Daniel R. Hesse – Chief Executive Officer
Joseph J. Euteneuer – Chief Financial Officer
Steve Elfman – President, Network Operations and Wholesale
Brad Hampton – Vice President of Investor Relations
Jonathan Chaplin - New Street Research
Brett Feldman – Deutsche Bank
Michael Rollins - Citigroup
John Hodulik - UBS
Jennifer Fritzsche – Wells Fargo
Philip Cusick – JPMorgan
Mike McCormack - Nomura Securities
Kevin Smithen – Macquarie
Sprint Nextel Corporation (S) Q2 2013 Earnings Conference Call July 30, 2013 8:00 AM ET
Good morning. My name is [Desandra] and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprint Second Quarter 2013 Earnings Release. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.
I would now like to turn the call over to Mr. Brad Hampton, Vice President of Investor Relations. You may begin your conference.
Thank you, Desandra. Good morning, and welcome to Sprint’s second quarter 2013 earnings call. On today's call, Dan Hesse will discuss operational performance in the quarter. Steve Elfman will provide an update on Network Vision and Joe Euteneuer will cover financial results. After that we will open the call up to your questions.
Before we get underway, let me remind you that our release, quarterly investor update and presentation slides that accompany this call are all available on the Investor Relations page of the Sprint's website. Slide two is our cautionary statement. I want to point out that in our remarks this morning we will be discussing forward-looking information, which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review, including our annual report on Form 10-K, and when filed our quarterly report on Form 10-Q for the second quarter of 2013.
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 in the attachment to our earnings release and also at the end of today's presentation which are available on our website at www.sprint.com/investors.
Let's move on to earnings per share on slide four. Basic and diluted net loss per common share for the second quarter were $0.53 compared to $0.21 in the first quarter and $0.46 in the year ago period. There were a few noteworthy items impacting EPS this quarter that I'd like to cover. The current period included accelerated depreciation of approximately $430 million or negative $0.14 per share on a pretax basis primarily due to the shutdown of the Nextel platform as the assets associated with the Nextel platform have now been fully depreciated. The loss per share also included a non-cash charge of approximately $623 million or negative $0.21 per share on a pre-tax basis, primarily related to lease exit charges and backhaul access contracts associated with the Nextel platform shut down on June 30th. More specifically, these charges were taken with regard to payments that extend beyond June 30th, 2013 for which the company will not receive any economic benefit.
Finally, there was $34 million or approximately negative $0.01 per share on a pretax basis related to costs associated with the transaction. Net tax expense was $55 million in the second quarter. We expect net tax expense for 2013 to be between $160 million and $200 million excluding any transaction related impact. As we look forward to our third quarter results, our financial statements will be impacted by purchase price accounting treatment of the Clearwire and Softbank transactions. However, subject to fair valuation of assets we will not have better visibility until late in the third quarter, so any forward guidance is based solely on our preliminary estimate at this time. We will also be providing financials for our predecessor period from July 1 to closing of the Softbank transaction on July 10, and a successive period from July 11 to the end of the third quarter.
Furthermore, we expect to switch to reporting EBITDA instead of OIBDA similar to industry peers and Softbank, but it will be defined on the same basis and will have no impact on comparisons to prior periods. Lastly, while we are not consolidating the results of Clearwire in this quarter, we have included Clearwire Communication LLC's second quarter 2013 financial results in our Form 8-K filing and they are also available on our website at sprint.com/investors. I will now turn the call over to Sprint's CEO, Dan Hesse.
Thank you, Brad and good morning. We appreciate everyone on the call joining us and for your ongoing interest and support. Since I joined Sprint about five and half years ago we have endeavored to fix the brands, take the customer experience from worst to first, improve our cost structure, shore up our balance sheet, and embark on an aggressive and comprehensive network rationalization and modernization project. In terms of the sheer volume of activity and the associated level of effort from our team, no quarter can compare to the second quarter of 2013.
In this quarter we completed and closed the acquisition of spectrum and customers from U.S. Cellular. We acquired Handmark and OneLouder. We negotiated, finalized and prepared to close two additional major and transformative transactions complete with the requisite government approvals, board deliberations and shareholder solicitation efforts. We received and responded to an unsolicited proposal for another transaction including a very robust and accelerated due diligence process, and we completed the customer migration, customer impact mitigation and shutdown of the Nextel network. So in this context, I am especially pleased to report another solid quarter of operational and financial results. Let me begin with a summary of this quarter's highlights.
Turning to slide 6 please. Driven by all-time record postpaid, Virgin and Boost ARPU, total Q2 operating revenues of almost $9 billion are up year-over-year for the 12th consecutive quarter. Our adjusted OIBDA performance of $1.42 billion is essentially flat year-over-year in spite of this being our peak dilution quarter for Network Vision expenses. We sold over 5 million smartphones in the quarter with smartphones representing 86% of our Sprint platform postpaid handset sales. We sold over 1.4 million iPhones with 41% of them going to new Sprint customers. We were again able to achieve a balanced smartphones sales mix between our two major OS platforms and we remain well ahead of our committed sales volumes to Apple.
