward-looking information which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review, including our Form 10-Q for the first quarter of 2009 and when filed, our Form 10-Q for the second quarter of 2009.

Turning to slide three, 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 second quarter can be found on the attachments to our earnings release and also at the end of today’s presentation, which is stored on our website at www.sprint.com.

Beginning this quarter, we are no longer providing adjusted net income or loss or adjusted earnings or loss per share values. Table 5 now provides you with selected items net of taxes for your analysis. Basic and diluted loss per common share for the quarter was $0.13, compared to $0.21 in the first quarter 2009 and $0.12 in the year ago period.

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

Daniel R. Hesse

Thank you, Yijing. Good morning, everyone and thanks for joining us and for your interest in Sprint. As I prepared my comments for this earnings call, one observation was clear -- Sprint is not the same company it was 12 months ago. During prior quarters, our focus on operating improvements and efficiencies enabled Sprint to stabilize our earnings trend and during the second quarter, we saw a sequential improvement in adjusted OIBDA. We continued to generate strong free cash flow during the quarter, resulting in a cumulative free cash flow production of almost $1.5 billion during the first half of 2009. We ended the quarter with $4.6 billion of cash. We have paid the portion of our long-term debt maturities due in 2009 during the second quarter and we now have more than enough cash on hand to pay our scheduled debt maturities through the end of 2011.

Improving the customer experience is our top priority so my favorite statistic of the second quarter is that we have now achieved 18 consecutive months of improvement in customer satisfaction metrics for customer care and first call resolution.

Another area that makes an important contribution to the customer experience is network performance. Our networks are performing at best ever levels and based upon a recent 13-city 3G performance test, our network performance was recognized by PC world as being more reliable than Verizon and AT&T.

The results of PC World’s comparative testing clearly demonstrated that Sprint continues to have the most dependable 3G network among U.S. carriers.

We also saw momentum in our brand perception metrics. Sprint's Now Network campaign recently won the prestigious Cannes Gold Lion Award, which is the Oscar of the advertising world, from more than 2,000 campaign entries and over 200 finalists worldwide.

Sprint also won four silver lions and a bronze lion, the only brand to win multiple awards within a category.

Our successful launch of the Palm Pre, perhaps the smoothest and best executed new device launch in our history, has set the stage for post-paid customers to discover the new Sprint. Meanwhile, our successful Boost Unlimited offer continued to attract new customers, with Sprint's corporate brand pillars of simplicity and value.

Boost Unlimited provided us with another strong quarter of prepaid growth, generating the highest quarterly prepaid net adds in our history.

We have been so impressed with the potential of the prepaid market in the U.S. that we are doubling down on wireless by yesterday’s announced acquisition of Virgin Mobile U.S.A. This acquisition will strengthen our position in the prepaid market, giving us two great brands, more operational efficiency, and additional management talent. Dan Schulman is a proven winner with exceptional industry credentials and he adds to the strong list of experienced leaders who have joined Sprint as we endeavor to build a truly world class leadership team.

Slide 6 highlights some of the underlying trends and metrics for the quarter. Our postpaid ARPU continued to remain stable for the sixth consecutive quarter at $56. The data portion of our postpaid ARPU grew to more than $15.50, while the postpaid CDMA data ARPU now exceeds $18.50.

Second quarter postpaid churn dropped sequentially by 20 basis points to 2.05%. The growth we have experienced in smartphone and touch devices, the ongoing adoption of our everything plan, and the continued reduction in customer credits were tailwinds in the quarter.

During the quarter, our postpaid smartphone and touch devices had an ARPU of more than $80 and churn of less than 1.5%. Additionally, the improved prime mix of our postpaid customer base helped to offset economic pressure on corporate liable churn. In the second quarter, we achieved a new high of almost 85% for the prime mix of our postpaid subscribers, which is up from 82% in the second quarter of 2008 and 74% in the second quarter of 2007.

Moving to slide seven, our postpaid net add performance still needs much improvement but the sequential quarterly change in postpaid CDMA net adds was the best we have seen since the first quarter of 2007. Our combined CDMA and iDEN retail adds, postpaid and prepaid, were the best in two years. Our iDEN retail adds were the best in three years.

Our Boost Unlimited prepaid offer has been a big part of our recent retail subscriber momentum. Net adds for the second quarter exceeded the first quarter. Our total of almost 770,000 net adds represents the highest reported level of prepaid performance by any U.S. carrier in three years.

Going to slight eight, we continued to make progress improving the customer experience. We have seen a significant year-over-year increase in the use of sprint.com for a variety of self-service transactions, including the green friendly option of signing up for e-billing. Sprint.com provides the customer with convenience and helps to deflect calls from our call centers. Because of these efforts, and numerous others, we were able to reduce care calls per subscriber by 21% year over year.

For customers that called care in June, the portion of survey respondents that gave us the highest possible rating for their customer care experience increased by 33% from a year ago. Meanwhile, the portion of customers that gave us the lowest possible rating, those most susceptible to churning for service related reasons, reached a new all-time low, declining 46% year over year. Additionally, June first call resolution results improved by 19% year over year.

Due to the continued reduction in the number of calls to care, we have been able to discontinue the use of 12 call centers year-to-date and have eliminated a total of 19 vendor call centers during the last 12 months.

Multiple sources have provided feedback that we are making measurable progress on the customer experience and the brand. A quarterly independent survey of customer satisfaction, conducted by a national wireless monitoring service, showed that customer satisfaction with Sprint Nextel is at an all-time high. Another third-party survey of our customers during the quarter showed a year-over-year improvement in the percentage of customers that were satisfied or very satisfied in the categories of care, network, and with their rate plan.

