Sprint Nextel Corp. Q4 2009 Earnings Call Transcript

 |  About: Sprint Corporation (S)
by: SA Transcripts


At this time I would like to welcome everyone to the Sprint fourth quarter earnings conference call. (Operator Instructions) I would now like to turn today's call over to Yijing Brentano.

Yijing Brentano

Good morning and welcome to Sprint Nextel’s fourth quarter earnings call. Thanks for joining us this morning. For the format of the call, Daniel Hesse, our CEO, will discuss operational performance in the quarter, and then our CFO, Robert Brust, 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 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 Form 10-Q for the third quarter of 2009 and when filed, our Form 10-K for 2009.

Turning to slide three, throughout our call we will refer to several non-GAAP metrics. Reconciliation of our non-GAAP performance and liquidity measures to the appropriate GAAP measures for the fourth 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.

Next, I would like to quickly cover our EPS results. Basic and diluted loss per common share for the fourth quarter was $0.34 compared to $0.17 in the third quarter of 2009 and $0.57 in the year-ago period. Approximately $0.11 of the fourth quarter loss per share was due to a noncash charge to increase the valuation allowance on deferred taxes. In 2009, basic and diluted loss per common share was $0.84 compared to $0.98 in 2008.

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

Daniel Hesse

Thanks Yijing, thank you for joining us this morning. I think some of you may be joining us from your homes, enjoying this winter. Going to slide number five, we’ve been making progress each quarter and the most recent quarter is no exception. I talk about the same three priorities on each of our calls; the customer experience, the brand and cash and I will keep this string going on this call.

I’ll try to shake it up today by going in reverse order, starting with cash, with $666 million of free cash flow in the fourth quarter, Sprint generated $2.8 billion in free cash flow in 2009, the highest level ever for Sprint Nextel allowing us to acquire Virgin Mobile, iPCS, and invest approximately $1.1 billion in Clearwire in the fourth quarter and still end the year with almost $4 billion in cash, cash equivalents, and short-term investment.

Robert will talk more about earnings and cash in his remarks. If you go to slide six, regarding the brand, we continue to make progress perhaps best evidenced by our improving subscriber performance. We lost a total of 69,000 retail subscribers in the quarter and fewer than one million for the entire year, an improvement of over four million year over year.

Although post-paid subscribers declined by 504,000, the fourth quarter represents both the best sequential and the best year over year improvements in company history. Sprint’s 600,000 or 54% year over year improvement post-paid results we would have achieved without any acquisitions lies in sharp contrast to the rest of the industry.

Our Sprint branded services which run on the CDMA network were net add positive in the fourth quarter and showed the best sequential improvement in almost three years. We showed a lot of progress in the second half. The improvement in net adds in the second half both year over year and compared to the first half of the year were both best ever results.

The brand improvement is being demonstrated further through gross adds. Second half gross add performance year over year and versus the first half were both the best in five years. Our estimate of fourth quarter share of gross adds or SOGA, shows an improvement year over year of 350 basis points.

Our fourth quarter cost per gross add was also the lowest in over three years. We also maintained a high percentage of prime customers on post-paid, over 84%. Churn of 2.11% was a slight improvement both sequentially and year over year. But we still need to do better with churn. Going to slide seven, fourth quarter prepaid net adds were 435,000.

For 2009 Boost generated over 2.5 million net adds and we grew Boost revenue by 35%. Although we took actions to minimize churn during the fourth quarter the success experienced by Boost unlimited during the first three quarters of 2009 became increasingly difficult to replicate. Prepaid competition expanded and intensified as our competitors used more aggressive pricing tactics.

We expect this highly competitive environment will continue. Our prepaid team is taking actions to overcome these recent challenges and expects to regain momentum during the second quarter. We expect to make meaningful progress in our prepaid net add results as we enter the second half of 2010.

Prepaid should continue to be a source of subscriber and financial growth for the company. We are beginning to implement a robust multi-brand strategy to appeal to multiple segments of the prepaid market with our Boost, Virgin Mobile, and Assurance brands. Each of these brands along with others will target a specific segment of the market with a unique value proposition.

If you go to slide eight, large contributions to Sprint’s momentum come from improvements in our top priority area; the customer experience. Customer satisfaction with care and first call resolution as measured both by a Sprint sponsored external survey and by a very reputable independent survey have now improved for eight consecutive quarters.

Both metrics also hit all time highs. Because of the improvements we made JDPower asked me to keynote their annual customer experience roundtable in New York three weeks ago. In JDPower’s most recent survey not only was Sprint’s improvement by far the most significant Sprint alone accounted for half of the improvement showed by entire industry.

As we look back on 2009 the University of Michigan customer satisfaction study showed Sprint made not only the most improvement among wireless carriers, but the most improvement of any company in the survey from all industries. In a recently released well-respected independent survey, Sprint was the only company that improved customer satisfaction in every category.

From fourth place at the end of 2008 Sprint moved to number two in satisfaction with price value. Also from fourth place in 2008 Sprint moved to number two in network satisfaction. In consumer reports Sprint moved past AT&T and based upon our analysis of the specific market data, Sprint improved or stayed the same in 80% of the markets. The next best competitor was at 24%.

