Sprint Nextel Corp. (NYSE:S)
Q1 2010 Earnings Call
April 28, 2010 08:00 am ET
Yijing Brentano - IR
Dan Schulman - President, Prepaid Group
Bob Brust - CFO
Dan Hesse - CEO
Ric Prentiss, Jr.
Good morning. My name is Janice, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprint 2010 first quarter earnings conference call. 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).
Miss Brentano, you may begin your conference.
Thank you, Janice. Good morning and welcome to Sprint Nextel's first quarter 2010 earnings call. Thanks for joining us this morning. For the format of the call, Dan Hesse, our CEO, will discuss operational performance in the quarter. And then our CFO, Bob Brust, will cover the financial aspects of the quarter. Before we get started, 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-K for 2009.
Turning to slide three; throughout our call, we will refer to several non-GAAP metrics. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures for the first quarter can be found on the attachments to our earnings release and also at the end of today's presentation, which is stored on our website at www.sprint.com/investors.
Next, I would like to cover our EPS results. Basic and diluted loss per common share for the first quarter was $0.29, compared to $0.34 in the fourth quarter 2009 and $0.21 in the year ago period. Approximately $0.12 of the first quarter 2010 loss per share was due to an increased valuation allowance on deferred taxes. Bob will discuss this further in his remarks.
I will now turn the call over to Sprint CEO, Dan Hesse.
Thank you, Yijing and thank you for joining us this morning. Let me begin by saying that as I reflect on my ninth quarter at Sprint, I am encouraged by the improvements we've made especially in light of the declining performance trend lines we entered 2008 with.
Our turnaround has been made more difficult by a weak economy in late 2008 and in 2009 plus the strong competitive challenges we faced. But what were negative sequential and year-over-year trends have changed from negative to flat and some are now turning positive.
If you go to slide four, the first quarter represents our first sequential increase in total net operating revenues and wireless service revenues in nearly three year. Consolidated adjusted OIBDA and adjusted OIBDA margin both grew sequentially. And perhaps most important of all, our post-paid net adds shows the best year-over-year improvement in five years driven by the largest share of gross adds or SoGA improvement in five years estimated now at 500 basis points, an increase in gross add market share of 45%.
We continue to execute well around our three priorities, which are improving the customer experience, strengthening our brand and generating cash.
Starting with the first, with respect to customer experience, I am pleased to report our 9th consecutive quarter of improvement in customer care satisfaction and in first call resolution. As Cliff Moore, the Chairman and Co-Founder of the Customer Operations Performance Center or COPC, the world's leading authority on customer contact centers recently said and I quote, 'Sprint's nine consecutive quarters of improvement in first call resolution and customer satisfaction is a true rarity and it is at the highest end of best-in-class levels, demonstrating continuous improvement in the contact center industry.
Our customer satisfaction top-box score has improved 15% year-over-year and is at an all-time high. Our bottom-box score has improved 35% year-over-year, also reaching an all-time best. And we're not buying satisfaction with billed credits. We've reduced customer care credits by 47% versus last year.
In the recent JD Power Wireless Customer Care survey, Sprint improved the most of any carrier, 17 points versus the industry's four points. Sprint alone accounted for half of the improvement shown by the entire industry.
Our networks are also performing at their best levels ever as measured by drops and blocked calls. Based on a survey of large businesses by the Yankee Group and Mobile Enterprise Magazine, business customers with more than 500 employees, ranked Sprint number one in voice service satisfaction and number one in data service satisfaction.
If you adjust post-paid churn for the discontinued Helio platform we acquired as part of the Virgin Mobile transaction, our churn of 2.12% ties Sprint's best first quarter churn performance since the merger. We expect to complete the Helio decommissioning in the second quarter and this will have a negative impact on second quarter post-paid churn by 6 to 8 basis points. But, we still expect that post-paid churn will be lower in the second quarter.
The second is brand, second priority. In part of our confidence in churn comes from the continuing improvement in Sprint's brand metrics. We're making significant strides in strengthening the Sprint brand among the customers of each of the major wireless carriers our MWI or most want to investigate score has improved more for Sprint than for any competitor.
Likelihood to recommend Sprint among our customer base has shown steady and significant gains, more improvement than for any carrier among their base. Our confidence in the quality of the customer experience we have built for Sprint customers led us to offer the industry's first true 30-day performance guarantee which we introduced on March 31.
Sprint's value network and 4G messages are continuing to gain traction as we see statistically significant improvement in customers associating these messages with the Sprint brand. Awareness in correct brand linkage for the Now Network is now ahead of all competitor taglines.
If you go to slide five, in Reputation Institute's 2010 study recently published by Forbes, Sprint's corporate reputation score with consumers grew 11% in the past year, the 18th largest gain among the companies in the survey, the 150 largest companies in US, almost tripled the gain of either AT&T or Verizon. Even though external brand held in corporate reputation studies are helpful in determining the direction your brand is taking, a more tangible measure is the change in subscriber trajectory.