Yet another independent customer satisfaction survey conducted by the University of Michigan found that Sprint has made the most improvement year-over-year in customer satisfaction among the top wireless carriers. We intend to continue to make more progress.

Moving to my final slide, number nine, the industry has been evolving with increasing importance being placed by customers on carrier device leadership. We have made significant progress recently. We have a very solid portfolio of smartphones, touch phones, and feature devices. On June 6th, we launched the Palm Pre, and on July 12th, we launched the BlackBerry Tour world phone in selected channels with broader distribution to come soon.

The Tour launch was important for Sprint because in addition to expanding our portfolio of world and BlackBerry devices, we made evident we intend to bring RIM devices to market as quickly as anyone.

During the second quarter, we also launched the MyFi mobile hotspot device. The slim MyFi device allows for up to five users to simultaneously use WiFi capability to access Sprint's 3G network. We are also leveraging the cradle point family of devices to offer similar 3G, 4G dual mode capabilities.

Mobile hotspots will expand access to and make more relevant the 3G and 4G capabilities of our Now Network. Four-hundred-and-twenty-five million WiFi devices in the United States are enabled to use either Sprint's 3G or 4G network capabilities. Because WiFi devices can access 4G with the mobile hotspot, this can help speed up the adoption of 4G.

We continue to be a leader in enabling a new breed of open devices and MV&O models, including powering the latest version of the Amazon Kindle. In fact, Sprint recently certified our 300th non-Sprint branded device for use on our now network.

We are providing distinctive capabilities and offerings for our business customers with a variety of converged wireline and wireless services. In recognition of Sprint's ability to deliver innovative solutions that enable converged communications solutions for business customers, Sprint, with our partners Cisco, IBM, and Microsoft, received the global telecom innovation award from global telecom’s business.

So overall, we were pleased with the second quarter results. Cash flow, ARPU, retail subscribers, customer service, and network performance were strong points. We were also pleased with the abundance of third-party recognition for the progress we have made and we hope that these will help the marketplace realize that Sprint is a very different company than we were a year ago.

Postpaid subscriber trends need to improve. We hope this third-party recognition will help to shorten the typical time lag for perception to catch up to reality. We are a different company which provides a very different customer experience than we did a year ago but brand perception catching up to this new reality is crucial to improving our post-paid subscriber trends.

Now I’ll turn it over to Sprint's cash czar, Bob Brust, who will talk about the financial aspects of the quarter. Bob.

Robert H. Brust

Thanks, Dan and good morning to everyone. Moving on to slide 11, we had another strong quarter of free cash flow, generating over $675 million in the second quarter, compared to $11 million in the second quarter of 2008, and almost $800 million in the first quarter of this year.

Our liquidity position continued to strengthen during the second quarter, even with the repayment of our $600 million Sprint Capital corporation senior note. This was our only significant maturity in 2009.

We increased our cash balance, ending the quarter with $4.6 billion in cash and $6.1 billion in total liquidity. Our liquidity position continues to be a primary focus in ensuring that we can meet our financial obligations.

With free cash flow generated in the second quarter, we now have more than enough cash on hand to pay our debt maturities through 2011. Looking out further, we need to generate $3.6 billion in cash, or an additional $700 million this year, plus approximately $700 million in each of the next four years to fund our debt obligations through 2013.

Incremental to this, we will make the necessary cash payments associated with the Virgin Mobile transaction, which I will discuss further in a few minutes. As we look ahead, we continue to expect to generate positive free cash flow for the remainder of 2009.

We’ve spent over $320 million in capital during the second quarter, compared to approximately $300 million in the first quarter of 2009, and approximately $650 million in the second quarter of 2008, which included $100 million of 4G expenditures. As demonstrated in recent quarters, we are diligently managing our capital spend, spending where we need to, mostly for network development projects, maintenance, and data capacity.

With the continued success we have seen with the Boost monthly unlimited offer, we monitor the iDEN network very closely to ensure we are sustaining the appropriate level of capital spend. Recognition like we received from PC World validates the strength of our CDMA network and our ongoing commitment to spend capital as needed to maintain the 3G network. We expect full-year capital expenditures in 2009 to be less than 2008 levels, excluding the 4G spending. We estimate our spend to be less than $2 billion in 2009.

Now on to the financial results for the second quarter on slide 12.

Consolidated adjusted OIBDA for the quarter was $1.769 billion, up sequentially from $1.723 billion in the first quarter and down from $2.096 billion in the year-ago period. The chart on slide 12 outlines the sequential change.

Consolidated operating revenues declined less than 1% sequentially, the smallest percentage decline since the second quarter of 2007. The success of Boost Unlimited, both from a net and an ARPU perspective, has played a critical role in improving this trend and resulted in a stabilization of wireless service revenue during the second quarter. Although our postpaid losses continue, ARPU for this base of customers remained at $56 for the sixth quarter in a row. During the quarter, we saw ARPU benefits from fixed rate bundled plans, such as simply everything.

On the cost side, we saw several areas of improvement during the second quarter with labor reductions driving the largest decline. The labor decline included the realization f the majority of savings from the internal workforce reduction announced in January, as well as the benefit from the discontinued use of 12 vended cost centers during the year.

The net postpaid subsidy expense also decreased sequentially in the second quarter, primarily due to a slight rate improvement from a higher mix of lower cost messaging devices.