We shut down the Nextel Network as planned on June 30th. Our profitability focused efforts to recapture Nextel subscribers delivered a recapture rate of 38% of the postpaid Nextel deactivations in the first half of the year and 44% since the recapture project began in early 2011. Finally, we made good progress on our network vision deployment. We now have over 20,000 sites on air and with today's announcement we’ve launched LTE service in a 151 cities. I will focus the remainder of my remarks around our three consistent priorities, generating cash, improving the customer experience and strengthening our brand.
Please turn to slide 7. We ended the second quarter with cash, cash equivalents and short-term investments of $6.4 billion. As I mentioned briefly, adjusted OIBDA of $1.42 billion is essentially flat with the year ago period as growth in the Sprint platform and Sprint platform postpaid ARPU rates largely offset increases in network expense and Nextel platform revenue loss. We continue to deliver revenue growth on the Sprint platform, with postpaid service revenue up over 5% year-over-year, prepaid service revenue up 20% and wholesale and other revenue up almost 6%. Q2 represents our highest ever level of Sprint platform service revenues at $7.2 billion and our 14th consecutive quarter of sequential growth. This marks our 11th consecutive quarter of year-over-year Sprint platform postpaid ARPU growth.
Turning to slide 8 and the customer experience. The 2013 American Customer Satisfaction Index results were announced in the second quarter and Sprint is the most improved U.S Company in customer satisfaction across all 47 American industries studied over the last five years. I’m also pleased to announce that once again we continued to set new performance records in our customer care operations. Credits to customer accounts for our postpaid base reached an all-time lowest level and are now down 87% from our highest levels in early 2008. Additionally, calls to care per postpaid customer have been reduced by half as we had our best second quarter ever.
We expect the improvements in our customer experience, along with the significant overall of our network that is underway, that this will provide the foundation for future churn improvement. As I indicated on the last couple of calls, we are experiencing temporary pressure on Sprint platform postpaid churn as we progress through Network Vision ‘pardon our dust’ service impacts and the conversion of our network infrastructure, the loss of Sprint platform customers when we lose an entire business account due to our Nextel platform shutdown and pressure in the enterprise account segment associated with our smaller LTE footprint relative to our larger competitors.
As Steve will cover shortly in his remarks, the market for our Network Vision deployment is more fully complete. We are seeing improved network performance and we are beginning to see improvement in churn in those markets. In Q2 Sprint platform postpaid churn, the rate of 1.83% is down 1 basis points sequentially and up year-over-year as the normal seasonal benefits from 1Q to 2Q were offset by the network and mixed accounts pressures that I mentioned. Because so many corporate accounts disconnected their Nextel service in the final days of June, the CDMA or Sprint platform disconnects will affect third quarter churn even more than in the second quarter. Our churn performance will continue to be pressured for a few more quarters until Network Vision is complete.
Turning to slide nine in the Sprint brand, with the shutdown of the Nextel Network complete, the company serves over 53 million customers on the Sprint platform. As I've mentioned on previous calls, we have been very focused over the last few quarters on recapturing the Nextel platform subscribers. Even with that focus and a heightened competitive environment, which included the launch of the iPhone by one of our national competitors, we were able to maintain relatively flat postpaid gross ad volumes sequentially. We believe that our new pricing plans, Unlimited My Way and My All-in are a simple and compelling value proposition.
It seems that on a most every recent earnings call or analyst meeting, I was asked the question, when will Sprint abandon unlimited data plans. Our research tells us that customers who want unlimited plans are hesitant to switch to Sprint because of the belief that we too will discontinue our unlimited plans. With the new unlimited guarantee, customers who choose one of our new rate plans can receive a guarantee of unlimited voice, text and data for the life of their service with Sprint. The new plans also makes it simpler for families to mix and match devices and plans and save more as their number of lines increase. Also, we found that competitors were comparing their unlimited talk and text plans to our $110 Plan versus our $80 Plan, and such comparisons are no longer accurate or appropriate.
We also expect to continue to compete well in the prepaid space as our prepaid gross adds in the second quarter were up over 6% compared to last year and we estimate that we gained about 90 basis points in prepaid gross adds market share sequentially. Another hallmark of the Sprint brand and an increasingly important brand quality for consumers is our commitment to social responsibility. We are still the number three greenest company in America in Newsweek's annual ranking, the only telecom company in the top 25. And in the second quarter we were also the only telecom provider in the top 25 of the Green Power Partners Fortune 500 list, by the Environmental Protection Agency. Plus we received the highest U.S. company ranking in the 2013 Environmental Tracking Carbon Rankings by the Environmental Investment Organization.
I am also pleased to report that keeping with our responsibility commitments as we physically decommission the iDEN network, Sprint will recycle nearly all the equipment that we can't reuse, resulting in a projected 100 million pounds of network gear and other materials that will be saved from landfills. Please turn to slide 10. As I mentioned at the start of the call, we finalized and have subsequently closed two transactions that are transformative for Sprint. We are very pleased with the addition of the Clearwire spectrum and team to our business. Additionally, the Softbank transaction brings us capital and expertise that can accelerate our turnaround. We believe with the combination of our existing network modernization efforts, the addition of the complementary Clearwire spectrum, and scale from the Softbank transaction, we can over time build a powerful network and a much stronger competitor.