If you go to slide six, our estimate of Sprint's annual improvement in share gross add of 500 basis points based upon the actual reported results of AT&T, Verizon and Sprint, and the consensus estimate of T-Mobile represents our largest improvement in five years.
If you go to slide seven, our year-over-year improvement in post-paid net adds of 672,000 represents our largest improvement for any quarter in five years. And this has been accomplished in an increasingly challenging competitive environment, against a much larger Verizon and against the iPhone. And we're maintaining a strong credit quality with the percentage of our base with a prime credit rating, up slightly sequentially still rounding to a healthy 84% prime that is.
AT&T and Verizon have many wireless performance numbers that I wish I could report. They are still outperforming us. Sprint lost a total of 75,000 subscribers in the first quarter, but AT&T's post-paid net add this quarter were down 385,000 versus the same quarter last year to their lowest reported net add number since 2004. Verizon's post-paid net adds were down 546,000 year-over-year to their lowest net add number since 2003. So in this context, our post-paid subscriber improvements are noteworthy.
A contribute to our brand and to subscriber trends is maintaining a strong device lineup. Smartphones or touch screen handsets made up 57% of our CDMA gross adds or upgrades in the first quarter. Sprint launched to announce several new devices including the Motorola i1, the world's first push-to-talk Android-powered smartphone, the Motorola Brute TM i680 which combines ultra-rugged durability with the best-in-class push-to-talk services of Nextel Direct Connect and the Motorola i890 iDEN device.
We also launched the exclusive LG Lotus Elite and fashionable LG Rumor Touch. In addition, we announced the LG Remarq and the Samsung Restore, which brings our industry-leading lineup of full-featured green devices to three and the new high-powered Blackberry Bold 9650 world phone.
But the most industry attention has been directed toward 4G. The Overdrive 3G/4G Mobile Hotspot which we announced in January was recognized by PCWorld, CrunchGear and Ubergizmo as the best of CES 2010. It's becoming a very popular accessory for the Apple iPad as well.
More recently, the HTC EVO 4G using Android 2.1 and Americas first 3G/4G phone was awarded best phone and best smartphone of CTIA by CNET and by LAPTOP Magazine.
Let's talk about prepaid. We're glad we've expanded our prepaid business and it's estimated that prepaid decisions reached 54% of industry decisions in the first quarter an all time high.
First quarter prepaid net adds were 348,000. After losing some prepaid momentum during the fourth quarter, we were quite pleased with the early success of our efforts in the first quarter.
During the first quarter, the Boost Mobile brand launched two new CDMA handsets and the first Blackberry with the unique All-In plan for $60. We saw immediate demand exceeding our expectations. We also launched the new Assurance Wireless brand in five states, aimed at lower income families and individuals, which received accolades from both consumers and community services organizations.
And finally we enhanced our Virgin Mobile broadband offer and significantly expanded its distribution leading to a tripling of sales. All these actions contributed to the highest prepaid gross adds in company history and the lowest level of first quarter prepaid churn in four years.
We have also made significant progress on our prepaid team integration and synergy efforts. The prepaid reorganization is now essentially complete and the prepaid team is on their way to exceeding our synergy targets. We've been working hard not only to update the Virgin Mobile brand and its value proposition in handsets, but also to identify new segments and brands to address the expanding prepaid market.
In the next few weeks, we will not only announce, but implement our multi-brand prepaid strategy into retail channels. You can expect unique value proposition, great handsets and a variety of distribution channels to effectively target multiple segments of the prepaid market.
We expect that the combination of repositioning our existing brands and adding a new brand will enable us to make meaningful progress to our prepaid net ad results during the second half of 2010 after all brands are fully rolled out in the national retail.
Our third priority is cash and with respect to this objective cash generation as I mentioned earlier, consolidated adjusted OIBDA and margin both improved sequentially as revenues also grew sequentially. 2009 was the strongest free cash flow year in Sprint Nextel history and we're continuing to generate free cash flow with over $500 million added in the first quarter.
So in conclusion, I never said Sprints turnaround would be quick or be easy. Two years ago our performance trend lines were declining and they were deteriorating at an accelerating rate. I hope you'll agree that the trajectories of a number of important performance metrics are starting to improve in spite of industry trend headwinds. We are looking forward to the upcoming launch of the groundbreaking HTC EVO 4G device which we hope will provide a tailwind to our momentum.
It's now my pleasure to introduce the person recently recognized by Institutional Investor as the best Chief Financial Officer in the Telecom industry, Bob Brust, who will provide more detail with respect to our financial performance.
Thanks Dan for that very nice intro and good morning everyone.
Moving on to slide eight, we had a satisfactory quarter in terms of free cash flow, generating $506 million in the first quarter. That was down $160 million from the fourth quarter due to seasonably higher interest payments and payroll-related costs that were partially offset by some other working capital benefits. We expect to continue to generate a meaningful level of positive free cash flow during the remainder of 2010.