We also saw a reduced IT costs as a result of closely managed project spend and hardware rationalization. The boost contribution to OIBDA improved sequentially during the second quarter as we benefited from a full quarter of new customers brought on in the first quarter, as well as the strong net additions in the second quarter.

Before concluding my remarks, I would like to speak briefly about the acquisition of Virgin Mobile we announced yesterday. As part of the deal, Virgin Mobile shareholders will receive shares of Sprint common stock based on an exchange ratio determined prior to closing, which will be subject to a collar. Virgin Group and SK Telecom will receive Sprint common shares for Virgin Mobile common and preferred stock.

In total, Virgin Mobile has approximately 85 million shares outstanding and Sprint expects to issue between 81.4 million and 104.7 million shares of common stock, excluding Sprint's 13.1% stake. We expect the equity portion of the transaction to be approximately $483 million.

Virgin Mobile’s long-term debt will be retired with cash at the close of the transaction, and the subordinated debt will be retired with cash or stock. As part of the transaction, synergies are expected from general and administrative reductions, operational efficiencies, and streamlined distribution.

For the full year 2008, Virgin Mobile had operating revenues of $1.3 billion and adjusted EBITDA excluding transition and restructuring costs of $115.2 million.

Overall, Sprint's financial position continued to strengthen in the second quarter as we generated significant free cash flow and paid off our 2009 long-term debt maturities. We also saw encouraging trends in the quarter in terms of revenue and remain steadily focused on improving the postpaid component going forward.

As we begin to look into 2010, we will continue to look at additional cost improvement opportunity.

I will now turn it over to Yijing for our question-and-answer session.

Yijing Brentano

Thank you, Bob. In just a minute, Celeste 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 webcast of our presentation on www.sprint.com.

We will now open the lines for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Hodulik with UBS.

John Hodulik - UBS

I guess the first question is for Bob -- Bob, could you talk about the margins going forward? It sounds like you guys did a lot of cost-cutting here in the first half and you are going to have some elevated expenses as a result of the subsidies of devices like the Pre and Tour going forward. Can we expect a similar level of savings going forward that we’ve seen recently?

And then as it relates to the iPhone, Verizon mentioned that they saw some stress in the market in the last two weeks of the quarter. Can you give us a sense of what the new device and the new price points may be having on your postpaid business? Thanks.

Robert H. Brust

As regard to the margin going forward, we did a lot of cost reduction work early in the year which included a large reduction in labor we announced in January. We saw most of that impact in the second quarter and we will continue to see that throughout the year.

As the success of the new devices continues, there will be some added pressure on subsidy cost but we are not going to make any forward-looking statements on our margin expectations. It’s our goal to keep them stable during the next several quarters though, as stable as we can.

The second part of the question was?

Daniel R. Hesse

Bob, I’ll take the second part -- John, your question was the launch of the new iPhone and the new pricing for the older version, if you will, late in the quarter?

John Hodulik - UBS

You got it.

Daniel R. Hesse

Well, the good news for us is the Palm Pre did very well, in terms of its launch and demand. And we are now in the process of beginning to give more supply to our indirect distribution. When I say indirect, Best Buy, Radioshack, et cetera.

At least from what we can tell, and I think you should talk to them, I think there’s more interest in the new device than there is in the $100 device. I think largely if a customer just takes a look at what they pay over a two-year period with AT&T, $100 is a drop in the bucket.

John Hodulik - UBS

Okay, thanks.

Operator

Your next question comes from the line of Phil Cusick with MacQuarrie Research Equities.

Phil Cusick - MacQuarrie Research Equities

Sort of following up on John’s comments, you continue the guidance of postpaid improvement, postpaid loss improvements in ’09 versus ’08 but we are at a pretty rough run-rate and we’d have to see a pretty dramatic improvement going forward and we typically see a weakening in the third quarter. Dan, I wonder if you could talk about what’s going on in the business and how you can have confidence that ’09 is still going to be better than ’08?

And second of all, Bob, I wonder if you could quantify a little bit for us the ability to cut costs in the Virgin deal. G&A seems like a pretty big target. Can you give us some idea there? Thanks.

Daniel R. Hesse

What we have said is for the full year in 2009, we expect that the post-paid losses will be less than they were in 2008 and you are right. There are some seasonal issues that we’ll be facing. That being said, with the Palm Pre and with other new devices that we’ve launched, like the Tour and more that we have planned for the second half of the year, we have confidence that we have some great things that customers are going to be looking for.

In addition, it takes a while but quarter after quarter, customers are recognizing the, if you will, the reality of the value of Sprint and the quality of our networks and our care and our performance compared to our competitors and again, with each passing quarter, not only does our customer experience improve but the market’s recognition of the fact that we have a superior customer experience that we are providing gains traction, so it does take some time.

So you’re right, and this -- that it will be a challenge. Don’t expect to see any great hockey sticks, if you will, but we intend to continue to make improvements and that’s why we feel that we can continue with the forecast that we provided with respect to postpaid subscribers.

Keith O. Cowan

To respond to your question on the synergies in the Virgin transaction, we do think the transaction makes financial sense to us because we paid a fair price and there are very material synergy opportunities. You mentioned G&A -- obviously eliminating the public company structure and the related legal financial accounting tax regulatory requirements in connection with that presents a very significant opportunity for synergies. In addition, we see some potential opportunity around care, potentially a little bit around IT and billing, and then we also think there are some scale advantages, particularly on the purchasing side, in handsets and other products that we can bring forward in the next year or so, so in total we expect the synergies will make a very material contribution to the overall financial attributes of the transaction.