These improvements in care satisfaction have all been accomplished in an environment where we reduced care credits by 47% and reduced calls per sub 12% year over year and by 39% from 2007 peek levels. We closed three more call centers in the fourth quarter bringing the total to 19 centers in 2009 and 30 centers closed in two years.

Network performance like care is important to the customer experience. Our networks are performing at their best levels ever with PC World recognizing our reliability. Our customers enjoy more than twice the 3G coverage AT&T customers do. Our business customers in particular have noticed the improvements.

Sprint ranked number one among large business users, those are users with 500 or more employees, in both voice and data satisfaction in the recent Yankee Group and Mobile Enterprise magazine survey. We hope that the quality improvements we’ve made to our networks will bring a new breed of wholesale device to the network, like the new Skiff reader which generated so much excitement at the Consumer Electronics Show.

We will also work to make sure our selection of retail devices is second to none. Sprint continued to grow the breadth of our device offerings in the fourth quarter including the first CDMA Android devices in the United States; the HTC Hero, and the Samsung Moment. We also launched the Palm Pixi, Samsung Intrepid, Motorola Debut, and the new Blackberry Curve 8530.

In 2010 we have already launched the LG Lotus Elite, Motorola Brute i680 and we announced the Rumor Touch with many more devices to come. A robust portfolio of devices is important as 49% of our fourth quarter CDMA post-paid handset sales and upgrades were either Smart Phones or handsets with touch screens.

We are encouraged by the January launch of the Sierra Wireless Overdrive 3G/4G mobile hot spot, the first device of its kind. The Overdrive can turn over 400 million WiFi enabled devices today in the Sprint 4G devices including the iPod Touch, the iPhone and it iPad. The Overdrive won best of CES recognition, that’s Consumer Electronics Show, from both PC World and Crunch Gear.

The Overdrive combined with our growing 4G coverage provides our customers with mobile connectivity that is up to 10 times faster than 3G. However 4G is not just about speed, its also about great value. You get a larger data bucket for the same price as with 3G. For customers that prefer a traditional air card, we offer the only dual mode 3G/4G connection card the U301, which won PC Magazine’s Editor’s Choice Award.

We have also been working with several equipment manufacturers that will embed 4G capability into dozens of devices. Additional devices especially phones will be an important part of our 2010 4G plan. Expanding the coverage of 4G in 2010 will be an important catalyst for continued improvement in Sprint’s post-paid subscriber results.

So we chose to invest an additional $1.1 billion in Clearwire during the fourth quarter, brining our total ownership to 56%. So, with 4G as a catalyst we expect that both post-paid and total subscriber losses will improve in 2010 as compared to last year. Even though we still have much improvement to make, if there was one word that would sum up the fourth quarter and 2009, it would be progress.

Quarter by quarter we will strive to continue to improve the customer experience, strengthen the brand, and generate positive free cash flow. We feel we have momentum as we move into 2010. Now I will turn it over to Robert Brust, who will discuss the financial aspects of our results.

Robert Brust

Thanks Daniel, and good morning. Moving onto slide 11 we had another strong quarter as Daniel said in terms of free cash flow, generating $666 million in the fourth quarter and $2.8 billion for the full year 2009.

This compares to $664 million in the third quarter and $1.8 billion for the full year 2008. During the third quarter of 2009 we made a $200 million cash contribution to Sprint’s defined benefit pension plan which we do not expect to be necessary in 2010.

We are especially pleased with our consistent quarterly cash generation throughout 2009. We expect to generate a meaningful level of positive free cash flow in 2010. During the quarter we repaid the remaining $1 billion of outstanding borrowings on our revolving credit facility. We also provided a net $1.118 billion of funding to Clearwire and paid $560 million in net cash for the acquisitions of Virgin Mobile and iPCS during the fourth quarter in addition to issuing approximately 96 million shares for our acquisition of Virgin Mobile.

Even with our cash payments in the fourth quarter we ended 2009 with a solid cash, cash equivalent, and short-term investment balance of $3.9 billion. Our goal continues to be to maintain a healthy cash balance for the foreseeable future. Taking into consideration the availability under our bank credit facility, we also had a strong liquidity position of $6.6 billion exiting 2009.

Looking ahead we have $750 million of debt maturing in the second quarter of 2010, $1.65 billion in January of 2011, and a $2.750 billion in 2012. Our current view is to pay this debt as scheduled and not refinance. Enhancing our repayment ability we expect rebanding costs to lower sharply in 2011 and beyond.

Lastly our revolving credit facility expires at the end of 2010 and we plan to take appropriate action before its maturity. We spent $554 million in capital during the fourth quarter compared to $431 million in the third quarter of 2009 and $548 million in the fourth quarter of 2008.

Fourth quarter 2008 CapEx included $90 million of 4G expenditures. We spent approximately $1.6 billion in capital in 2009 compared to $3 billion in 2008 which included approximately $560 million of 4G. We remain extremely focused on network quality for our customers and will spend where we need to, largely for capacity, from the growth in data, network development projects such as dual modes 3G/4G, and network performance.

We continually make improvements in network quality and [inaudible] through additional macro sights backhaul capacity, the use of Pinko and Femco cells, repeaters and tuning. We also made strides during the quarter on our affiliate modernization program which involves expanding our EVDO footprint and adding capacity in certain markets that we acquire through our affiliate purchases.