Looking ahead at debt maturities, we have $750 million maturing in June, $1.65 billion in January of 2011 and $2.75 billion in 2012. We expect to pay the $750 million due this year in June and plan to pay the 2011 and 2012 maturities as scheduled and not refinance.
Our current revolving credit facility expires at the end of 2010 and we are currently in discussions with banks to negotiate revised terms for the revolver. We expect a facility to be completed in the second quarter and we will share additional details at that time.
We spent $419 million in capital during the first quarter compared to $554 million in the fourth quarter of 2009 and $291 million in the first quarter of last year. We continue to spend an appropriate amount on CapEx, mostly in the areas of development, capacity and coverage. We still expect the full year 2010 capital spending to be up to $2 billion.
During the first quarter, we also paid the remaining $50 million to Clearwire as part of the funding commitment we made back in November 2009. We ended the first quarter with cash, cash equivalent and short-term investment balance of $4.4 billion. We continue to expect to maintain an average cash balance of approximately $4 billion for the foreseeable future.
Moving on to slide nine. Importantly, our total revenues and wireless service revenues which include retail, wholesale and affiliate revenues grew this quarter sequentially for the first time in nearly three years. This represents a 3% and 2% increase, respectively.
The sequential growth was primarily achieved through the increase in prepaid revenues, resulting from the acquisition of Virgin Mobile and the continued growth of Boost Mobile subscribers, increased equipment revenues and the successful launch of Assurance Wireless, and the slowing revenue declines from post-paid subscriber losses and the iPCS acquisition. These benefits were partially offset by lower wholesale and affiliate revenues, mostly due to the transfer of Virgin Mobile and iPCS subscribers out of this category and lower wireline revenues.
Post-paid ARPU remained essentially flat at approximately $55. Compared to the fourth quarter, total post-paid data ARPU grew approximately 3% and CDMA post-paid data ARPU grew approximately 2%. Beginning this quarter, we are no longer disclosing ARPU data as it is depended on allocations of fixed-rate bundle service plans, which continue to increase in popularity.
To summarize, total revenues were up 3% over the last quarter driven primarily by the two acquisitions. Compared to last year, when revenues declined by 3%, due mostly to lower post-paid subscribers. Organically, revenues were stable sequentially.
Consolidated adjusted OIBDA for the quarter was $1.478 billion, up $69 million sequentially and down $245 million from the year ago. Adjusted OIBDA margins improved 60 basis points sequentially. Additionally, we saw year-over-year and sequential reductions in operating losses after interest.
Improvements in adjusted OIBDA margin and operating loss after interest were due mostly to revenue growth. As Yijing mentioned, we increased the valuation allowance for deferred taxes related to federal and state net operating loss carry forwards in the first quarter.
As we indicated in our 2009 10-K, our recent history of consecutive annual losses, we no longer recognize a net tax benefit from operating losses generated during the current period. As a result, we've recorded an increase valuation allowance of $365 million or $0.12 per share in the first quarter.
Moving on to slide 10. The prepaid contribution to the wireless segment improved sequentially, as we benefited from acquisition-related revenues as well as organic revenue growth from the continued success of the Boost Monthly Unlimited offer and Assurance Wireless.
We experienced approximately a $4 sequential decrease in prepaid ARPU due to a combination of the inclusion of lower ARPU Virgin Mobile customers for the full quarter and new customers from the launch of Assurance Wireless.
The Assurance Wireless business is gaining momentum with five states launched through the first quarter and many more to come throughout the year. While these customers have a lower ARPU, they are profitable and an important growth engine for our business.
With the upcoming relaunch of Virgin Mobile and other exciting announcements in the works, we expect prepaid ARPU to be flat to slightly up compared to the first quarter of 2010 for the remainder of 2010.
We also saw increased prepaid costs due to the inclusion of a full quarter of Virgin Mobile, the increased market in association with the launch of Boost Mobile on CDMA, as well as increased handset shipments. We expect that our prepaid group will continue to provide positive contribution to our wireless segment throughout 2010, while continuing to grow their prepaid subscriber base.
On the post-paid cost side, we saw improvements in the cost of service and net subsidy. Cost of service declined from the fourth quarter as a result of reductions in inter-company voice rates to reflect market pricing and lower affiliate roaming with the acquisition of iPCS.
Additionally, we continue to see favorable rates with our premium services providers offset by an increase in vendor fees due to our increased mix of smartphones. Post-paid net subsidy declines were mostly due to lower volume compared to the fourth quarter. We expect some rate pressure going forward from the continued growth in smartphones.
Wireline revenues decreased sequentially due to the inter-company voice rate declines reflecting market price declines and continued pressure in voice, data and IP. Cost of service improved mostly due to the mix of IP in the wireline base and rate changes helping OIBDA margin sequentially. We continue to expect moderate pressure on wireline results through the remainder of this year.
In summary, we are pleased with our revenue of OIBDA and free cash flow in the first quarter. Our general goal is to stabilize operations in 2010, which would be a significant improvement from reported trends we have experienced during the last few years. Remember that our revenue declined approximately $4 billion per year in 2008 and 2009. Stabilization of revenue in 2010 is very significant in Sprint's turnaround.