Phil Cusick - MacQuarrie Research Equities

Keith, can you give some background on the deal? Did Sprint approach Virgin or did Virgin sort of decide to sell here and Sprint found an opportunistic price?

Keith O. Cowan

Phil, that will all be revealed in the proxy statement. Discussions have been going on and we obviously were the original partners in Virgin back in 2001 and intimately involved since the launch in 2002, so it’s been a close relationship. They have always been part of the Sprint family and this simply brings that relationship together and gives us mutual benefits.

Phil Cusick - MacQuarrie Research Equities

Great. Thanks, guys.

Operator

Your next question comes from the line of David Barden with Banc of America.

David Barden - Banc of America

Dan, obviously earlier in the year, you kind of really highlighted the Pre as the device that was going to help kind of change the perceptions of Sprint. I think there’s a lot of hope that as that kind of proliferates through the channel, it will have some positive churn ramifications into the third quarter. Could you, kind of like AT&T has done with the iPhone, could you help us understand a little bit about the parameters around the Pre device, upgrades versus retention versus new customer additions -- how has this actually impacted the business? If you could put some numbers around that, that would be helpful.

And then the second piece, if I could, just some real -- really the big upside surprise in EBITDA this quarter was really on the GMG side. You know, CapEx has fallen now to $44 million in the quarter. The margins are in the 25% range, which is probably among the highest in the market right now. Is that business on a trajectory to kind of wind down and just be an in-house kind of transit provider, or strategically there’s been a lot of speculation where that’s going. If you could kind of help us think how to think about that in a couple of years out, that would be helpful. Thanks.

Daniel R. Hesse

With respect to the Pre, we are not going to disclose specific numbers yet but what I have said so far is that the -- early on, we expect a relatively high percentage of the sales to be upgrades to our existing customers for a couple of reasons. Number one is early on, we -- from a distribution perspective, the best place to get a Pre was in Sprint stores and we have a higher percentage of the mix of existing Sprint customers that go to Sprint stores.

In addition, we have the largest base of Palm subscribers at Sprint and historical Palm subscribers have been kind of chomping at the bit to get their hands on the Pre, so they were kind of lined up so early on, you are going to get a lot of historical Palm users coming to the Pre.

So now that we are beginning to open up distribution or provide more handsets, more availability to our -- we’ll call them non-Sprint store locations, our partners, Best Buy, Radioshack, we’ll see what the mix of, if you will, upgrades and gross adds is there.

With respect to -- I’ll let Paget Alves answer your question with respect to wireline but I’ll just reiterate that it is a very important backbone, that IP backbone, not only for 2G and 3G but for 4G is a very, very important critical asset to this corporation.

Paget Leonard Alves

We did have very favorable OIBDA performance in the wireline business on both sequentially and year over year, and that was due to several settlements, improvements in bad debt, expense, a very effective expense management and the continued strength in high margin services like the IP services, which we focused on for several years.

We do -- would not expect that to be as consistent a trend over the next several quarters but we do believe very -- to reiterate what Dan said, this is a strategic platform for us. It’s very important to our cable, the work we do with the cable industry. It’s very important to the enablement for enterprises in particular. A great example would be the unified communications platforms that we’ve just won awards for with, were recognized with Cisco, Microsoft and IBM, as Dan mentioned earlier, by global telecom business. So those are examples of the strategic value it has as we see businesses move away from fixed line networks to unified communications linking their wireless and their wireline networks together.

David Barden - Banc of America

If I could, just a quick follow-up -- Bob, could you call out for us the one-time benefits that GMG might have gotten in the quarter from a settlement perspective?

Unidentified Participant

About $20 million.

Robert H. Brust

Yeah, it was about $20 million. We’re not going to call out the details.

David Barden - Banc of America

Okay, that’s great. Thank you very much, guys.

Operator

Your next question comes from the line of Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

Strong results again at Boost. Now that it’s been out in the market for several months, can you give us a little bit, a better sense of where the economics are coming in? We’ve got a real mix in the prepaid disclosure between the traditional prepaid and the unlimited. Your usage jumped significantly from 15 to 19 hours but can you help us understand more of what those Boost Unlimited customers are doing in terms of their average ARPU, their average churn, their average usage so that if we are -- if you were to disentangle what the blended number is, where we could see this going, what’s the opportunity for churn to continue to drop, for example, in that segment?

And then a quick question for Bob -- I think I just want to make sure you said CapEx will be less than $2 billion for the year and I think you’ve only spent just over 600 now, so what are the things that really drive a big ramp in second half versus first half this year? Thanks.

Danny Bowman

Just to talk about the Boost piece here, first of all we are continuing to be very pleased with the Boost Unlimited performance. The usage is actually in line as we expected. As you’ve seen, we’ve made sequential improvement in overall ARPU quarter over quarter and continue to expect that.

We’ve also seen an improvement in churn. As you’ve seen, we have had about a 30, 40 basis point improvement in churn. The profile of these subscribers, basically they do use probably 2%, 2.5% times what we would see in a typical iDEN postpaid customer, but as far as us managing the network, expecting that usage and that profile, really the customer satisfaction improvement, we continue to be pleased there and expect a positive contribution to the company on a going forward basis.

Robert H. Brust

Our CapEx now looks like it will be below $2 billion for the year and most of the spending will be in some work on the network side, and Steve Elfman is going to address that for a second.