We expect that full year 2010 capital spend will be as high as $2 billion. Moving onto the financial results for the fourth quarter, consolidated adjusted OIBDA for the quarter was $1.409 billion, down sequentially from $1.506 billion in the third quarter and $1.7535 billion year ago period.

The chart on slide 12 outlines the sequential change. Consolidated operating revenues declined approximately 2% sequentially due to fewer post-paid subscribers. The decline of post-paid ARPU were approximately $55.00 and lower wire line revenues, offset by revenue growth in prepaid.

The decline in post-paid ARPU resulted from two primary factors, seasonably lower usage driven revenue streams and a loss in overage revenue associated with the addition of any mobile any time feature to certain plans. With this new feature we are excited about the opportunity to offer our customers a great value with a worry free bill.

Although we experienced some near-term dilution in ARPU with the launch of any mobile any time, we do not expect further deterioration of this magnitude. Looking at prepaid, we experienced close to a $4.00 sequential decrease in ARPU due to the inclusion of lower ARPU Virgin Mobile customers post acquisition, offset by continued growth in Boost monthly unlimited offer.

A further decline of $2.00 to $4.00 should be expected in the first quarter since we’ll have a full quarter of prepaid results including Boost, Virgin Mobile, and Assurance wireless. Wire line revenues decreased sequentially primarily due to IP rate declines and lack of IP growth. Labor actions taken in the fourth quarter will help OIBDA margins sequentially but we will continue to see pressure on full year results.

As we move into 2010 the expected continued growth in prepaid and improving trends in post-paid should significantly improve the downward trend in revenue we have experienced the past few years. On the cost side we saw sequential improvement in the cost of service and an increase in G&A. Within the cost of service we experienced seasonally lower roaming and favorable rates with our premium services providers offset by an increase in vendor fees due to our increased mix of Smart Phones.

Additionally our service and repair expenses were down due to seasonably lower volume and a focus on refurbishing devices. SG&A expenses increased sequentially primarily due to higher variable costs. The prepaid contribution to OIBDA improved sequentially as we benefited from continued growth in the Boost monthly unlimited offer.

The Boost contribution is partially offset by the post acquisition of Virgin Mobile impact on results which is driven by acquisition related accounting adjustments and seasonably higher gross adds. We expect that our prepaid group will continue to provide positive contribution to OIBDA through the course of 2010.

In summary the post-paid subscriber losses we experienced in 2009 will continue to create OIBDA challenges. We took actions in the fourth quarter to reduce costs and will take additional actions in 2010 in other operational areas. We expect to improve our near-term historical revenue trend in 2010 and generate more than enough cash to meet our obligations. Now I’ll turn it back to Yijing for Q&A.

Yijing Brentano

Thank you Robert, the operator will instruct our listeners on how to queue up for the question-and-answer session. I want to point out that you may access and audio replay or webcast of our presentation on our website. We will now open the lines for your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of David Barden - Banc of America

David Barden - Banc of America

Just starting out with the pricing side of the equation, obviously last quarter it seems like a long time ago but there was a lot of hoopla about the T Mobile pricing and it doesn’t really seem to have had any impact on your business in the 4Q results, I guess looking at the 1Q we’ve had Metro PCS take pricing down, AT&T, Verizon, and I’d love to hear your strategic commentary about pricing positioning and competition and your expectations for 2010. And the second question would be specifically related to Simply Everything, this was the big initiative two years ago. It was how you differentiated yourself competitively, those guys are coming off of two year contracts starting I guess next month, and it seems like AT&T, Verizon especially will be going after those guys, what kind of retention initiatives do you think are going to be necessary to lock down that base.

Daniel Hesse

As you sure you don’t have any more questions.

David Barden - Banc of America

Its two Daniel.

Daniel Hesse

Okay, let me take them one at a time, first of all on pricing, you’re right there’s been a lot of competitive activity. As you mentioned T Mobile as well as AT&T and Verizon in recent months so there’s no question that the industry is getting more competitive. There’s a benefit for us, I think its going to put more of a focus on what customers are paying each month.

That’s been actually a concern of ours that there’s been so much focus on the handset pricing that customers aren’t doing enough to compare what they’re paying each month and I think if you take a look at the value of for example Any Mobile Any Time, that’s a $70.00 plan. If you compare that to let’s say the Verizon AT&T plans, at $70.00, you have to pay an extra $30.00 for data. That’s included in ours.

You have to pay an extra $20.00 for text. That’s included in ours. If you want navigation, that’s maybe $10.00 a month. That’s included in ours. So we think we’re well positioned from a value point of view although we still have some education to do. I’d say the same thing with Simply Everything, if you just take a look at all the things that it includes, and you compare it to $70.00 plan, what you need to bolt onto those plans, we’re pretty well I think positioned from a pricing point of view.

So, yes it is getting more competitive, there’s no question from a pricing perspective but we kind of like where we are and our job will be to educate the consumer better in terms of what all is included in those offers. Your second question had to do with Simply Everything, and I think its similar to what we have to do kind in churn totally, first of all we’ve seen improved churn characteristics for customers that have Simply Everything and also Any Mobile Anytime, that’s a big piece of the economic equation because there aren’t any surprises, there aren’t overages, satisfaction tends to be high.

And what we do with our customers, what will be important are a number of things. Number one is still focusing on the brand health and the perception of the company among our customers and if you were to take a look at what we call MWI, most want to investigate, we’ve made a lot of progress in terms of brand health with our existing base.