I will now turn it back to Yijing for Q&A.
Thank you, Bob. In just a minute, Janice will instruct our listeners on how to queue up for the question-and-answer session. I want to point out that you may access an audio replay or webcast of our presentation on the Investors page of the Sprint website. We will now open the line for your questions
(Operator Instructions). So our first question comes from the line of Philip Cusick
I wonder if we can start with a sort of a big picture question with the slowdown in prepay, and I realize that that's going to accelerate in the second half, but the improvements in post-paid, do you think they were past a period where prepaid is really starting -- has become a much bigger part of this business? And are we getting to the point where post-paid really starts to drive this company again?
Phil, this is Dan. I think we're going to -- as I mentioned in my comments, really start to re-pickup prepaid momentum in the second half of the year. And also with industry decisions now being 54% prepaid, prepaid as a -- in terms of its percentage of the overall wireless industry is going to grow. So, our turnaround is really focused on both prepaid becoming a more and more important part of the company and doing better in that market. But also as you point out we are making improvements in the post-paid side. So prepaid has been growing nicely and that growth in prepaid has been quite frankly offsetting some of the decline in post-paid. What we hope to do is get post-paid growing again and prepaid growing robustly. So, I wouldn't say it's an either or. We expect both prepaid and post-paid performance to improve over time.
Can you remind us what the sort of typical seasonality is from 1Q to 2Q? You talked about churn coming down, but ARPU typically ticks up a little bit, gross ads sort of hold, is that something we can look for going forward or do you think that this year could be anomaly?
Well, we're not providing specific guidance with respect to Q2 other than that there is, of course, some seasonality favorability on the churn side in the second quarter. And so we would expect that second quarter churn in, we call it, the one-time Helio activity in the second quarter. I am talking about post-paid to improve noticeably.
Our next question comes from the line of John Hodulik
Dan, looks like you guys are going to be the only one of the main carriers to really grow gross ad share this quarter. What do you think is striving that? Is it still AMA or is it the performance guarantees that you guys are giving? And then follow-up to Phil's question. As you reposition the prepaid segments, how do you sort of make sure that you're not cannibalizing your post-paid base?
Let me take the first question. I think that, I mean, first of all, you are right. Any Mobile Anytime is doing well, but I think it's partly the kind of continuous improvement we're making in terms of customers service, customer care, the reputation of the company. That is something that just gains momentum quarter after quarter after quarter. So if you look at the trends lines, it is something that I think you are seeing repeat itself now quarter after quarter. It's kind of the third consecutive quarter of substantial improvement in SoGA, share gross adds. And so again I think we do specific things like Any Mobile, Anytime, of course devices are important. But I think it's just the overall strengthening in reputation of the company. The second question, forgetting, it was something about prepaid and post-paid –
Yes, the cannibalization. I mean as you have this new sort of strategy you are launching to reinvigorate the prepaid market. I mean how can you be sure that you are not going to cannibalize your own post-paid base?
Well, they are different offers and they tend to be in different channels. And, of course, there always will be some cannibalization, but net-net it's always better to have a post-paid customers looking at your prepaid offer versus someone else's. So, I don't think that our -- I think what's happening in the industry as prepaid as a whole is beginning to cannibalize post-paid. It's growing at a much faster rate. I don't think our prepaid offers from what I have seen disproportionately cannibalize our post-paid versus anyone else's, because we generally are in different channels
Your next question comes from the line of Michael Rollins
I've two questions for you. One is just update on the potential for cost cutting this year and how you are looking at that? The second question was dealing with iDEN. Just as the losses continue, how do you think about performance of CDMA versus iDEN from a churn perspective? And how do you look at that point in time where it makes sense to say, okay, the iDEN base maybe is getting small enough where you just need to make this big push in migrating to CDMA? Thanks.
Michael, this is Bob, I'm going to take the first half of that. Obviously, we will continue the intense pressure on costs as you go out the year and we will be watching it very carefully. But as I mentioned in my remarks, we've entered in different phase now in the turnaround. The last two years we were looking at these large volume, revenue reductions of about $4 billion a year and that put intense pressure on taking out billions of dollars of cost to reserve cash and the covenant and all that stuff. As the team is now beginning to look at stabilizing revenue and the prospects of revenue growth down the road. We now have to focus on maintaining, stabilizing the company, stabilizing the margins, stabilizing the cash, and being able to fund the upfront activities of things like 4G and all of that stuff in the new phone. So lots of pressure on cost, but a little change in emphasis now as we move into a different phase of our turnaround.