Steven L. Elfman

There will be a slight ramp in the second half of the year because during the first half, you do a great deal of the planning and getting ready to do augments to capacity or the build-outs, and the actual spend in the equipment with the vendor starts to happen in the second half, so that’s why you will see a change in the second half.

Simon Flannery - Morgan Stanley

And that’s primarily on CDMA?

Steven L. Elfman

Primarily on CDMA but certainly we are augmenting in iDEN as Boost has been growing rather dramatically.

Simon Flannery - Morgan Stanley

Thank you.

Operator

Your next question comes from the line of Michael Rollins with Citigroup.

Michael Rollins - Citigroup

Good morning. I was wondering if you could dive a little bit more into churn. If you look at the activities that you’ve been doing over the last 12 months around replacement of handsets and selling in some new devices, upgrading customers to new rate plans and extending contracts, how are you seeing voluntary versus involuntary churn move within the postpaid base? And is there a lag effect, such that -- in all these activities to date, but then take another quarter or two and then you’ll see some incremental benefit to churn from the cumulative effect of all of this. Thanks.

Robert H. Johnson

We’ve got a number of things going on in both involuntary and voluntary which are giving us some traction. On the involuntary side, we’re seeing some very strong improvements, even though some entry rates to collections have increased, we’re actually seeing a better [cure] rate as time goes on, which is indicative of the economic situation of customers paying later but in fact they are relying on their service more so they are actually paying at a greater rate, so very good performance in the involuntary side.

On the voluntary side, you actually named some of the things that are giving us some traction in terms of our initiatives, like handset upgrades and bundled price plans. We do have some headwinds in terms of the economy on the voluntary side with businesses that are downsizing their organizations and giving us some partial deactivations on their accounts, primarily partial but not their entire account deactivation. But we are making a lot of progress on several fronts.

Dan talked about the perception that is improving across all elements of Sprint. He set the priority that all of our organizations have an obligation to own churn improvement and when you combine the effects of customer care improvements that he quoted some statistics on earlier, along with the network improvements, we’re at best ever and we are also having some great satisfaction increases in our company-owned stores and third-party channels. That’s kind of a good perfect storm of helping us improve our perception and interactions with customers.

So a lot of traction on several fronts on the voluntary side as well.

Michael Rollins - Citigroup

And just in terms of where that -- can you just give us a sense, is voluntary up or down from a year ago, involuntary up or down from a year ago? And I guess is there a timing that we should look for improvement in on a year-over-year comps as we move six, 12 months down the road?

Yijing Brentano

Mike, we don’t disclose the separate [twins] for voluntary and involuntary, so we won't be able to address that question.

Michael Rollins - Citigroup

Thank you very much.

Operator

Your next question comes from the line of Jason Armstrong with Goldman Sachs.

Jason Armstrong - Goldman Sachs

Maybe a couple of questions -- first on wireless, just getting back to the quarter, the wireless revenues, flat sequentially with a mix shift from postpaid to Boost. Obviously that’s been going on for a while, it continues. So if we sort of step back here, flat revenues, mix shift to Boost -- Dan, you know, I’ve heard you talk recently about being very favorable on the economics of Boost so far, especially on the iDEN platform, layer in a huge amount of sequential cost-cutting we saw behind force reduction, call centers, et cetera and yet wireless EBITDA still declined sequentially. So I’m just trying to understand how this kind of all fits together in terms of the commentary.

And then maybe secondly on wireline, just getting back to the question there, maybe strategically, number of players obviously as we went through the quarter speculated as trying to fit assets together here. I’m just wondering, to what extent are you open to taking on risks of being a consolidation partner in this business, if that’s important to you or should we interpret your earlier comments as sort of being content with the backbone as is? Thanks.

Daniel R. Hesse

First of all, I think the challenge for us, even though we have made progress in the areas that you’ve described, not only in cost cutting but we in fact have, if you will, revenues and margins from our Boost business helping to offset the decline in revenues on the postpaid side. The fact of the matter is there are a lot of scale and fixed costs in our business, so the challenge we have is improving our post-paid ad trajectory. That’s just going to continue to put pressure on the business until we turn that around, so we are mitigating on the bottom line and from a cash flow perspective, OIBDA perspective, we are mitigating the impacts of the loss of postpaid subscribers, but we are not totally offsetting them and that’s really the value that Boost, which you highlighted, brings to the table for us.

Actually, kind of related to that, kind of as a follow-up to Michael’s question earlier, which Bob answered, Bob Johnson -- or was it one of our Bob Johnsons, answered with respect to the churn, also the challenge we have in reducing churn is that we have to increase our -- the number of gross adds we have on postpaid. The largest contributor to churn performance is high gross adds, so any company that has a lot of high gross adds, you would expect them to see improving churn, even if their customer service isn’t improving because you have basically two kinds of customers -- customers on contract and customers off contract, so you have -- so also the challenge for us in terms of why we are going to push so hard to begin to improve our ad trajectory is to have more customers coming in and a higher percentage of customers on contract. That will have a big impact on churn.

So anyway, the overall issue, Jason, for us is to turn around that post-paid trend and we are very focused on it and we are doing a lot of things to, if you will, mitigate it, both on the economic side as well as all of the actions we are doing to improve customer service and what have you that Bob described but that is -- that’s still job one and what we are focused on.

The second issue is we feel good about where we are with respect to our backbone. We have a great set of assets that is generating positive cash flow for the company. It’s making a big difference in our performance with our business customers, the awards we are receiving, the capabilities we are providing in the marketplace. So we are -- I don’t know if content is the word to use because content is not part of our vocabulary here but we like our position in the wireline world.