So I will now turn the call over to Steve Elfman, who will provide you with more detail on our Network Vision progress as well as a brief update on integration efforts associated with our U.S. Cellular and Clearwire acquisitions.
Thanks, Dan. The second quarter was a milestone quarter for the Network Vision project. Please turn to slide 12. The biggest milestone was completing the shutdown of the Nextel network on June 30. Following this shutdown, we began powering down equipment and eliminating T1s at each of the over 20,000 cell sites, which we expect to be substantially complete within 90 days. Also over 4 million subscribers have migrated to the Sprint platform as Network Vision commenced in early 2011.
Please turn to slide 13. Momentum continued in the second quarter and expanding the Network Vision footprint we now have zoning complete on nearly 35,000 sites and leasing complete on close to 34,000. More than 30,000 sites are ready or have already begun construction. There are 600 cities under construction and we have now launched 4G LTE in 151 cities. Most importantly, we have maintained our solid pace of bringing sites on air since the first quarter and now have over 20,000 sites on air. Additionally, we're also pleased with the performance we are seeing in the Network Vision sites we have on air. We continue to see LTE speeds that are competitive in the range of 6 to 8 megabits per second for downlink and 2 to 3 megabits seconds for uplink. And in markets where we have the majority of the sites complete, we are seeing significant improvement in blocked and dropped calls. We expect this performance to continue to improve as we bring full site clusters on air and continue to tune the network.
As we said last quarter, we continue to expect to have LTE coverage for approximately 200 million pops by the end of 2013. Please turn to slide 14. Another significant milestone in the evolution of Network Vision is the closing of both the Midwest spectrum acquisition from U.S. Cellular and the acquisition of Clearwire. Both of these transactions should provide additional capacity to further improve the customer experience in our network. As we mentioned at the closing in May, the U.S. Cellular transaction brought us 20 megahertz of PCS spectrum in Chicago and its surrounding markets and 10 megahertz of PCS spectrum in the St. Louis market.
We've already begun to deploy capacity using the acquired spectrum and we'll continue to do so through the third quarter of next year. With regard to Clearwire, we've been actively engaged with them to build both network integration plan as well as the integration of all functions into Sprint. As it relates to expanding LTE on 2.5 gigahertz, Clearwire had roughly 2,000 TD/LTE sites commissioned at the time of closing and expect these and additional sites under construction to continue coming on air in the second half. The Sprint Network plan will be to add the 2.5 gigahertz radios to our network to increase capacity and performance for our customers. Also on July 19th, we launched our first tri-band LTE data device that included LTE on 800 megahertz, 1,900 megahertz and 2.5 gigahertz. And we expect to start seeing tri-band LTE smartphones later this year.
As I said in my opening, this truly was a milestone quarter in the Network Vision history with the completion of the Nextel platform shutdown, accelerated progress on the network upgrade and the addition of strategic 2.5 gigahertz and 1.9 gigahertz assets to make our network much better. We see continued momentum in the pace of Network Vision as we move into the third quarter and we are pleased with the service improvements we are seeing.
Now, I'd like to turn it over to Joe to go through the financials.
Joseph J. Euteneuer
Thank you, Steve and thanks everyone for being here today. Since our last earnings call, we achieved several milestones for Sprint, as we shut down the Nextel network and closed three transactions. With the heavy investments being made in our network this year, it was imperative that we continue to deliver solid financial results and I’m pleased to report that through our disciplined approach, we did just that in the second quarter.
Moving to slide 16, our Sprint platform postpaid business continued to show growth in both subscribers and revenues during the second quarter. Sprint platform postpaid net adds were 194,000 in the second quarter, including 364,000 recaptures from the postpaid Nextel platform. With the second quarter being our last opportunity to move Nextel subscribers to the Sprint platform, our focus was clearly on recapturing as many customers as possible. Even with this heightened focus on the Nextel recapture effort, Sprint platform postpaid gross adds were flat sequentially and only down 5% year-over-year in what turned out to be an extremely competitive quarter. Given the status of our Network Vision deployment and our transition to more of an external acquisition focus as Dan discussed, we expect the sequential increase in gross adds for the third quarter to be slightly less than last year.
As Steve mentioned, we successfully shutdown the Nextel platform on June 30th and we were able to recapture 34% of our Nextel postpaid subscribers in the second quarter. As expected, this rate fell from 46% in the first quarter, largely due to churning off customers with zero usage. Sprint platform postpaid churn of 1.83% in the second quarter was up 14 basis points year-over-year, but improved 1 basis point sequentially. While we typically see larger sequential declines in the second quarter due to normal seasonality, we faced several challenges this quarter. While we continue to see gradual improvements as network performance strengthens and LTE coverage reaches critical mass, we still expect elevated churn in the near term due to the issues Dan discussed, in addition, the seasonal headwind of the third quarter which will be working against us.
The U.S. Cellular transaction closed on May 17th and we acquired approximately 410,000 U.S. Cellular postpaid and prepaid customers. By the end of the second quarter, we had moved approximately 71,000 of these customers to the Sprint network and had about 212,000 still remaining on the U.S. Cellular network that we will be aggressively working to recapture in the coming months. More importantly, as Steve mentioned, this transaction’s primary value of acquiring additional spectrum for capacity in Chicago and St. Louis markets we will benefit millions of subscribers.
Moving to the rate component of revenue growth, record Sprint platform postpaid ARPU of $64.20 in the second quarter grew 1% sequentially and year-over-year, due to continued penetration of our $10 premium data charge. As 79% of the postpaid handset base are now on smartphones, changes in our insurance program pricing that were implemented in the first quarter and ongoing initiatives aimed reducing customer discounts and credits. With the launch of our new Unlimited, My Way and My All-in plans, we continue to expect ARPU on the Sprint platform to experience sequential and year-over-year growth throughout the remainder of 2013 excluding the expected impact of purchase accounting that I'll discuss later.
Let's move on to our Sprint platform prepaid business on slide 17. While we reported net prepaid customer losses of 486,000 in the second quarter, this was related to the onetime net subscriber loss of Assurance customers who did not recertify in accordance with the annual lifeline re-certification requirement implemented last year. As we have mentioned for the last couple of quarters, this impact was actually less than we expected as some customers sequentially recertified. Also, we continue to grow Assurance gross adds sequentially for three consecutive quarters. I also want to remind you that billing had been suspended on subscribers who did not recertify as of December 31. So this subscriber loss had no sequential impact on Sprint platform prepaid service revenues in the second quarter which were still up 20% year-over-year.
Our Virgin and Boost brands continue to perform well as both brands reported record ARPU. Sprint platform, Boost and Virgin Mobile both had positive net adds in a seasonally slow quarter for the prepaid industry, and Virgin Mobile gross adds were also up 70% year-over-year. Based on these trends we are seeing across each of our prepaid brands, we expect to return to prepaid subscriber growth next quarter. As expected, our wholesale and affiliate business had net customer losses of 228,000 in the second quarter primarily due to a targeted effort by our wholesale MVNOs to eliminate inactive accounts in their base and lifeline recertification. With these efforts substantially complete, we continue to expect to return to positive net adds in the back half of the year. Given the net subscriber losses in the second quarter were primarily driven by non-revenue generating accounts, we still grew wholesale affiliate and other revenue 6% year-over-year.
Let's move on to our wireless operating expenses on slide 18. Total wireless cost of service of $2.3 billion in the second quarter was up $121 million sequentially and flat to the second quarter of 2012. The sequential increase was impacted by seasonally higher roaming expenses and additional estimated Network Vision net dilution, which primarily impacts cost of service. While estimated Network Vision net dilution was also higher on a year-over-year basis, we were able to mitigate this with lower service and repair costs primarily related to lower transaction volumes and lower rent, and utility expenses on the Nextel Network primarily related to least-exit charges taken last year associated with the accelerated thinning project.
Moving to the subsidy expense. Total wireless net subsidy for the second quarter was approximately $1.5 billion which was flat both sequentially and year-over-year. As expected, we did see sequential growth in postpaid upgrades, which were up from 7% of the base in the first quarter to 8% in the second quarter. But this was offset by reductions in prepaid which included seasonally lower sales volumes and a higher mix of lower subsidy Assurance devices. We continue to expect a higher postpaid upgrade rate in the back half of the year as the impacts of the first customers who upgraded under the 3Q '11 implementation of our 20-month policy began upgrading their devices late in the second quarter.
Switching to SG&A expenses. Total second quarter wireless selling, general and administrative costs of $2.3 billion were up $28 million year-over-year and $64 million sequentially. The sequential increase was impacted by higher selling expenses primarily related to higher sales volumes and seasonally higher bad debt expenses associated with exiting tax season. From a year-over-year perspective, slightly higher media spend was partially offset by lower bad debt expenses as our bad debt percent of service revenue was our best 2Q result since 2009.
Please turn to slide 19. Wireline adjusted OIBDA for the second quarter of $129 million was flat sequentially and down $20 million from the year ago period, mostly driven by the annual resetting of our intercompany transfer rates to reflect current market prices and is neutral to consolidated adjusted OIBDA. Consolidated adjusted OIBDA of $1.42 billion was basically flat to the year ago period, even with our highest quarter of Network Vision net dilution. Total estimated Network Vision net dilution to adjusted OIBDA was approximately $250 million during the quarter, compared to approximately $145 million in the first quarter and approximately $175 million in the year ago period.
With the shutdown of the Nextel network, we now expect the net impacts to adjusted OIBDA to be more neutral in the second half as Nextel network cost savings related to rent, utilities and the elimination of T1s offset continues Sprint network spend on backhaul and labor as we aggressively work to expand our LTE footprint .
Moving to cash and liquidity on slide 20. We continued to make improvements to our liquidity in capital structure this quarter. We paid $480 million to close the U.S. Cellular transaction and retired $300 million of iPCS debt maturities, leaving us with no significant debt maturities between now and December of 2015 when including the Clearwire maturities. We ended the second quarter with a total liquidity position of $8.5 billion, including cash, cash equivalents and short-term investments of $6.4 billion and $2.1 billion of an undrawn borrowing capacity under our revolving bank credit facility. We also have $500 million of expected future liquidity from our secured equipment credit facility.
Subsequent to the end of the quarter, we also received $1.9 billion equity infusion from SoftBank at the closing of the transaction and paid $3.8 billion related to the Clearwire acquisition. Also with the closing of the SoftBank transaction, the $3.1 billion convertible bond was automatically converted for shares of Sprint, thereby reducing long-term debt by the same amount. We also acquired approximately $600 million of cash from Clearwire at the time of closing, which will be used to support Clearwire operations and interest costs and assumed approximately $4.3 billion of their debt. With the desire to accelerate network investments and position the business for future growth we will continue to appropriately manage our capital structure and ensure we have adequate liquidity to operate the business and fund these investments.
Capital expenditures were $1.9 billion in the second quarter, which included approximately $1.5 billion of Network Vision capital. While Network Vision capital continues at increased levels as expected, we anticipate total CapEx to continue at similar to slightly higher levels throughout 2013 and be close to $8 billion for the year. Rebanding expenditures, which are not included in capital expenditures, were $43 million for the second quarter. Free cash flow was negative $404 million for the quarter, compared to positive $209 million for the second quarter of 2012 and negative $493 million for the first quarter of 2013.
I'd now like to discuss guidance for the rest of 2013. Our strong OIBDA performance in the first half of the year would have given us the confidence to increase our previous 2013 consolidated adjusted OIBDA guidance from the high-end of $5.2 billion to $5.5 billion to a range of $5.5 billion to $5.7 billion. However, the recently closed Clearwire acquisition and resulting integration, along with the non-cash purchase accounting impacts of both the SoftBank and Clearwire transactions, are preliminarily estimated to have an approximate $400 million dilutive impact to our adjusted OIBDA results in the second half of this year, with the majority of this getting in the third quarter.
The preliminary purchase price effect to OIBDA cannot be completely determined at this time given that we are still in the process of obtaining evaluations of Sprint and Clearwire for accounting purposes. As you know, the effects of these items are non-cash but will have an impact on our income statement including, net operating revenue and OIBDA results. We currently estimate the net effect of the elimination of deferred revenue, deferred cost, and deferred rent to result in a reduction of second half 2013 OIBDA of approximately $250 million to $300 million.
We expect to reduce the deferred revenue balances associated with upfront cash payments received by us primarily related to activation fees and prepaid customers. The estimated deferred revenue adjustment is expected to result in a second half 2013 reduction in net operating revenue of approximately $175 million within an expected net reduction in OIBDA in the second half of 2013 of approximately $100 million, the majority of which is expected to impact the third quarter of 2013. We also anticipate the elimination of deferred rent liabilities which resulted from recognizing rent expense for tower leases on a straight line basis. As a result, we expect operating expenses primarily related to rent expense to be higher than our current run rate by approximately $150 million to $200 million during the second half of 2013.
And finally, the consolidation of Clearwire operation is currently estimated to result in $100 million to 150 million reduction in OIBDA in the second half. Therefore, while we won't know the final impact of the purchase accounting and integration cost until late into the third quarter, we currently estimate consolidated adjusted OIBDA for 2013 to be approximately $5.1 billion to $5.3 billion. Regarding subscribers, we expect the prepaid segment to return to growth in the third quarter as the organic trends are unencumbered by the one-time event seen in the second quarter. In postpaid, we expect sequential pressure on churn as the continued impact of mixed accounts and network are compounded by seasonal trends. In spite of increasing competitive dynamics in the industry, we expect postpaid gross adds to experience a slightly lower sequential increase than last year.
Finally, much like the first quarter, there was increased potential for distraction but our workforce continued to focus on execution and I want to thank them for their dedication. Now, I'll turn the call over to Brad for Q&A.
Thank you, Joe, and just a minute as Desandra will instruct our listeners on how to queue up for the question-and-answer session. I want to point out that you may access an audio replay or a webcast of our presentation on www.sprint.com/investors. We will now open the line for your questions. Operator, please instruct our participants.
(Operator Instructions) Your first question comes from the line of Jonathan Chaplin of New Street Research
Jonathan Chaplin - New Street Research
A quick question for Steve. I am wondering if you could give us some detail on how quickly you think you can deploy the 2.5 gigahertz spectrum on your network and how pervasively over the next year or two you expect to deploy that? And then you mentioned that you'd have 2.5 capable handsets in the back half of this year. How quickly do you think the device ecosystem around 2.5 for you is going to mature? So that by the end of the year, how much of your portfolio do you think will be 2.5 capable and how does that sort of progress in the first part of 2014? Thank you.
Hey, Jonathan. Let me start at the back first because I now remember that question. We'll have a few handsets in the fourth quarter that are 2.5 capable and that of course will be a low percentage of our overall portfolio. But beginning in '14, all of our devices that we get will be 2.5 capable. So as we sell more, it will be a higher percentage of our portfolio. In terms of the build out of 2.5, we have already begun the zoning, the leasing, on quite a number of our sites. We will get more specific as time goes on, as we are just now working with our vendors on the final contracts for 2.5. But we'll have several thousand sites up this year because of the work that Clearwire was doing before us. Next year we'll get across the nation. It will not be fully built up, but it will be quite a bit easier than the current Network Vision plan because we will already have backhaul. We will already have done most of the leasing and it will be more of an overlay effect the way you’re seeing our competitors do overlay LTE network. So it will move much faster than the current Network Vision plan.
Jonathan Chaplin – New Street Research
And so when it's fully deployed, Steve, what percentage of your 38,000 sites will it ultimately be on?
I would expect it to be on close to 100% of those. The reason I say that, Jonathan is actually it requires more density for 2.5. So overall when it's fully deployed it will be more than the 38,000 sites that we'll be on once it's done. So it will be on the ones that we've got now and the ones that Clearwire has and then likely additional ones. We'll get more specific as time goes on.
Your next question comes from the line of Brett Feldman of Deutsche Bank.
Brett Feldman – Deutsche Bank
Just a one quick follow up. You mentioned all of the devices that you'll be -- in your lineup that you’ll be getting next year will include 2.5. Can you confirm that that includes the iPhone? And then the second question is, you've talked about how you’re going to see some pressure in the near term on your postpaid trend as you work through the final phases of Network Vision. At what point do you have to be from a network standpoint to really feel like you’re positioned to drive a sustained turnaround in the postpaid customer trends? And maybe just qualitatively speaking, like what behavior do we think -- should we expect from you? For example is that going to be a point when you would launch new products or change your marketing or your pricing or anything else just to help us understand what the roadmap is to getting back to growth?
I'll start with the first question. We can't confirm anything on the iPhone at this time or anytime. So take my comments to all the other devices this point in time and we’ll wait to see what Apple does in the future. So that's one. The other, in terms of our network, as we get towards the end of this year and have the approximately 200 million pops covered, I think is one way where I would say we’re reaching critical mass in most of the key markets that we really think our marketing team will be able to market the network as having the density required to compete effectively and to be able to remove from Dan’s future scripts the ‘pardon my dust’ quotes. So we're looking really towards the end of the year. The good news is that actually everyday keeps getting better in many of the cities. And we've got several uprights now that we have seen churn go down. We've seen performance go up and it just gets better every quarter. And our job is just to keep going faster and faster. At least I hear that every morning.
This is Dan. I can't get into competitive specifics at this time with respect to what we would do. But I think what Steve is describing is that some time in 2014, let's say the end of this year, early 2014 we’re getting critical mass close to competitive parity during 2014. And the important thing in terms of what we believe will be a better, a superior network experience will depend upon how quickly we roll out the 2.5, because that will give us extraordinary capacity and some speed and performance advantages in the market. That will come later. But generally what you would see from us is once we are beyond what I referred to and Steve has referred tom the ‘pardon our dust’ we would feel very good about our improved network performance. You’ll be able to see more networking messaging from Sprint, making sure that the customers are aware of the very significant improvements we've made in our network. And then just I guess you’ll have to wait and see what we do then. Thanks for the question.
Your next question comes from the line of Michael Rollins of Citi.
Michael Rollins - Citigroup
A couple of questions. First, on the iDEN cost. Joe, is there just a way to think about, now that the network is shut down, what the sequential drop off in cost of service or total expense might look like just from the iDEN part. And then just more of a broad question. Can you describe the unlimited experience for your customers in terms of may be how much usage they are consuming on a monthly basis versus non-unlimited customers whether it's for Sprint or in the industry. And may be give us a sense of whether those customers are more sticky on your unlimited service, again versus what you might see for non-unlimited or what the standard is in the industry? Thanks.
I will take second one. Michael, this is Dan. We actually are not seeing a difference, and we'll call it a selection, adverse selection or what have you in usage between ourselves and our major competitors between an unlimited customer and a customer that is not unlimited with respect to our competitors that don't offer unlimited. So users kind of use the service as they do. Where we are seeing an increase in usage though, I think what drives usage has less to do with whether the person is on an unlimited plan or not and with versus whether they are on LTE or not. What we are finding is, LTE is really what drives usage much more so than the right plan. Which is why rolling out Network Vision is crucial to us in terms of our network performance as well as what we're able to do with the Clearwire spectrum at 2.5. I think the first question was for you, Joe.
Yes. The first question related to iDEN. As I said, we had about $250 million of dilution this quarter and we expect it to be neutral in the next quarter.
Michael Rollins - Citigroup
And then, Dan, just back on the unlimited customers. Are they stickier churn wise than what you see for non-unlimited or what you see in the industry?
All other things being equal, like network performance and what have you, we do believe that it provides us with churn benefits. So all other things being held steady or constant, the worry free nature. What we see is when we looked at high levels of churn what drove an awful lot of churn and drove a lot of calls to care and customer dissatisfaction, were over just on bills. So, we do believe it definitely has a customer satisfaction benefit. It has a reduced cost of serving the customer benefit. There is a simplicity at the front end in terms of the sales process benefit and there is a churn benefit. And that's what -- when we do the math, why we believe unlimited clearly makes sense for us for the long term and why we have committed it for the long term.
Your next question comes from the line of John Hodulik of UBS.