Michael, Dan here on the CDMA versus iDEN issue. CDMA churn is lower than iDEN churn and when you look at post-paid add losses, iDEN is the major contributor to those numbers and has continued to be so over the last few quarters. So there is no question that we are losing post-paid customers at a more rapid rate on iDEN than on CDMA. But we've also, of course, starting last year, we began to load that iDEN network up very effectively with cash producing, kind of profit producing prepaid customers and that's been an effective strategy. But also over time, what we're looking at and this has been reported. Again, the other thing I want to say is we continue to really focus on providing great service to our post-paid customers on iDEN, the network is performing at its best levels ever. And as I mentioned in my remarks, there is three new iDEN devices that we've introduced. But as a combination of post-paid and prepaid traffic or volumes come down, we will look at them with new technology. We can potentially use some of very small pieces of the freed up iDEN spectrum for CDMA and CDMA capacity and CDMA coverage. So we're beginning to look at that as well. Sprint Nextel has very, very strong spectrum assets if you look at what we have at 800, 900, 1900, 2.5 with Clearwire, and so there are a lot of alternatives that we can look at to get the best return on those investments.
Your next question comes from the line of David Barden
If I could just first follow-up on those comments a little bit Dan, I guess now with post-paid iDEN is seeing these persistent declines and now the prepaid iDEN business starting to see the declines as you focus more on CDMA devices. Is the intention to slowly wind down the iDEN network or is the intention to kind of keep the network intact and do something else with it. I remember back in the day there was talk about giving it to the government or other things. I was wondering if you could talk more strategically about that decision. And then secondly just Bob, you mentioned plan to keep $4 billion or so on cash on the balance sheet. Those are big numbers even for a company like Sprint that struggled a couple of years ago that seems to be behind you. As you look ahead to Clearwire, the importance of that business to your second half strategy with the EVO launch, is it more appropriate for us as investors, as analysts to start looking at Sprint and Clearwire as one entity from a funding, from a capital investment and from a strategic standpoint?
David, Dan here. Network technologies, all continue to evolve 1G, 2G, 3G and iDEN and CDMA are no exceptions. So, we will continually look at what's the best utilization of our spectrum assets and one of the best technologies available to provide the applications that our customers want. So, you may read or see things that Sprint is considering over the long-term. They are just -- we'll always evaluate, if you will, all of our options. So, you are right. A couple of years ago, we did look at a process where we evaluated what buyers might be out there for iDEN, we decided to keep the network. And just like any technology or network, we're thinking long-term in terms of an evolution plan and when we've reached decisions and we haven't reached any, we'll communicate those. But, in the meantime what we're doing is doing the best job we can of utilizing the assets that we have with the technologies that are available and I think we've done an effective job of that. But our plans will evolve over time.
David, this is Bob. We've made a decision. We are going to try to keep around $4 billion of cash on the balance sheet, because we need to delever the company in the next few years and we do have the $750 million coming due in June, the $1.650 billion next January and in 2012, $2.7 billion. So a lot of that will be that firepower and the continuing cash will be used to delever the company. When that's done that effectively delevers us by 25%, which is a good start. Clearwire is clearly 4G, is an important strategy for the company with the new devices coming out now. I kind of view investments in Clearwire as just an offset for capital if we were building out these networks ourselves. So we are prepared and we are preparing to do what has to be done to make sure Clearwire is successful on that, we can successfully use that network.
Your next question comes from the line of Jonathan Chaplin
Just a quick question on churn. Churn trends in post-paid are a little bit obscured this quarter and next quarter because of seasonality. You opened the presentation of the slide that showed the improvement in all of your reputation related metrics. That should ultimately be leading into improving churn. I am wondering as you look internally at the data in a more granular level than you can report to us, what you are seeing in terms of the underlying improvement in churn trends when you take out the seasonality that you had -- the negatively seasonality that you had in 1Q and a positive seasonality that you have -- that you'll likely have in 2Q? Thanks.
Well, thanks Jonathan for the question. We're not to going to provide more specific guidance, but I can't tell you that we are confident that a combination of our offers, the simplicity of our offers, the strengthening of the brand, the improvement of the customer service, all of those things will contribute to improved churn kind of sans seasonality going forward. So, what I call real improvements in churn kind of year-over-year, which I think because of the seasonality of churn, is the best way to look at churn. So it's a variety of activities that we're involved in. So, for example, bundle plans, customers that are on bundle plans that get both voice and data, for example churn at a lower level; customers that that buy, we call smarter devices churn at a lower level. And so there are a number of things as well as I'd mentioned earlier our offers, our brand, our service quality that we believe will reduce churn meaningfully over the long-term.
Dan, have you seen any adverse impact to churn since you've launched the money back guarantee?
It's too early to tell, but no we have not.
Your next question comes from the line of Jason Armstrong.
Congratulations, Bob on the accolades. Maybe a couple of questions, first on, just following up on the churn question, I guess one of the ways we've looked at it is, if you look at gross adds from two years ago, there is a high correlation and what happens with churn this quarter. And as we look at that over the course of 2010, go back to 2008, your gross add activity dropped off pretty down meaningfully. So I'm wondering is that the right way to think about the way churn can fall off over the course of this year. And the second question is just on margins. I think Bob in your prepared remarks, you talked about rate pressure going forward giving increasing gross adds and smartphones in the mix. Was this a comment on expectations for margin pressure and how should we think about that? Thanks.
Jason, I'll take the first half of that. You are exactly right. There is basically a correlation with gross adds because, in fact, there was two buckets of customers that you have when you look at it from a churn point of view. You have on-contract customers that churn at a low rate and customers who are off-contract that churn at significantly higher rate on average. So we are focusing on improving on both, number one, getting more gross adds, which puts more or a higher percentage of our customer base on-contract that helps with churn. But we are also seeing improvements in off-contract churn, which kind of comes the hard way by just providing better customer service. And thinking of churn going forward, it's a combination of two things. It's the percentage of on-contract customers and that, of course, has been helping our competitors reduce their churn over the last few years as they've been driving a lot of gross adds, but then also improving off-contract churn, and we are making a lot of progress there as well.
Great. And on the margin question?
I was referring there, as we went into the first quarter, we had some favorability in our subsidies because the number of handsets was down from the fourth quarter. But as we look into the remainder of the year, the remark was that we would probably see some more pressure in that as we bring out all the new handsets that Dan was describing about and move into the 4G. So our goal, as I've said earlier in the meeting, was to try to stabilize all our metrics. And this will put some downward pressure. But we will continue to work on costs as well to keep these things kind of stable through the year.
Your next question comes from the line of Mike McCormack
First, I guess, for Bob. On the expense side, clearly, year-over-year, it's been tough to get cost down. But just trying to get a sense for the impact of the network outsourcing and when or if we might to be able to see a benefit of that on the cash cost side from that. And then, secondarily, on the Any Mobile, Anytime, can you guys give us some flavor on the impact on ARPU during the quarter?
On the expense side, we've been working through our expense to do things to protect our margins, stabilize our margins, maintain our cash flow, where we needed to do, to do those things we talked about earlier. But also some of that expense has to go back into revitalizing the business in marketing media, subsidies, and all those type things. So that's where we're working through. On the network side and the outsourcing, we have transferred over a sizeable number of people into the outsourcing deal. Most of that has been those savings; the initial savings have been recognized, and it will continue to be a better deal for us as we don't have to do the additional heavy lifting on IP and stuff like that, which [I assume brings] to the party. So those savings, while significant flow into the company and they are not in big chunks and they are in our estimates going forward as we try to stabilize the operations this year.
Mike, Dan here. With respect to Any Mobile, Anytime; Any Mobile, Anytime has had a, we call it, a declining or negative impact on ARPU. But that wasn't unexpected. In that year, we have much less; we call it, overage revenue coming in. But with respect to the case that we put together, we did the analysis when we launched Any Mobile, Anytime on, we call it, the profitability of it. And it is doing better than we anticipated because even though the ARPU decline has been real, we're getting more gross adds and lower churn than we expected on Any Mobile, Anytime. So all in, Any Mobile, Anytime has been doing very well for us. But it does pressure ARPU. But again, this is also part of the, we call it, the tailwind to the churn and also to gross adds.
And Dan you guys have been disclosing the number of 4G adds?
Disclosing number of 4G what?
Additions during the quarter?
As of this time, we're not planning to disclose that.
Your next question is from the line of David Dixon
A couple of questions. First of all, Dan, just following up on iDEN network outlook, I wondered if you could talk about the strategic importance of coverage liaise that comes to Sprint and perhaps some insight on the potential timing to wave some coverage liaise spectrum into the network going forward certainly help you on the roaming expense line? And along with that if you could perhaps give us some insight, Bob, on the funding strategy for D Block spectrum if you are able to? And secondly, one of the strategic objectives appears to be that set yourself apart as much as possible from your competitors T-Mobile, Leap, and Metro in the pre-paid space, but we've seen the expansion in competitive coverage recently from those operators. We've seen as well a decision from the FCC that mandates in-region roaming that helps in that regard. So perhaps if you could talk a little bit about how aggressive you think you need to be on pricing to drive this differentiation going forward? That will be terrific. Thanks.
You've asked more than we're going to about chat about. I want to make sure though that the first question that I understood it, because you cut out just a little bit, the first question was about iDEN, I think it was. And was it coverage?
That's right. So let me just clarify that, Dan. We were highlighting the strategic importance of coverage liaise spectrum, specifically and how important you think that is? Obviously, the iDEN network offers that opportunity, and I know you've mentioned in your remarks that you are working in this area. I just had some insight into the timing that you think you expect to weave that into the network going forward. Is that two, three, four, five years ahead? Or are we expecting to see that perhaps as early as next year? And then the funding strategy for D Block spectrum, which speaks really just for the longer term future proofing of the network?
Well, first of all, as I mentioned, we are beginning to do that in a very small way today, that is using, for those on the call, we have high-quality 800 megahertz spectrum on the iDEN network that provides very good kind of in-market and in-building coverage that gives us the advantage of not only improving service to our customers, but also the opportunity to reduce our in-market roaming costs for our customers. So that's why we are looking at it on CDMA. So, for example, as customers are, as we have fewer customers on the iDEN network, we can take some of that spectrum and use it for our CDMA services; and we are beginning to do that. And we are still looking at all of our alternatives what I have mentioned earlier and we haven't reached decisions yet because there are a number of very promising technologies coming onboard that will make it more cost effective, if you will, to reaffirm spectrum and use it more efficiently across our various networks. But David, you are exactly right. One of the big benefits of doing that is to potentially reduce in-market roaming costs. With respect to the D Block, we support an auction of the D Block to promote competition in wireless broadband. So that's we have been kind of very, very clear and vocal in terms of our position on the D Block, and we would expect that to be auctioned at some point in the future.
And then on the pre-paid strategy going forward?
What was the question with respect to prepaid?
So specifically just how aggressive we think we need to be here with respect to pricing, that was one of the areas of differentiation you pushed forward within '09 with Boost out of the gate which was very successful. We've seen some recent coverage expansion activity. At Leap, we've seen in-roaming mandate be established here by the FCC that helps the regional wireless carriers artificially perhaps, but it's a question on how aggressive do you think you need to be on pricing going forward to continue to drive that differentiation from Leap and Metro and then T-Mobile in the prepaid space?
Well, we don't provide a lot of competitive information with respect to what we plan to do on the pricing side. But I think our multi-brand strategy in pre-paid allows us to much more effectively provide kind of cost effective and price effective solutions for customers in different segments. Dan Schulman, do you want to make any comments?
Yeah. I'll just really quickly, Dan. Look, price is always a part of anyone's value proposition. But I think if you deploy sophisticated marketing approach that usually looks at much more than just price. And as we segment, as Dan said, much more effectively, we can address the sort of unique market needs without using a single blunt tool like pricing as the dominant weapon of choice. So I think our segmentation, our understanding of customer needs, and the multiple brands that we have out in the market and more that we are going to put out into the market, allow us actually to market much more efficiently than just by pricing down different segments. In fact, you'll see our strategy is well beyond pricing. So I would also point out that there is some rationality in pricing piece of this market. I think you are seeing some formulary quite aggressive players like Page Plus actually beginning to take up their pricing in some of the unlimited space. On May 18, they'll take the pricing up from $35 to $40 for an unlimited package. So I think people are beginning to understand that if you look at different segments, there are obviously price points that are out there, but you can compete very effectively by providing the right value to meet the right needs of those segments.
Your next question comes from the line of Simon Flannery
Perhaps, you could just update us a little bit on the Virgin integration, where are we in terms of driving synergies from that transaction and other benefits from the integration. And secondly, Dan, a lot of talk in the industry around tier data pricing, buckets of data, how are you thinking about that?
Well, Simon let me take the second one and then I'll give the first question to Dan Schulman. We are thinking about it, but we'll announce any changes to pricing when we are ready to do that. But it's clearly something worth contemplating and analyzing. Dan, do you want to answer this question with respect to pre-paid?
Yeah, sure. Hi, Simon. So I think the integration, frankly, is going much better than any of us expected. I think a lot of that is because there is a great cultural fit between the Boost organization and the Virgin Mobile organization. Frankly, that cultural fit can be much better. So we formed the team. The team is now up operating, running quite efficiently. We did aggressively go after synergies. We cut almost one-third of the combined organization that was painful to go do, but we got through it quite quickly. We now have synergies that are not only well ahead of plan, but they are well ahead of plan, both in the amount that we've realized and in the timing as well. And as I mentioned, we've done that without losing any of the efficiency or productivity of the organization. In Q1, we hit all of our targets. Frankly, we exceeded most of them. And importantly, reversed a lot of the Q4 trends. We were losing share as we exited Q4, and if you normalize our share of gross adds, we actually gained slight share in the first quarter. So I think the other real important thing is we've been together now for four and a half months or so. We've got our strategy completely formulated. That strategy has been enthusiastically received by retailers, by handset manufacturers. And frankly, in the middle of this coming month in May, we will roll out a fully revamped Virgin Mobile proposition. We'll roll out another brand to address the pay-as-you-go segment, and by the end of the second quarter, we will be fully rolled out with our multi-brand strategy. So I feel like the integration from all of our perspective has done quite well.
Your next question comes from the line of Tim Horan
Two questions. Dan, do you think you were affected more by the weaker economy than your peers on the downside, and maybe you can benefit a little bit more from the upside? And Bob, just a clarification on the wireless EBITDA margins. You've been kind of stable for the last three quarter or so at 17% on the wireless EBITDA. Do you think that's a good goal for this year and next? Or are you saying that possibly that could drop down to 16%, you'd be happy with that within handset subsidies? Thanks.
With respect to the economy, Tim, I think we probably were affected a little more just because the economy tended to affect business more than consumer in terms of what we saw. And we have a higher skewing toward business. So higher percentage of our revenues and number of our customers come from business or enterprise customers as a percentage of our overall base than our competitors. And we'll see whether that begins to move around. Although, traditionally, you see whatever kind of moves down first, pulls back or starts to improve first. From what I can see on the economy that consumers are responding and coming back faster than business in terms of their attitudes and their buying behavior. Business customers are still taking a little longer than they once did, let's say, two years ago to make decisions. They are more thoughtful about adding cost back and they taking cost out. So I think over time when the recovery comes, you'll see business come back robustly. But we are seeing some signs that business is beginning to come back. But I think it's actually, if you will, recovering at a slower rate and a lot of it is psychological than what we are seeing on the consumer side.
On you question, Tim, on the wireless margin. As the year progresses, we continue to work on cost to keep that margin stable. I think the big pressure we'll have actually as the year goes on is the subsidy rate as these more smartphones and the 4G equipment comes out. So again, the overall thing is to try to keep this as stable as we can during the year.
Your next question comes from the line of James Ratcliffe.
Wondering when you look forward to 4G, can you talk about the margin in a truly variable per customer basis you are likely to see on 4G going for Clearwire versus the variable operating costs you face for incremental 3G customer? And also, how do you think in the event that Clearwire brings another carrier onboard as a customer, how do you think your economics there would stack up versus that carrier?
Well, with respect to those questions that's more detailed than we provide, but let's just say that we work with Clearwire on what are, if you will, wholesale rate is that we get from Clearwire. But the answer to the second part of your question, as part of the contract, if you will, as part of the creation of Clearwire, we have a discount, let's call it, the founder's preference discount that is lower than what can be offered to any other carrier.
Your next question comes from the line of Ric Prentiss
A couple of quick questions, maybe one for Dan Schulman. Dan, last quarter when we were talking about the segmentation work, there were some discussions that now you have two networks to sell on, both the CDMA and the iDEN side. Now, you've been onboard, combined the teams, what are your thoughts about the pre-paid segmentation having the ability to have owner economics on both networks? And then the second question would be, a lot of discussion on the post-paid side, a lot of discussion on the possibility of an iPhone coming on CDMA. For Dan Hesse side, what are your thoughts as far as if a device comes, is it good, bad, and different your share gains that you guys have been seeing?
Dan, do you want to take part one?
Yeah. Sure Dan. Good to talk to you Ric. First of all, it's, obviously, quite nice to have owner's economics as opposed to MVNO economics. You can create, I think, very compelling value propositions, sort of backwards engineer your cost structure to make sure that you deliver exactly the financial return that you want to back into the corporation and yet still provide value propositions or a clearer design to win in the marketplace. And so I do think having owner's economics. But coming from a MVNO background, that looks at every single piece of the cost structure and knows that in pre-paid, it's really, Jacks or better in the poker game is to have a leaner cost structure possible. And so we've been able to utilize both having network owner's economics and that philosophy of really minimizing every single possible cost that you can have to create propositions that, one, you see out in the market, but, two, as I have mentioned, we'll introduce several new propositions within the next two to four weeks into the marketplace that I think will have very compelling value propositions.
We are going to utilize both the iDEN and the CDMA network. I think the CDMA network, you are going to see us utilizing that more and more. Frankly, it provides depending on the segment that you are addressing, superior kind of data type of connectivity, especially for the revamped Virgin Mobile proposition. That's going to be a very important element of the proposition as we go after young, savvy consumers who are all about staying connected through advanced devices via social networking. And also, even on the Boost side, we just announced another couple of handsets on CDMA. I think actually on the Boost side, quite frankly, as we tend to utilize iDEN for push-to-talk functionality, this is a large segment that want that, but going on to CDMA getting a broader array of handsets, probably a better data experience has enabled us to compete very effectively in that Talk and Text segment without actually having to lower prices. I mean the demand is definitely there for Boost. It's just a matter of making sure we can supply all the handsets that we need to on that. So I'd say in general, Ric, we are going to be utilizing both of those networks depending on the segment that we are targeting. And I think we can provide very compelling value propositions and very attractive financial returns back to the company.
Ric, Dan here with or Dan Hesse, the other Dan, on part two. Obviously, I am not going to comment or speculate on whether or not we may have the iPhone at anytime in the future, but theoretically there is no question. Apple is a very strong brand. They make very compelling products. So something like that would clearly drive more customers.
Your next question comes from the line of Brett Feldman.
Just maybe continue discussion here about the importance of broadband in the pre-paid space, and you highlighted earlier that the majority of the decisions now are in pre-paid. Should we expect that you are going to leverage your relationship with Clearwire to offer 4G services to your pre-paid customers?
That's a possibility.
What would be the key decision here? Is it just whether the demand is in place or whether you are following up the cost curve or whether you got cheap phones? Or is it more nuance in that?
The decision is really no different than it would be for offering a 3G service. And stay tuned, especially as you see Dan Schulman and the pre-paid team roll out their multi-brand strategy, things will become more apparent.
We have reached our allotted time for question and answers. Miss Brentano, do you have any closing remarks.
Yes. Thanks Janice. Thank you very much for your participation today. If you have any additional questions, please contact Sprint's Investor Relations team at 1-800-259-3755. And this concludes our call. Thanks again.
This concludes today's conference. You may now disconnect.
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