Jason Armstrong - Goldman Sachs

And are there any particular capabilities that you feel like you are missing on the wireline side that would be natural extensions to the backbone that you don’t have right now?

Daniel R. Hesse

No, no significant ones.

Jason Armstrong - Goldman Sachs

Okay, thanks.

Operator

Your next question comes from the line of David Dixon with Friedman Billings Ramsey.

David Dixon - Friedman Billings Ramsey

Two questions, if I could -- I wondered if you could give us a little more detail on the intra-quarter trends in gross postpaid additions and churn, postpaid churn, particularly before and after the launch of the iPhone in mid-June. You know, our checks were [inaudible] that there was some progressive improvement through the quarter, so just your comments on that.

And then secondly, if I may, could you discuss the variety of options you have at your disposal here to help drive improved net postpaid momentum in the second half? I think some insight into when you expect this to occur would be helpful and perhaps just some thoughts on how you tracked in the second quarter relative to internal plan would be great. Thanks very much.

Daniel R. Hesse

David, I’ll try to remember those. The first in terms of intra-quarter, as we’ve seen each year, actually for three successive years, when there’s a new device launched, you will see -- like say the iPhone in particular, a real hero device, you will see a blip for a period of time in increased churn. But we think that just like a year ago, the instinct helped to mitigate the impact of that significantly. This year we had the Palm Pre, which mitigated that as well. So I don’t want to lead you to believe that there’s no impact at all from the iPhone. It is a successful device but I think we’ve mitigated the impact significantly with a strong device lineup, which kind of leads to number two. I think your question was about the second half of the year.

Continuing to roll out not only the continued success of the Palm Pre and the Tour, which I talked about earlier on the call but new devices, and other programs that we have in mind for the second half of the year, as well as just continued customer experience, customer care, network performance and the market recognition of that, which is just -- it’s something that happens over time -- we believe will begin to start to turn the postpaid performance around but again, gradually.

And you had a third question, I think.

David Dixon - Friedman Billings Ramsey

It was really -- you mentioned it just then, I think, in terms of your gradual expectation for this to occur. I’m trying to get a sense of the trajectory. I mean, one of the things that we hear from discussions with your handset vendors, your relationships there are perhaps the best they’ve ever been. That’s encouraging but just trying to get a sense of how you expect that to manifest itself in terms of the progressive improvement. You mentioned you hope that it improves -- suggests that perhaps you haven’t seen that as yet but just some insight on how we can kind of adjust our expectations over the next couple of quarters would be helpful.

Daniel R. Hesse

Well, we don’t provide that level of specificity with respect to our outlook but one thing to keep in mind as well is we are launching a number -- we’ve announced we -- we are going to announce a number of markets that will launch 4G at the end of the summer and a bunch more that will launch during 2009, and then of course we’ll be launching a lot more markets in 2010 and we believe that being the only player in the market with 4G, the distinct capabilities of that, I mentioned earlier the fact that it’s not just the new devices that are required to operate on 4G but with the mobile hotspot, any device that has WiFi built in, and there’s, as I mentioned, $425 million of them, can become mobile 4G devices immediately. We think that will have a significant up-tick on our postpaid performance.

So kind of keep that in mind as well. We think 4G will be a very significant differentiator for Sprint going forward.

David Dixon - Friedman Billings Ramsey

And that would be from a branding perspective, more of a focus on 4G advertising and marketing to tie that into obviously the great network that you’ve got on the 3G side, because obviously you’ve seen some aggressive pricing from Comcast out of the gate on that front.

Daniel R. Hesse

Yes, in those markets where 4G is launched, but actually even if you take a look at the tag line that you see on our ads that you’ve been seeing for quite some time is the “America’s Most Dependable 3G and first 4G from a national wireless carrier”. I think that will be an important element of our branding nationally but specifically in the markets that we are launching 4G in, you will see a stronger emphasis on the 4G element of Sprint's value proposition.

David Dixon - Friedman Billings Ramsey

Okay. Thanks very much.

Operator

Your next question comes from the line of Craig Moffett with Sanford C. Bernstein.

Craig Moffett - Sanford C. Bernstein

I wonder if you could comment a bit on the future of the iDEN network. You’ve been adding subscribers at a pretty rapid pace on the prepaid side on iDEN, and you introduced a $50 boost CDMA plan that we’ve positioned as a retention plan. Given your druthers, would you rather continue to grow the iDEN network, even if that means reinvesting in it? Or would you envision moving the Boost prepaid plan primarily to the CDMA network down the road?

Daniel R. Hesse

Greg, we think both network platforms have a lot to be said for them and we intend to make sure that we provide superior network performance on both networks and we will monitor them both very closely, but what you’ve highlighted is a -- call it an option that we have that we will continue to evaluate and Steve Elfman hit on it a little bit earlier, and that is we will continue to deploy capital on both the iDEN network and the CDMA network, and it really depends upon -- again, it’s a very local city by city, where the capacity is required, decision that we will continue to make going forward.

So we will monitor it very closely and -- but we will continue to provide great service on both, but what we hope is that we have kind of the problem that we really want to have, and that is that Boost Unlimited will be very successful on the iDEN network. We will continue to retain Boost customers on the CDMA network and do a better job of retaining our postpaid customers on the iDEN network, which again gives us the option to manage our network assets as effectively as we can and basically have both network assets be at capacity but make sure that we are providing great service and they are not, if you will, at over capacity.