Unfortunately we haven’t made as much progress with non-customers but that’s, we believe that will come. And particularly perception of price value which I mentioned is coming up so customers on Simply Everything are going to know they’re getting a good deal from Sprint as well as perception of the network. Strong handsets, they’ll be looking to upgrade.

We’ll want to make sure that we have the handset lineup that they’re going to want that will be very attractive, that’s a very important element of retention and customers that have Simply Everything are automatically on our premier program which means they get an upgrade every year and that puts them in kind of a special situation relative to the industry and of course handsets are becoming very important.

So a strong handset lineup with Simply Everything customers being able to upgrade more frequently than they could on competitors I think puts us in a good position. We’ve also I think done a much better job on our save desk of late, we’ve really focused that, time and attention on that, and we’re seeing our save rates improve. So we know there’s no question the environment, and it’s a good question to ask, the environment on pos-paid is getting much more competitive, T Mobile, Verizon and AT&T have all taken pricing actions since we launched Any Mobile Anytime.

But we think we’re priced where we need to be and still provide very very good value to customers. And on the prepaid side, I can throw it over to Dan Schulman but there’s no question that there’s increasing competition in prepaid where when we launched Boost unlimited at the beginning of 2009 we really had kind of a very strong value proposition where $50.00 meant $50.00. Now Boost has moved from really aggressive price plan to one could argue at parody possibly even premium to similar plans in prepaid.

So Dan has I think a very robust and comprehensive plan on prepaid that allows us to use different brands for different segments of the market.

Dan Schulman

I think as we think about the prepaid market as Daniel just mentioned obviously Boost had a great first three quarters of the year but it was kind of a single play being run and competition eventually caught up to that and impacted some of its growth in the fourth quarter. We’ve been looking quite hard at the overall prepaid segment right now and it’s a pretty robust segment, somewhere between 55 and 60 million Americans now have prepaid.

And so the market is no longer a one size fits all. There are definitely very distinct segments of the market out there. They have very unique needs and wants. They shop in different channels, they want specific handsets, there are specific value propositions and so what you’re going to see from us on the prepaid side and we’ve just started to implement some of this, is to actually create brands that have very unique value propositions that appeal to very specific segments of the market.

And so some segments of the market are more price sensitive than other segments of the market and we’ll take actions where we need to there. Others have much different needs and we don’t need to take pricing action there and so what we’re looking at is on a segment by segment basis and a brand by brand perspective exactly what type of value proposition do we need to have out there to clearly win in the marketplace because by the way different competitors target different segments of the market and you don’t really need to react from a pricing perspective just because one competitor takes actions across the market.

And so we’ll have not only unique value propositions but very unique CPGA and CCPU for each of the brands that we put out there so that we think that we can drive not only very meaningful net add growth but provide a very compelling financial return as well. And so that’s in a nutshell kind of our strategy in the prepaid market and we’ll have that fully rolled out by the end of the second quarter.

Daniel Hesse

And I’ll just make one more point, I know of the analysts on the call understand this but with respect to the upgrade program on Simply Everything, when customer does upgrade they sign a new two year contract so that’s why its important, it kind of keeps the customer if you will, a long way away from being near the end of their contract.


Your next question comes from the line of Michael Rollins - Citigroup

Michael Rollins - Citigroup

Two questions first on the churn side, can you talk about with the improvements you’re seeing in care and some of the things that you highlighted again this quarter if you’d expect to see that reflect itself in better churn especially going into the first half of 2010 and then second can you just talk about where you want to see Sprint’s role in any potential further consolidation in the industry.

Daniel Hesse

First as I indicated in my remarks, I wish we had made more progress in churn than we have. I think we’re doing all the right things but the market is getting more competitive and we still have to do better. It is our plan to continue to improve churn and to have better churn in 2010 than we did in 2009 and our customer experience and perception of our service, our price value, our network, are all important elements to that in addition to some of the other things I mentioned in terms of having a good handset lineup, having good loyalty programs, etc.

So it is our plan to improve churn in 2010 and if had to just point to the one weakness in terms of our post-paid performance that I wish we had made more progress in, even though Q4 churn was an improvement both sequentially and year over year, its in churn and of course maintaining a good high quality prime mix is an important element of that as well which we have maintained.

So we’re not giving any specific guidance with respect to churn in 2010 but we’re working on it very hard. With respect to our role in further consolidation we would look at any specific situation that came forward but all that is theoretical so I won’t speculate on it.

Michael Rollins - Citigroup

And on the churn comments that you made, is there a difference between CDMA and iDEN churn trends that investors should be thinking about.

Daniel Hesse

Yes, iDEN churn is higher than CDMA churn. So that, you should think in those terms. So for example we lost 504,000 post-paid net adds in the fourth quarter yet CDMA was net add positive so I think that obviously gross adds are an element of that, no question, but also higher churn on iDEN.


Your next question comes from the line of John Hodulik - UBS

John Hodulik - UBS

I guess following up on Mike’s question, do you think the CDMA business has turned the corner now that you’ve gotten back to growth and maybe what’s driving the gross add share you had there, maybe its partially Any Mobile Anytime or I know you talked a little bit about, a little bit looser on the credit metrics in the third quarter I was wondering what you would say was the driver of the gross add strength. And then on the prepaid side, it sounds very much like you are going to use some of the new brands or maybe the Virgin brand to effectively cut price on in some sort of market segments when Metro PCS had their analyst day a month ago I think they made it pretty clear that they intended to remain the price or value leader in the space given their cost structure. Is there a risk of that by coming out with another sort of off brand that you risk really squeezing whatever economics are left out of the unlimited prepaid segment.