John Hodulik - UBS
May be just some clarifications on some of the subscriber and margin commentary, I guess for Joe. You said that the sequential improvement in gross adds would be somewhat less in the second half and you see some pressure on churn. Does that mean, when we look at the CDMA numbers, we net out the ones you guys won from Nextel and the recapture from U.S. cellular, so we are looking at about a loss of 236. Are those the kind of numbers we should expect going forward in the second half until you guys are able to ramp up the marketing machine with the new network? And then, Joe, on your commentary on the margins being neutral, does that mean we should expect sort of a 17.6% margin level that we saw in the second quarter through the rest of the year. So, are you talking towards it sequentially in the second half from margin level? Thanks.
Yeah, on your first one on the subscribers, we were basically commenting on the year-over-year, the second quarter to third quarter gross add movement last year in comparison to this year. As a result of having LTE continued to be built out so we were thinking that, that growth rate is going to be roughly about half. And in regards to margins, I think we got to remember that when you look at it on a quarterly basis you do have a lower margin in the fourth quarter just as a result of all of the gross adds you're going to put on. But overall you will see on an annual basis margins continue to grow as we improve our profitability.
John Hodulik – UBS
One follow up. You guys pointed to postpaid service revenue growth. Given the subscriber trends, you’re not going to able to recapture those Nextel ones any more. Do you think you can continue this growth rate in postpaid service revenues throughout the Network Vision process before you guys again start to be viewed to be more aggressive in terms of trying to gain new subs?
Yeah. Growth in revenue going forward we continue to expect -- obviously we're going to get the benefit of the continued penetration of smartphones that gives us the $10 add on charge. So that will be there for us. And as we get -- what we can see in the markets where we have LTE deployed to date, we see better churn and we see better gross adds. And as Steve talks about as you start exiting the year, you’re just going to have a bigger base to market off of. And as Dan mentioned, I think starting in 2014, you have more critical mass to actually go attack the marketplace.
Your next question comes from the line of Jennifer Fritzsche of Wells Fargo. Jennifer, your line is open.
Jennifer Fritzsche – Wells Fargo
I just wanted to ask a little bit about the 800 megahertz spectrum you’re freeing up in the [sub]. If you would use this to expand LTE and deepen your coverage there, also beyond expand coverage in LTE beyond your 3G footprint with the thought of reducing some wholesaling costs.
Jennifer, I’m actually sorry. I had trouble really hearing you. I know the 800 we've -- I'll try and tell you what we're doing with 800 and see how close that comes to the mark. So we've started to use it basically in our voice and 3G network and adding capacity in multiple cities. Basically we’ll be starting in the late third quarter to be introducing LTE on 800 and we'll be building 800 LTE throughout next year with that. And also as we expand footprint over time, we'll be using more of the 800 spectrum for better in-building coverage. I'm not sure how close that came to the question, so maybe you can ask from that.
Jennifer Fritzsche – Wells Fargo
Great, you answered most of it, Steve. I just wondered if you would extend it into areas where you’re using wholesalers now. That was the main question.
Okay. You mean -- I get it, where we’re doing roaming right now. So most of our roaming outside of our own footprint of courses with one major carrier and wherever I get an opportunity to do that, I shall. But with the rural carriers we are doing -- we are going to continue doing roaming with small rural partners.
Your next question comes from the line of Phil Cusick of JPMorgan.
Philip Cusick – JPMorgan
So Joe, this may be a little desperate but number one, can you help us think about 2014 EBITDA versus the numbers that are in the proxy? Just outline again for people what the different scenarios mean and how you think about it at this point. And then second of all, do you anticipate needing more cash in 2014? And what do you think about -- what should we be thinking about in terms of refinancing over the next six months? Thanks.
Yeah, sure. So think about it this way. The information in the proxy, all of that information was put together come to a culmination of a transaction which included the time when DISH got involved in the whole thing. As you look at the information in the proxy, the one takeaway you should walk away with is the fact that we are big believers in the growth of OIBDA over time. The specifics of what 2014 will actually be and be forecasted out will come later this year once we finish the plans with SoftBank and get closer to yearend just like we do every year with you. I think we have been fairly transparent in regards to the capital builds Steve has talked about, what he wants to do with 2.5, et cetera. So I think we're pretty consistent on where capital wants to go. But I think directionally as far as the growth of OIBDA, the improvements in margin over the next couple of years are clearly there. The specifics associated with 2014 we will give you in the not too distant future.
This is Dan. Just for people on the call, I think it's important, the proxy was a scenario planning model used to evaluate alternative transactions, it's not a budget. And as Joe is indicating, the new board of directors of the new company hasn't met and convened and approved a budget for the company moving forward. So, that obviously will happen once the new board gets together.
Philip Cusick – JPMorgan
And in terms of refinancing and cash need? Thanks, again.
Yeah, sure. I think in that regard I think it's really, when you look at our overall performance we've now increased our guidance on OIBDA at least on this core Sprint business, two consecutive quarters in a row. That continued improvement with OIBDA and the timing of capital will be the ultimate decider of when and if we need additional cash in the business. So not saying that we don't, but I think it's more of a timing issue than anything.
Your next question comes from the line of Mike McCormack of Nomura Securities.
Mike McCormack - Nomura Securities
Maybe just a little more discussion around the gross adds in the back half, I think there is no other questions here so. I think folks were expecting maybe a better result, I know you guys are ramping up the marketing machine. I guess, just some commentary, if you would, on whether or not the competitive landscape is changing dramatically and that's having an impact on your expectations? And then thinking, Joe, maybe that subs versus EBITDA balance you've had historically, so how do we reach that balance, if you will? And then just lastly on enterprise exposure on the Sprint platform, can you give us some sort of idea what the sizing is? Thanks.
This is Dan. With respect to the first half, it's not so much that the competitive landscape has changed. I think from a pricing perspective, if you will. But we are, we do find ourselves behind, if you will, our major competitors from a footprint perspective, in terms of LTE, and in terms of our Network Vision project. So that is, if you will, that has an impact on both gross adds as well as churn, so net adds from a postpaid perspective in the second half of the year until we get there. We're also, of course, extremely disciplined in terms of focusing on OIBDA. So for example, in our view, at least our best analysis shows that we spent the least on, if you will, on media and advertising in this past quarter of the big four. I'm not saying what we will do going forward but we're very focused on earnings and profitable growth. And so those are two issues that you need to consider in terms of the background on some of the things we have said with respect to postpaid subscribers in the second half.
Mike McCormack - Nomura Securities
Dan, I am sorry, just a follow-up there. It seems like AT&T is getting a little more willing to give you margin to get subs. Do you not see that as a pretty significant change?
I think that's your -- I'll let you reach your conclusions with respect to what you think AT&T is doing. There is no question. I mean there is no question it's a competitive environment out there, and I'll leave it at that. But it's been competitive really for some time. And the bigger issues for us have to do with, we simplify our rate card. I think it's very important to understand that in terms of the changes we've made in our recent pricing, that it is ARPU neutral. It was not a price down, it was really more a simplification with respect to our customers, which is why we were able to guide to stronger ARPU going forward. So it is clearly not -- and it's OIBDA accretive. So it is the opposite of what I call giving up margin in interest of going after subs. And I can't predict what our competitors are going to do in the third and fourth quarters and how they will balance profitability versus subscriber growth.
Mike McCormack - Nomura Securities
Understood. And just on that comment on enterprise exposure. Do you have any sense on what the sizing is there for the Sprint platform?
We'd say, yeah, we do have very good feeling, not that we're going to disclose it, but in terms of enterprise exposure, talking about mixed accounts. It's not an insignificant area issue and it's why we focused so much on Nextel recaptures over the last roughly year and a half or so. It's not just recapturing the Nextel customers, but it's the same companies that -- most have a lot of CDMA or Sprint customers as well. And so winning these accounts has been our focus. And because as we roll right at the end of the quarter, by definition the Nextel service was being turned off at the end of -- if you will at the end of June.
A lot of the customers that were hanging on till the very end were those who really quite frankly love their Nextel service and were not particularly pleased when we had to turn the network down, even though we worked with them very closely. And the CDMA customers, they typically -- a lot of these companies put their entire business out for RFPs and some of those -- a lot of them we won, but some of them we lost and those will trickle out in Q3 and Q4, particularly Q3 being the largest quarter for if you will those mixed account losses because they come right after if you will the (inaudible) losses.
So the Nextel network if you will is the gift that keeps on giving. We’re almost done. We’ve shut the network down, but we still do have a couple of issues that will -- in terms of this mix account effect that will impact the second half of the year. But it's largely behind us and as Joe indicated, we'll begin to see the savings accrue immediately in Q3, which will improve our OIBDA dilution performance if you will significantly and noticeably in the second half of the year.
Operator, we have time for one final question please.
Your final question comes from the line of Kevin Smithen of Macquarie.
Kevin Smithen – Macquarie
Joe, with the additional $400 million in cost, it looks like your leverage will creep up to around 4.5 times at the midpoint of the new guidance. You mentioned you were taking steps to provide for sufficient liquidity. Can you elaborate on that? And can you raise more debt refinance or will there have to be an equity or convertible component?
No. Our capacity to go out and raise unsecured debt is still very robust. I think our debt trades very well. So yeah, I wouldn't think that we would have any problem at all, especially knowing that we just got upgraded by two of the rating agencies. So I think people are pretty confident on our ability to deliver on the results. And we believe, forget everybody else, we as a management team here, are very confident in the growth of OIBDA and margins on a going forward basis, which just then reduces the leverage and gives you more capacity on a going forward basis as far as taking on debt.
Kevin Smithen – Macquarie
How high would you take on -- what target leverage ratio would you do if you were to make additional investments or accelerate the network or buy additional spectrum?
You remember Kevin that our ultimate goal as we continue to improve the business is to start delevering the company in the next couple of years. So I think it's that ability to grow our OIBDA and get behind this capital program that will start generating the free cash flow that allow us to take on any debt necessary and not bring it out to any extreme levels. Obviously investment grade is a goal that we have some time out in the future.
Thanks everyone for your participation today. If you have any additional questions, please contact Sprint's Investor Relations team. This concludes our call.
Thank you. This concludes today's conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!