Craig Moffett - Sanford C. Bernstein

And should we assume then that there’s no plan for the moment to use the $50 Boost CDMA plan as an acquisition plan, instead of as a retention plan?

Daniel R. Hesse

If there is a change in our plan or strategy, we will let you know.

Craig Moffett - Sanford C. Bernstein

Okay, thanks, Dan.

Operator

Your next question comes from the line of Timothy Horan with Oppenheimer.

Timothy Horan - Oppenheimer

Two questions -- one, Dan, you had about 250,000 or so improvement in net adds this quarter versus first quarter but that’s kind of what you’ve been doing the last couple of years, improvement in second quarter versus first quarter and you had been talking and have been clearly improving customer care, the network, handsets, but it doesn’t look like it is showing up in the net adds and gross adds. And I think your body language is kind of implying it’s not really showing up yet in the third quarter. Is there something that is structural here that is a little bit more than just marketing and these other issues? Is there other steps that you can take from -- you know, maybe just something that we are missing and maybe I am misinterpreting what’s going on but clearly you’ve done a great job. We’re just not seeing it in the numbers yet.

And then secondly, could you give us a little bit more color on the Virgin Mobile strategy, what customer segments you think you will go after and pricing -- are you going to make any changes to what they are doing? And I apologize if I missed the strategy on that acquisition prior to this. Thanks.

Daniel R. Hesse

The challenge that we’ve had is on the ad side is we have two networks and two customer bases. We have CDMA and iDEN. What you’ve seen, or what we have had for really three years almost constantly is a reduction in -- sequentially in gross adds and we’ve been working hard to begin to mitigate that and slow that decline in gross adds down. And we were making a significant amount of improvement in churn and the headwind that we’ve hit on churn has been primarily the economy and its impact on corporate libel or business customers and we’ve had a -- we have a much higher exposure, if you’d say, which generally is a good thing. Business customers if you look out over a long period of time, they churn less, they have better economics. But as Bob Johnson mentioned, we’ve had a fairly high impact of partial de-acts, and what a partial de-act is is you don’t lose the corporate account. Maybe they had -- let’s say they had 200 phones with you but they might reduce it by 50 or 100. You keep the remaining 100 but it’s a significant impact on your overall net add number.

So that has been -- that has, if you will, been a bit of a headwind in terms of having us turn this net add performance around.

So we’ve had, if you take a look at -- really, it’s a trendline that’s been with us for three years and we are -- we are mitigating the trendlines, we’re improving the trendlines but they haven’t gotten to the positive point yet and it’s really been the gross add decline that has been fairly significant over the last three years and we are working hard to turn that around. And as I mentioned in my comments, a big element of that has been the impact that the -- the hit the brand took back in 2006 and 2007 when we did have some service issues and we have improved that, and it just takes a while when that happens for perception to catch up to reality, so there are no quick fixes, if you will, to that. You will see gradual improvement. But as I mentioned earlier, we really -- we’re working on all fronts. There’s no silver bullets. It’s not only customer experience, it’s new handsets, it’s 4G. We’re hoping that we will begin to see that move up.

On Virgin, you know, they are still a separate public company and with respect to their plans, their strategies and what will happen post close, we will have to wait for that and I think also their earnings are coming up in early August, so you will have an opportunity to talk to Virgin then.

What I will say though is that we -- we see an opportunity here to use two brands very effectively. The Boost brand has been a traditionally strong brand in its segments and we have been enhancing and expanding its relevance and that’s why our gross adds have been moving up. New spokespeople like Danika Patrick and what have you that I think are helping increase or expand its relevance and its target audience and Virgin has been historically very strong in the youth market. So we think there’s an opportunity here where two brands are clearly better than one.

Timothy Horan - Oppenheimer

Very helpful. Thank you.

Operator

Your next question comes from the line of Christopher Larsen with Piper Jaffray.

Christopher Larsen - Piper Jaffray

Thanks for taking the question. Two questions, I guess, Dan -- the first on Virgin Mobile. The unlimited plans that they have seems to be about $10 above where you are on Boost. Is it your thought to keep that segmentation out there where you’ve got different prices for similar services because they are different brands? And maybe you could also talk about your thoughts on the broadband unlimited plan that they’ve got out there.

And then additionally on the presales, are -- there’s talk that the sales have slowed. Our indications in the stores are it seems like the sales force really needs to come up to curve on that. Are you beginning to do any training on that and can you talk about extending the exclusivity, or how long you might be able to be the only one with that Pre? Thanks.

Daniel R. Hesse

Let me take them one at a time. First of all with respect to Virgin, its market plans and what have you, for a variety of reasons we’re just going to have to defer on that and not comment on that yet. And so once the deal is -- or the transaction is closed, we will have the opportunity to talk more about what our strategy might be going forward.

With respect to pre-sales, I think one of the reasons that the launch has been as successful as it has been and what I referenced earlier in my comments, we really think is the most successful launch in our history is the fact that we did do quite a bit of training at the store level and even in the launch weekend and for a while after and actually it’s still the case. A number of employees of Palm are in our stores, as well as now beginning to go to our indirect stores to make sure that the sales reps are really well-trained, well-educated on the device.