Daniel Hesse

Well its my hope and our plan that we’ve turned the corner, so we do see momentum going into 2010 with respect to our CDMA post-paid business. But it will continue to be a competitive environment going forward. With respect to the improvements in terms of net add performance the MVP really is Any Mobile Anytime, that’s been what’s moved the needle the most.

From a credit point of view we’d make minor tweaks basically to try to keep our credit policies similar to Verizon and AT&T. So as they move theirs, we move ours. We try to more or less mirror them. There will be slight differences market to market but as our strong prime percentage results indicate, we’re not going back to some things Sprint did many years ago which was to loosen credit policies to go after adds, that is, we are not doing that.

We are only going after profitable revenue period on post-paid. The second part of the question maybe Dan Schulman I’ll let you answer that.

Dan Schulman

Actually the reason that we’re launching a multiplicity of brands is because these unique segments in the market have different needs and actually when you launch different brands it isn’t all about pricings. There’s different handsets, different feature functionality that customers want and so by doing this and you’re really using I think a degree of sophisticated marketing through this and not just pulling price levers by any means.

And in fact through the multi brand strategy our anticipation and our plan is that we actually significantly grow our contribution margin and so I think by doing this we actually allow ourselves a lot more flexibility to be very competitive in the market to grow our net adds but also to improve our financial picture as well and so I think by doing this it gives us a lot more flexibility, allows us to target various competitors, without necessarily having to pull price levers in each and every segment of the market.


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

Phil Cusick - MacQuarrie Research Equities

Maybe we can switch over and talk about cost savings, whether that’s more layoffs in 2010 or really just the ability to keep costs under control as data demands drive up. You’ve got 18% margins here and your nearest competitor has 33, I wonder what you think you can do to either start to rebound those margins, is it that you’ve got too many networks running here, is too competitive an environment, how should we think about that.

Robert Brust

On the cost side, in 2009 we had a large reduction in force that we announced in the early part of the year and then we had a smaller one we announced in the fourth quarter and that as far as we can see right now that takes care of that part of our cost reduction program.

This year we’re into more each of the operating managers has a very tight cost budget to achieve to let us get the margins we need to make our OIBDA targets and our cash flows. So this year its more of a cost control atmosphere than a big take out so we don’t envision any more right now, we don’t envision any more headcount reductions.

The margin issue is complex, we do have [inaudible] networks and that is a problem for us. And we’ve been in a long-term revenue decline which we hope is nearing an end. And as that revenue decline nears and end and we can start growing revenue would take a lot of pressure off the margins. So I don't see any huge margin relief in the near future. That’s going to take a more stabilization of the revenue and getting back into a growth mode.

Phil Cusick - MacQuarrie Research Equities

Can I follow-up on the spectrum spending, you said a big drop off in 2011 should we look for it mostly flat in 2010 or do you think this recent run rate is more the number.

Robert Brust

The run rate that we’ve been incurring holds on for this year, $100 to $200 million the quarter and then that drops off sharply next year.


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

Simon Flannery – Morgan Stanley

Can you talk a little bit about the launch of the 4G products and I don’t know to what extent you can talk about the results in Q4 but how that’s been tracking, how usage has been tracking, customer reception, churn and so forth and also talk about your pricing around putting those down to the $60.00 level and then if we could also just touch on the wire line business, looked like that had a step down in revenue sequentially. You talked about some IP pricing, but perhaps also touch on the enterprise environment and are you seeing any signs of improved economic activity there as you look into 2010.

Daniel Hesse

I counted three questions there but I’ll, let me take them one at a time, with respect to 4G there are really two things that are important to making a lot of hay with 4G, one is its kind of coverage and the number of markets, it makes it much more efficient to sell, to advertise, etc. and you’ll begin to see that as we hit if you will a critical mass, in 2010 that we didn’t do in 2009 and we finished 2009 with about 30 million pops covered and our expectation is we have roughly four times that amount of coverage at the end of 2010.

The other element that’s very very important is just having some devices available in dual mode 4G/3G and we launched really two devices in January, one was the U301 dual mode air card and the other is the Overdrive. So we’re just beginning if you will to have a combination of network coverage and devices that are attractive and as I mentioned in my remarks, what will really make a difference is having some what we call phones, as well that you can make phone calls on also being launched during the year.

That will make a big difference. So internally we call 2010 the year of 4G. Its going to be the year that we’re the only game in town and it’s a combination of we need to get more markets turned up and we need to get a better device lineup and then we think we can really start to show some sizable progress in that regard.

We also thought it was important not to provide a disincentive to customers to try out if you will dual mode 4G/3G. As you know with having owning over 50% of Clearwire, we look at the pricing of 4G/3G with really two hats on. One is if you will the transfer price that we’re charged as an [MVL] if you will on 4G as well as just the overall economics of that network.

And if you take a look at the second half of that which is the economics of that network it’s a lot cheaper to produce a gigabyte on the 4G network than on the 3G network so actually one of the questions would be why don’t you provide 4G at a lower price than 3G because you could, but we have no intention of doing that because there’s a if you will not only a speed advantage but what we are doing is offering a larger bucket.

Because as customers get 4G devices they’re going to want to use their devices a lot more in the mobile environment and so raising the cap if you will in terms of gigabytes we believe reflects the superior economics of 4G over 3G in terms of data production. The last question you had was with respect to wire line and I’ll let Paget talk about that.

Paget Alves

The sequential decline that you saw there, there are a couple of things that are impacting this. We had one is a transfer price when in effect we adjusted prices for the services we provide to our wireless segment and we did that to respond to some of the pricing pressure in the market, for price reductions in the market. That along with some other non recurring items have caused this both some, had a positive impact on the third quarter and a negative impact on the fourth quarter.

So on balance at least 50% maybe a tad more of the change was the result of those kinds of items. So we do not expect to see that recurring in 2010. From the standpoint of the economy the economy has effected the business marketplace, I think Dan mentioned earlier that you do see between iDEN and CDMA there’s some difference which is to some extent a byproduct of the economic sensitivity that iDEN has to the business marketplace.

But generally we’re optimistic about what the economy will do going forward. We’re starting to see some planning certainly in the business, the larger businesses are beginning to make decisions and anticipate making purchases so we’ve seen a very different environment as we move into 2010 as compared to say the second half of 2009.


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

Jason Armstrong - Goldman Sachs

First on margins, you talked about improving sequential margins into the first quarter of next year, I’m just wondering is the message here that 4Q was sort of the trough and we move up more sustainably from here or is there more of a comment that reflects some positive seasonality in the business sort of quarter on quarter. And then second question just on the iDEN network if you can speak to the commitment levels to the iDEN network, you recently made a move to put Boost back onto the CDMA platform, so I’m just wondering what the message is there as it relates to iDEN.

Robert Brust

In my comments before we do not plan to, or I didn’t mean to say we’re going to improve margins in the first quarter and I didn’t think so, we’re trying to maintain our margins while we’re in this transition from the sales declines we’ve seen for the last several years. So in the near-term I wouldn’t look for any big margin deviations until we can get the revenue turned around.

Daniel Hesse

On iDEN we continue to support the iDEN network and we plan to launch new devices. We just launched the Motorola Brute, i680 in January, which I mentioned and the network is performing at its best levels ever. I don’t want people to misunderstand the launch of Boost on CDMA. We’re going to be offering Boost on both iDEN and CDMA because we want to give customers if you will more choice based upon how they want to use the network.

So its an opportunity for us just to grow prepaid more by in addition to continuing to offer Boost on iDEN to also offer it on our CDMA network.


Your next question comes from the line of Jonathan Chaplin - Credit Suisse

Jonathan Chaplin - Credit Suisse

So looking at the improvement in post-paid net adds this quarter actually just looking at the stock improvement over the course of the last few quarters, should we expect that same kind of consistent improvement quarter over quarter as we head through 2010 or are there seasonal impacts that we should be aware of there. And if we are looking at that as the magnitude of improvement is it conceivable that we’re looking at flat to positive post-paid net adds by the end of 2010. And then I’m wondering if you could give just a little bit more color on when you’re hoping to see a turn in the top line. It sounded like that was something that could happen in 2010 as well.

Daniel Hesse

And I appreciate your efforts to get more guidance out of us, obviously we hope to continue these trends. There will always be some seasonality so you should as you look at your models going forward always reflect seasonality and that’s why we give guidance on an annual basis because there are if you will pluses and minuses quarter by quarter.

But as we’ve said we expect to lose fewer post-paid subscribers in 2010 than 2009 so expect some improvement there. We’re not guiding specifically yet with respect to when we expect to be net add positive or when we expect to have revenue growth but needless to say we have goals internally with respect to both.


Your next question comes from the line of Mike McCormack – JPMorgan

Mike McCormack – JPMorgan

Can you just make a couple of comments maybe first on what you’re seeing from a port ratio perspective versus other carriers and maybe more specifically it looks like the AT&T non [iPhone] sub churn rate has been quite high for the past two quarters, is there a way that you have sort of seen any change in port ratios against those guys. And then secondly on the prepaid business, [Leap] you’re putting itself up for sale, do you have any commentary on what that means for the industry. Is that them sort of saying this is too competitive, we need consolidation or is it just a sort of non endorsement of that business model.

Daniel Hesse

With respect to port ratios, by competitor we don’t provide that information, that competitive information. With respect to Leap, I can’t comment on the specific transaction or process but generally I think consolidation will be healthy for the industry, some consolidation. It is needless to say very competitive. Its very much of a scale game, when you’re talking about national wireless carriers. Not only network, marketing, channels, buying phones, you go right down the list.

There are a lot of scale issues that would lend themselves to in essence benefiting from consolidation and scale. So without any comment on Leap in particular I see consolidation as a positive for the industry.

Mike McCormack – JPMorgan

Just staying on the more general theme, do you think that that marketplace is more interesting from an organic perspective to take share or do you think M&A is a realistic method of gaining share there.

Daniel Hesse

Well I think M&A, again it depends upon the regulatory environment and how they look at it and of course like any M&A transaction it depends upon what the numbers look like at the end of the day. What’s the price, what are the synergies and what have you, so you have to look at them all, so its hard to make a broad statement. But if the price were right, if the synergies were significant, I think M&A is absolutely a way to get to growth in the industry.

If a particular transaction makes sense for anybody.


Your next question comes from the line of James Ratcliffe - Unspecified Company

James Ratcliffe - Unspecified Company

Quick question on taxes and as you wrote down an additional portion of your NOLs in the quarter at this point when if at all do you expect to actually start paying material cash taxes.

Robert Brust

We did adjust the deferred taxes with a valuation allowance of around $300 million during the quarter but that’s a little time out before we’d be paying any material taxes and that’s not in the guidance we had offered. So that’s down the road a ways.


Your next question comes from the line of Timothy Horan - Oppenheimer & Co.

Timothy Horan - Oppenheimer & Co.

Two questions, what’s the threshold on ownership for you to start consolidating Clearwire and then secondly it sounds like prepaid net adds are probably going to worsen here a little bit given the increase in competition and being materially, hopefully materially better towards the second half of the year, and just curious if you think that’s an accurate outlook and then could you maybe just give us a real high level ballpark of what you think would be a good year in terms of net adds. I guess you had and this is in total you had a million decline this year which is a huge improvement over the last couple of years, but do you think getting to flat this year is a good number, a million decline is a good number, I know you’re saying its going to be better but just an order of magnitude or maybe a million growth would be a good number in your mind.

Daniel Hesse

You guys don’t give up, with respect to trying to get more guidance out of us. I won’t say what a good target is for improvement in net adds year over year. Obviously more is better so we want to make the improvement, we’re going to try hard to make it as large as we can. I want to make sure I understand your question on Clearwire, did you say something about a threshold.

Timothy Horan - Oppenheimer & Co.

When you do have to start consolidating Clearwire results or do you have to, it seems like your equity ownership would require you to have to start consolidating those results, if you get up to 60% ownership do you have to start consolidating, just wondering what ownership level do you have to start consolidating, maybe also if you can just talk about maybe how prepaid has been trending through the fourth quarter and maybe into this first quarter given the increased competition.

Robert Brust

On the Clearwire thing, there’s a lot of rules that go in the consolidation part is ownership, part is governance, part is control, Board members and all that stuff. So we’re not near that yet and so the accounting for Clearwire should remain as it is for the foreseeable future.

Dan Schulman

I’ll just kind of repeat where we were, we do expect to fully launch that by the end of the second quarter with a robust revamp portfolio of brands. Each of those brands aimed at particular competitors and particular customer needs and so we expect to make very meaningful progress with net adds as we move through the year until we are very confident in that forecast.


Your next question comes from the line of Chris Larson – Piper Jaffray

Chris Larson – Piper Jaffray

Couple of questions, first on the rebanding, could you clarify that the $2 billion in CapEx does not include the rebanding of 100 to 200 million a quarter and then there’s, you’re supposed to be vacating some channels soon here, I think in the first half of 2010 but the channels to move through are not open yet, any sense whether the FCC is going to make you do that and then you mentioned that you spent some CapEx on 4G, was that on only on WiMAX or did that include any LTE spend.

Robert Brust

The 4G reference I made is only on the WiMAX. And your first question was—

Chris Larson – Piper Jaffray

On the rebanding.

Robert Brust

The rebanding is not included in the up to $2 billion of CapEx we talked about. That’s in addition and that’s the way we’ve been reporting it over the past few years.

Chris Larson – Piper Jaffray

Just wanted to clarify that. But also you’re supposed to vacate some channels soon, has the FCC given you any assurance that you’re not going to be forced off the channels before you have the space to move those iDEN frequencies to.

Daniel Hesse

We’re working with the FCC and you’re correct that some of the public service organizations are not ready to move. So we do expect that the process could take longer than planned but our expectation is that we will work very closely with public safety and the FCC toward a solution that makes sense for everyone.


Your next question comes from the line of Rick Prentiss - Raymond James

Rick Prentiss - Raymond James

I think I want to focus my questions on 4G, I think you said internally seeing 2010 as the year of 4G only game in town, phones coming later this year, a couple of questions in that regard. First how important is mobility to selling the WiMAX product, how important is having even more coverage than the 120 million pops that you talked about, and what are the options as far as if that is true kind of getting Clearwire some more funding.

Daniel Hesse

Let me take then one at a time, we think mobility is absolutely crucial. But you raise a good point or point something out that its also a fixed solution and a mobile solution so there are opportunities for us and for companies like Clear to get customers to cut the cord at home by using 4G really as a stationary or a premise based high capacity connection but our primary emphasis at Sprint is on dual mode 4G/3G and customers that would be mobile and that is where we see by far the largest opportunity for us because of we’re a mobility company primarily.

But again there are some fixed applications but mobility is absolutely crucial. Of course we want to get the coverage to even greater than 120 million pops. Of course there’s some realities in terms of just how quickly you can effectively bring up markets, do sell siding and what have you, it just takes awhile to build out a 4G network so we would expect that you would see more pops being expanded in 2011 and then 2012 so this would be a continuous process like so many generations are.

As a matter of fact, in Sprint’s case we put a lot of 3G coverage in place back in 2007 and a number of competitors are really just beginning to roll out 3G, so that will be a process that continues. With respect to Clearwire funding, as you know we just put a lot of equity in and others put a lot of equity in and they also raised some additional debt.

So the Board of Clearwire will always, they’ll determine how much additional funding if any is needed going forward and we’ll look at the alternatives to do that when the time comes.

Rick Prentiss - Raymond James

As you look at your positioning versus the cable and maybe other wholesalers is it really that mobility factor that you think differentiates how you go after the customers.

Daniel Hesse

I think the great thing about we’ll call it the partners, is each of us has the potential to be very strong with a different value proposition that gives Clearwire even greater potential then let’s say a 4G network that is owned only let’s say by a mobile player. The cable companies can bundle it with if you will broadband at home and on the go, they can bundle it with video services and other things that are really in there wheelhouse.

So we see each of the partners really going to their strength. Clearwire as I mentioned earlier has traditionally been a fixed line replacement company. They’re good at that. That will be their greatest strength. Generally single mode, 4G as a landline replacement. Not that they won’t also do other things. In Sprint’s case very much mobility. A mobile offering and in the case of Time Warner, Comcast, Bright House, a different bundle that they’ll be very strong and when a customer wants to have video service or high speed internet at home in a fixed environment.

So I see the different partners that are investors in Clearwire expanding the total size of the addressable market and pie that 4G has because we each bring customer bases, to the table, our subscribers don’t have a total overlap so they’re bringing, all of us are bringing a customer base and unique capabilities or skills to the table.

And that’s the plan or vision of Clearwire is that we have all these different companies with different strengths and customer bases going after the market that I think gives the company special potential.


Your final question comes from the line of David Dixon - Friedman Billings Ramsey

David Dixon - Friedman Billings Ramsey

Just a question on the strategic cost initiatives, cost structure initiatives in three key areas, first one is just on rounding costs to Verizon. I imagine those are quite high at the moment, I wanted to get a sense of how we should think about opportunities to launch post-paid CDMA on 800 over time. Secondly on the back haul side, not seeing those challenges now as we’ve been losing customers but as we gain customers and seeing more data I would expect that that back haul issue is going to be significant, so I’d like to get your thoughts on how we should think about the back haul migration to Clearwire’s network moving off special access over time. And then thirdly the multiple network charges, moving Boost on CDMA you alluded to it before, and I appreciate that we’re going to be roaming toward two networks here, but how should we think about the potential for lower CPGA or better network efficiencies by migrating progressively to CDMA for both prepaid voice and [inaudible] customers and post-paid.

Daniel Hesse

Let me take them kind of one at a time here, one on costs and roaming, right now no we don’t have plans to roam let’s say on Verizon at 800 megahertz because you have to put that capability in the phone, that dual mode capability which adds cost and price to the devices and our coverage is so darn good we don’t really need to. I mean coverage is a Sprint strength both the size of our voice footprint and data footprint and then of course the economics of roaming are not that favorable.

So, roaming is still fairly expensive so we are not looking to expand to roam on 800 megahertz because it just doesn’t make economic sense to us. Secondly with respect to back haul migration, our number one regulatory issue and we’re pleased that the FCC is taking this issue up quite seriously is special access and just the very very high costs that we pay, roughly a third of the operating cost of a sell sight are special access charges that go back to and the lion share of the cases directly to our competitors with extremely high margin.

So we think there’s some opportunity for special access costs to come down. In addition as we build out the network with Clearwire we’re working together to maximize the use of existing sell sights that Sprint has and to share the back haul expense whether that back haul be, because there are scale economies if you will be provided by the local exchange carrier and we can get better economics if we’re sharing if you will the capacity of whatever we might buy.

Or potentially using Clearwire technology could be radio, as a back haul alternative to the local exchange carrier so we’re looking at every possible way to decrease costs and working very closely with Clearwire to really come up with a win win for both Clearwire company and Sprint to look at ways we can share sell sights and back haul any place possible.

But the real key for Sprint in terms of our regulatory initiatives in 2010 will be to make a lot of progress on special access which is the one industry structure issue that really hasn’t been addressed and needs to be addressed and the data has been out there for a long time so I have some cautious optimism that we’ll see some progress made in special access. And your last question was something about Boost on CDMA, I just want to make sure I understand that question.

David Dixon - Friedman Billings Ramsey

It was thinking about the opportunities you may have to improve the cost structure by migrating over to the CDMA network for prepaid in terms of device cost, broader array of device manufacturers, and just general network efficiencies.

Daniel Hesse

As mentioned earlier not only the decision to launch Boost on CDMA as well as the acquisition of Virgin gives us an opportunity to get better scale economy out of our CDMA network and our handset buying so there will be very close coordination if you will between let’s say Dan Schulman on the prepaid side, and Steve Elfman’s group that is traditionally bought post-paid phones to make sure that we are getting as much if you will scale as we possibly can in terms of our purchases.

We still do have the iDEN network and we want to make sure that we are utilizing that network and have a revenue covering our fixed costs on that network but as we look to additional investments, where those investments be in new handsets or those investments being in capital that we would put into the networks, we’re going to get a better return and a longer lived return on incremental investments on the CDMA network than on the iDEN network so that is what’s behind it.

Over time CDMA will give us a better return on our investment.

Yijing Brentano

Thanks for your participation today. If you have any additional questions, please contact Sprint Investor Relations team at 1-800-259-3755. This concludes our call this morning. Thanks again.

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