As a matter of fact, a number of weeks ago, actually this was probably about three, four weeks ago, we had planned a senior leadership team to Oklahoma City, which was a call center that was the -- call it where the real Pre experts were, so if calls came into customer care with issues or questions about the Palm Pre, they were diverted to Oklahoma City where people were highly trained on the device. And we actually cancelled that trip and went to a Denver call center instead because the -- there just weren’t any significant issues. It had been going so smoothly there really wasn’t a, if you will, a post-mortem that really needed to be done on that device, it had gone so well. And I’ve been out in retail stores, I was in one last week. I was in a number of them the week before. I do that regularly and I’ve gotten from person after person at the retail level, as well as the call centers, just boy, how well we have done in terms of training and processes and what have you for this device to make sure that we give our customers a good experience.

We also mentioned now we are beginning to enter a new phase, which is the device will be widely available in non-Sprint stores and we are working very hard to make sure that the sales reps -- and I am sure they will, because they are great partners -- at places like Best Buy and Radioshack are up to the task as well. And we are very confident they will be.

Christopher Larsen - Piper Jaffray

And on the exclusivity?

Daniel R. Hesse

What we’ve said publicly is that we will have -- we are the exclusive provider of the device into 2010 and we have no more to say other than that, but thanks, Chris.

Christopher Larsen - Piper Jaffray

Thank you.

Operator

Your final question comes from the line of Walter Piecyk with Pali Research.

Walter Piecyk - Pali Research

Thanks. Just really two topics, Boost and then the balance sheet. It sounds like you are still going -- excuse me -- guns blazing on prepaid with Boost. You know, there’s been criticism when you first launched about whether you could generate a profit on this. I don’t know if there was a way you could -- I know you don’t break this out separately but characterize the profitability of the unlimited plan. And as far as the capacity you had on iDEN, is this -- are you taking existing 800-megahertz spectrum or is this adding sales [slice]? That’s the first question.

And then the second thing, just on the balance sheet, I mean, you are generating obviously a ton of free cash flow the first half of the year, your cash levels are well above the $4 billion that I think you targeted initially and I think even that number, you were doubling like a worst-case scenario. So maybe if you can talk about the uses of free cash flow or the excess cash on your balance sheet, what the plan is in the second half of the year for maybe bringing the cash levels down and targeting debt, or what other options you think you might have. Thanks.

Daniel R. Hesse

With respect to the profitability of Boost Unlimited, and as Bob indicated in his comments as well, it is making a nice contribution and will continue to make a nice -- even a greater contribution to our positive cash flow going forward. We did have spare capacity on the iDEN network, which we manage on a city-by-city basis and it was an opportunity to bring customers on, and the beauty of prepaid is that of course you don’t have bad debt concerns. You have a very low subscriber acquisition cost, or CPGA, not only because of what you pay retail, because it’s a relatively easy -- much easier sale because you don’t have to get a customer to agree to a two-year contract and what have you, so there’s less of a -- less compensation as well as a much lower phone subsidy.

And given the fact that we had spare capacity on the network, we hit profitability very quickly, positive cash flow very quickly on Boost Unlimited. And the profitability though is even greater if we are able to decrease churn levels on Boost Unlimited to be lower than historical prepaid churn levels. Some people that talk about well, prepaid is not that profitable. The big profit swings you will see on prepaid are churn and as we mentioned, we’ve seen improving churn on our Boost business. Because of the simplicity and value we believe, and the network quality of our Boost Unlimited offer, we are not saying that we could get churn levels on Boost to postpaid levels but we can get them clearly closer to postpaid levels than historically has been the case in prepaid, and then we can expect prepaid to be even more profitable and potentially profitable even as we add capacity to our networks and we will let you know when we make those decisions going forward. It’s kind of related to a question that we had earlier with respect to iDEN or CDMA and what we intend to do as our prepaid business grows, and our intention is we do expect our prepaid business to grow and we have a lot of confidence that our prepaid business, not only what we have today but of course with the acquisition of Virgin Mobile, will continue to be a very positive financial contributor to the business going forward.

And I’ll let Bob answer the second part of your question, Walter.

Robert H. Brust

Our goal has been to have around $4 billion of cash on the balance sheet through this difficult time we are in to handle our debt going forward. We are above that now by $600 million but beginning next year, we have a pretty rugged schedule of debt repayments and $2.4 billion next year, 1.7 the year after, and then 2.7 the year after that. So we just want to make sure we can comfortably handle those maturities. We also will spend some of the cash on paying back the Virgin debt at close, and we do have a small, previously disclosed pension obligation to deal with in September.

So other than that, we are going to continue to just prepare to deal with the debt as it comes on the balance sheet and delever. We looked at -- we cannot pull debt forward after the first maturity in 2011 because we of our covenants without issuing equity or raising new cash and -- so we right now are not looking at that option right at the current time. So we are just going to continue to --

Walter Piecyk - Pali Research

But when you say pull that forward, that would include buying the debt in the open market as well?

Robert H. Brust

Yes, after the first obligation in 2011, we’re restricted by the covenant. So --

Walter Piecyk - Pali Research

So is there a chance of renegotiating that covenant within the next six months?

Robert H. Brust

Well, our bank revolver does expire at the end of 2010 and we will be renewing that revolver in the next 18 months, so obviously we will look for the best covenant we can possibly get. So we may have an opportunity to change that but not at the current time.

Walter Piecyk - Pali Research

Great. Thank you.

Operator

Ladies and gentlemen, we have reached the allotted time for our question-and-answer session. Do you have any closing remarks?

Yijing Brentano

Thank you. Thanks for your participation today. If you have any additional questions, please contact Sprint's investor relations department at 1-800-259-3755, and this concludes our call. Thanks again.

Operator

This concludes today’s second quarter Sprint earnings 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: transcripts@seekingalpha.com. Thank you!

Source: Sprint Nextel Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts