Sprint's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: Sprint Corporation (S)

Sprint Corporation (NYSE:S)

Q1 2014 Earnings Conference Call

April 29, 2014 08:00 AM ET

Executives

Brad Hampton – Vice President-Investor Relations

Daniel R. Hesse – Chief Executive Officer

John Saw – Chief Network Officer

Joseph J. Euteneuer – Chief Financial Officer

Analysts

Jennifer M. Fritzsche – Wells Fargo Securities LLC

Amir Rozwadowski – Barclays Capital, Inc.

Adam Ilkowitz – Nomura Securities International

Kevin Smithen – Macquarie Research

Phil A. Cusick – JPMorgan Securities LLC

Jonathan Chaplin – New Street Research LLP

John C. Hodulik – UBS Securities LLC

Operator

Good morning, my name is Toni and I will be your conference operator today. At this time, I’d like to welcome everyone to the Sprint Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions).

Thank you, Mr. Hampton you may begin.

Brad Hampton

Thank you, Toni. Good morning everyone and welcome to Sprint’s quarterly earnings call. On the call today, Daniel Hesse will discuss operational performance, John Saw will provide an update on the network and Joe Euteneuer will cover financial results. After that, we will open the call to your questions.

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

Slide 2 is our cautionary statement. I want to point out that in our remarks this morning, we will be discussing forward-looking information, which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review, including our annual and quarterly reports.

Turning to Slide 3, 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 quarter can be found in the attachments to our earnings release and also at the end of today’s presentation, which are available on our website at www.sprint.com/investors.

Let’s move on to earnings, on Slide four. Financial results include a predecessor period for the first quarter of 2013 related to the results of operations of Sprint Communications, Inc. formerly Sprint Nextel prior to the closing of the SoftBank transaction on July 10, 2013, and the applicable successor periods. In order to present financial results in a way that offers investors a more meaningful comparison of the year-over-year quarterly results, we have combined the first quarter 2013 results of operations for the predecessor and successor periods.

The enclosed remarks relating to the first quarter of 2013 are in reference to an unaudited combined period, unless otherwise noted. For additional information, please reference the section titled Financial Measures. Trended financial performance metrics on a combined basis can also be found on our Investor Relations website.

As announced earlier this year, Sprint changed its fiscal year end to March 31. As a result, Sprint will file a Transition Report on Form 10-K for the three-month transition period ended March 31, 2014. Since our board of directors has not yet met to approve our fiscal year budget, we will be providing updated guidance for the calendar year on this call and we will provide guidance for the fiscal year on our next earnings call with fiscal first quarter results. Any references to the first quarter on today’s call, we will refer to the quarter ended March 31, 2014.

Net loss for the quarter was a $151 million compared to a net loss of approximately $1 billion last quarter and $652 million in the first quarter of 2013. I would like to discuss a couple of items impacting our net loss this quarter. First, we had $75 million of asset impairments primarily related to the certain network equipment assets that are no longer needed.

We also recognized $52 million of severance and lease exit costs, primarily related to backhaul access contracts for which we will no longer be receiving any economic benefits. And our previously announced workforce reduction plan.

Total depreciation and amortization was approximately $1.3 billion for the quarter compared to $1.5 billion last quarter and the year ago period. As you may recall 2013 included accelerated depreciation primarily related to the shutdown of the Nextel network and certain legacy 3G equipment.

Net tax expense was $56 million in the quarter and we expect net tax expense of $220 million to $260 million for the calendar year. Lastly, although Clearwire’s financial results are now consolidated with Sprints, and included in today’s presentation, its standalone audited financial results will be available on our website in the next several weeks, as required by its debt covenants.

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

Daniel R. Hesse

Thank you, Brad. We appreciate everyone joining us this morning. And thanks very much for your interest and support. I’ll touch on the operational highlights for the quarter. Turning to slide 6, our adjusted EBITDA of $1.84 billion is our best performance in almost six years and represents growth up 22% compared to the prior year quarter. This quarter marks the 11 consecutive quarter, we’ve exceeded or matched the Street consensus expectation for adjusted EBITDA.

Operating income also improved in the quarter in at $420 million represents our highest level in over seven years. We launched the revolutionary new Framily plans in the quarter and they quickly became our fastest growing rate plans on record hitting the 1 million customer mark in less than 40 days.

And finally, we continued progress on our network deployment. Sprint LTE service now reaches over 225 million people. We remain on track to be substantially complete with our voice and 3G network rip and replacement by mid-year. During the first quarter, we also launched more Sprint Spark markets and Sprint capable devices including the Samsung Galaxy 5, and the HTC One M8.

I’ll focus the balance of my remarks on our unchanging priorities, generating cash, improving the customer experience and strengthening the brand.

Please turn to Slide seven. We ended the first quarter with cash, cash equivalents and short-term investments of $6.2 billion. We delivered 1% year-over-year growth in consolidated operating revenue and postpaid ARPU grew year-over-year for the 14 consecutive quarter.

Joe will take you thorough the drivers of our adjusted EBITDA performance shortly, but as we have discussed with you in recent quarters we remain intensely focused on cost management and driving efficiency in the business even as we fund sizable investments in our network to deliver what we believe will be the best network and customer experience in the industry over time.

Our adjusted EBITDA service margin is up 4.5 percentage points compared to 2013, and a 23% is our best performance in almost six years. We are increasing our forecast for full year adjusted EBITDA from $6.5 billion to $6.7 billion up to $6.7 billion to $6.9 billion. With the increase in adjusted EBITDA and the accelerated depreciation of the Nextel and legacy CDMA assets behind us, we delivered our highest operating income in over seven years.

So please turn to Slide eight, and the customer experience. And one has become quite a streak , the first quarter represents our 21 quarter in a row of improved performance and lower costs in customer care. And our postpaid business calls for customer to care and care credits granted to customers were both best ever results and each improved on a year-over-year basis for the 21 consecutive quarter.

Our intense focus on improving the customer experience also yields significant bottom line results. In the first quarter alone we were down nearly $100 million in care expenses compared to the year ago quarter. (indiscernible) savings on an annualized basis on top of the billions we’ve already taken out of care expenses over the last several years.

Compared to the first quarter 2008, our quarterly spend on care credit is down 87% and our postpaid calls to care per subscriber are down 62%. Based on external third party data, we are now the wireless industry best-in-class company for care calls per customer.

As I discussed with you on the last couple of calls and as expected our postpaid churn continues to be elevated as we work through the significant construction impacts associated with the complete rip and replacement of our entire 3G and voice network. This impacts our customers experience and satisfaction levels which we had improved from industry worst to industry best levels. But the construction is required for the ultimate integration of the diverse Sprint, Nextel and Clearwire infrastructures, area interfaces and spectrum bands into a single network architecture that supports Sprint Spark.

This intense network overhaul impacts the performance of our voice service, while the infrastructure is being replaced. The impact to the voice call experience is the largest driver of elevated churn we are experiencing during the construction. Based on data we collect from customer surveys, dissatisfaction with network as the main cause for customer churn is more than two and a half times higher in the first quarter of 2014 versus Q1 of 2011, the last first quarter as we have a seasonal business, before the network replacement activities began.

The increase in network related churn also accounts for significantly more than the total increase in churn over the same period. As I discussed last quarter churn elevates during the construction period and then begins to drop after we reached 70% complete with a voice and 3G construction in the market. We continue to see encouraging performance trends in the markets that are furthest along with a network build as customers have time to experience the improved performance.

Turning to Slide 9, to illustrate the transfer observing I’ll decompose our customer voluntary trends performance this quarter. Compared to the overall average rate for the quarter markets where the voice 3G construction is less than 70% complete are seeing churn approximately 15 basis points higher. Churn stabilizes when the voice network construction progress reaches 70%. For markets where we’ve been 70% or more complete for longer than six months churn in the quarter was 10 basis points lower than the average and for markets where we’ve been 70% or more complete for over 10 months churn was approximately 25 basis points better than average or 40 basis points better than in markets that are less than 70% complete with the voice built.

On a more detailed intra-market level, we also analyzed churn at the individual customer level within markets, as I explained a market that has had its voice network at least 70% complete for over 10 months has a market churn of 25 basis points below average, but within the market churn very significantly between customers who have had the five towers that utilized the most completed and those customers who’s top five towers are not yet complete. In fact, within the market the churn difference between these two sets of customers exceeds 40 basis points, if we use top five towers as a surrogate for voice network completion this gives us confidence of churn should continue to come down as we complete the voice network build.

Given those performance trends as we approach a mid-year completion of the bulk of voice and 3G construction, we’re confident that we’re building a solid foundation for a return to postpaid subscriber growth in the second half of the year. Additionally, we’re seeing promising leading indicators of future churn improvement. As the construction progresses, network performance metric such as blocked and drop call rates are steadily improving and network customer satisfaction which has been highly correlated with voluntary churns since we started the construction, improved slightly this quarter after three consecutive quarters of sequential declines.

Given the progress on our network build while we do expect churn to be relatively consistent with first quarter levels in the second quarter as the peak disruption from the network construction remains, we continue to expect lower churn in the second half of the year. Today, we’re also announcing availability of Spark in six more markets bringing the total to 24 Spark markets. Before I transition to a discussion of our brand, let me also mention some notable customer experience achievements in our prepaid business. For the third time in a row our Boost Mobile brand was recognized by J.D. Power & Associates for highest satisfaction with the purchase experience among non-contract wireless providers and Boost was among the only 50 companies across many industries to be named as – sorry – was among only 50 companies across many industries to be named as a customer service champion for 2014. Boost also accomplished its best ever first quarter churn performance this quarter.

Please turn to Slide 10, in spite of the network headwinds I just discussed, we’re able to deliver 16% year-over-year growth in Sprint platform postpaid gross adds. Tablet sales volumes were strong in the quarter a large majority of the tablet ads where we’re existing Sprint customers which enables us to grow revenue per account and reduce the count churn, even though it reduces reported ARPU, 90% of our customers are choosing a plan of $15 a month or more, a nice addition to account level revenue.

Turning to Slide 11, during the first quarter we refreshed this Sprint brand positioning and launch new advertising campaign, featuring Framily and our network. Early results from the Framily campaign that launched at the end of the quarter were encouraging and represents some of the top engagement levels we’ve seen. In the first three days of the campaign we logged over 2.4 million online video views of the advertising. We also launched a marketing campaign in the quarter, featuring America’s newest network, now present in 20 cities that are the furthest along with network modernization this campaign touts the benefits of a network rebuild from the ground up.

Please turn to Slide 12. So in conclusion today I discussed our plan which builds on the foundation of our new network and leveraging our innovative Sprint Spark in Framily platforms. In four large metropolitan markets where the voice and 3G network replacement has been largely complete for months. We are seeing improvements in churn and on a lagging basis gross add share. In those markets we have now returned to consumer postpaid positive net ads. We forecast achieving positive postpaid net ads in the second half of the year. Later today here in New York City I am also looking forward to sharing with you the potential for Framily as an innovation platform.

I will now turn the call over to our Chief Network Officer, John Saw, who will give you more details on the network progress. John.

John Saw

Thank you, Dan. I am pleased to be with you today to provide an update on America’s newest network. We are in the home stretch now with rip and replacement of our legacy voice and 3G networks and continue to expect to substantially complete our 3G 1.9GHz network modernization by mid-year.

In addition, we expect to have voice service on our 800MHz spectrum on air across the majority of our footprint by the middle of the year, further enhancing the coverage and quality of our voice network. Also we now cover more than $225 million pops with 4G LTE across 443 markets and expect to cover approximately $250 million LTE pops by middle of the year.

In addition, we expect to have nationwide availability of high-definition or HD voice by mid-year, with over one third of our postpaid base already on HD voice capable handsets. Sprint Spark is now available in 24 markets and we plan to continue to evolve the enhance LTE network capabilities of Sprint Spark throughout the year by expanding both 800MHz and 2.5GHz LTE footprints.

We began turning up the 800MHz LTE radios on our sites last quarter and we’ll continue to expand across markets well we have completed the 800MHz spectrum rebranding. Regarding the TDD-LTE bill on our 2.5GHz spectrum I am pleased to report that we have completed lab testing of the A transmit get receive or 8T8R base station equipment with all three of our vendors and have begun field testing. We expect to begin overlaying to 8T8R equipment on our existing network, middle of the year and expect to approximately $100 million total 2.5GHz LTE pops deployed by the end of the year.

Turning to Slide 15, I would like to give you some visibility into the network performance improvements that we are seeing the network. Last quarter, we shared with you some of the improvements in network metrics and churn while markets exceeded 70% completion.

As we move closer to the goal line of our rip and replacement of the network you can see that the metrics only continue to improve. In markets where the legacy voice and 3G networks has been completely replaced we are seeing a 77% reduction in voice blocks and 34% reduction in voice drops compare to the levels prior to construction. That is really improvement from the day-to-day levels of the network prior to any disruption from the network upgrade.

This is extremely important because the number one factor driving our customer churn and the perception of our network is the voice performance. We are also beginning to see a meaningful reduction in roaming in the markets they are complete on nearing completion. This was not a key pillar of our rationale to undertake a complete rip and replacement of a network that is proving itself out.

Our team is laser focus on an efficient and aggressive build that completes the network upgrade, deploys high definition voice, rolls out new spring spot markets and optimizes network quality and performance for our customers. This includes working closely with our PS in sales marketing and care to understand a specific customer pain points with the network. This allows us to focus our resources on the sites impacting the most customers and to minimize impacts to the overall customer experience.

As Dan mentioned we’re already seeing significantly better churn and gross add performance in this markets that are completed. The finish line is finally insight in our marathon to completely rip and replace our network from a grown up. And I’m very excited about this foundation that we’ve built. Our new network is only the beginning as it now becomes the platform from which we will innovate to bring more capabilities and new services to our customers. We plan to continuously optimize our network as we overlay additional spectrum bands and evolve the capabilities of the network. It is fundamentally what I expect from my team everyday and what we have to do as we set our sights on having the best performing network in America. Our customers deserve America’s newest network which means fewer drop calls and a better broadband data experience than ever before.

I’ll now turn it over to Joe to take you through the financials.

Joseph J. Euteneuer

Thank you, John. And good morning everyone I’m happy to share with you that our quarterly results have continued the momentum in margin improvements that we built last year with adjusted EBITDA margins over 23% this quarter. We remain committed to improving the efficiency of our wireless business and driving cost out. As we continue to invest in our network for future growth. With that let me walk you through this quarter’s results.

Moving to Slide 17, Sprint platform postpaid net subscriber losses were $231,000 in the quarter driven by elevated churn levels which were up four basis points sequentially at 2.11% as we continue to experience network disruption and perception headwinds in a competitive retail market. We added 516,000 postpaid tablets in the quarter as we continue to grow existing accounts in our base. 7% of our Sprint platform postpaid base upgraded during the quarter inline with the seasonal trends from last year. Smartphones represented 94% of postpaid handset sales in the quarter. And now account for 83% of our postpaid handset base. Also 29% of all postpaid devices sold in the quarter selected the installment billing option up from 7% last quarter.

As expected Sprint platform prepaid experience net losses of $364,000 in the quarter driven primarily by the annual recertification of our assurance lifeline base, we expect a greater negative impact this quarter as more of the recertification deactivations occur and assurances impacted by the recent implementation of the national lifeline accountability data base.

It has had a negative impact on gross adds and were likely tamper the growth of this program not only for us, but also for the industry. We also shifted our focus away from lower ARPU, lower profit prepaid plans, to the higher ARPU, higher profits services within our boost and Virgin brands.

Wholesale and affiliate net additions up $212,000 were primarily driven by connected devices and marks the third consecutive quarter of growth in this business. Moving to revenue, wireless service revenue of $7.3 billion was relatively flat year-over-year as a slight decline in postpaid service revenues were largely offset by slight increases in prepaid and wholesale revenues.

Sprint platform postpaid ARPU of $63.52 in the quarter was inline with the year-ago period, while we did see a sequential decline in ARPU due to a higher mix of tablets and a mix shift to Framily plans. We expect these factors to drive sequential ARPU decreases through the year and on a full year basis to be approximately 5% lower in calendar year 2014. That being said it is important to remember that this is still accretive to EBITDA as tablets help grow revenue per account year-over-year.

And the shifts to Framily plans drive device sales through Sprint Easy Pay which benefits net subsidy expense. Sprint platform prepaid ARPU of $26.45 grew 2% year-over-year as the base mix shifts to higher ARPU Boost and Virgin brands. As expected wireline revenues declined $89 million sequentially driven by the continued cable voice over IP migrations and the annual inter-company rate refresh, with the inter-company impact being neutral to consolidated adjusted EBITDA.

Please turn to slide 18, consolidated adjusted EBITDA of over $1.84 billion, was up $334 million from the year-ago period and up $690 million from the fourth quarter. This improvement is driven by the continued improvement in our wireless adjusted EBITDA of over $1.8 billion, which improved 32% year-over-year and 75% sequentially, posting margins over 25%. Even when excluding the benefits of installment billing, we saw a double-digit improvement in wireless adjusted EBITDA year-over-year. While the expansion of wireless adjusted EBITDA margins is encouraging to growth and consolidated margins is somewhat muted by wireline and adjusted EBITDA which declined as expected sequentially by 89% to $12 million. Again driven by cable migrations in the annual intercompany rate refresh, which is neutral to consolidated adjusted EBITDA.

Wireless equipment net subsidy in the quarter was $1 billion. Equipment revenue was up $186 million year-over-year, primarily due to the introduction of installment billing for devices, while cost of products was down $255 million, mostly due to a higher mix of tablet sales, resulting in a net subsidy decline of $441 million year-over-year. The sequential decline of $531 million in net subsidy expense was also driven by seasonally lower sales volumes.

As we discussed last quarter under the Sprint Easy Pay, customers are billed for their device over 24 months and we recognize the equipment revenue less the imputed interest, at the same time as the expense. While customers on Framily plans enjoy competitive prices on their monthly service, which pressures ARPU and service revenues, the total value proposition when combined with Sprint Easy Pay is accretive to EBITDA as the average monthly payment is actually the same or oftentimes higher in exchange for the flexibility of a no-contract offer.

In addition, we are seeing customers that elect the installment billing purchase option having a 33% higher attach rate for device protection plans. Furthermore, while it is accretive upfront, it is important to note that we also see a higher customer lifetime value for customers taking Framily and Easy Pay as compared to subsidized plans underscoring the long-term value creation of the program. Ultimately, we want to provide our customer with the choice that works best for them in providing both subsidized and installment device purchasing options and service rate plans.

Wireless cost of service of $2.1 billion decreased $65 million year-over-year, primarily due to the elimination of network expenses related to the Nextel platform, lower 3G roaming expenses, and lower service and repair expenses, partially offset by the net impact of the Clearwire acquisition. Wireless cost of service improved $142 million sequentially, primarily as a result of lower Sprint network modernization spend and 3G roaming expenses.

Wireless SG&A expenses of $2.3 billion, increased $43 million year-over-year, but we’re down $171 million sequentially. The year-over-year increase was primarily driven by higher bad debt and selling expenses, partially offset by lower care expenses that Dan mentioned. The sequential decline was driven by lower selling and care expenses, partially offset by higher marketing expenses.

Moving to Slide 19. We ended the quarter with a total liquidity position of $8.6 billion including cash, cash equivalents, and short-term investments of $6.2 billion, and $2.4 billion of undrawn borrowing capacity under our revolving bank credit facility.

As we look ahead, we have roughly $300 million of other maturities that come due in calendar year 2014, which we expect to retire in full, and no significant maturities until December of 2016. Additionally, our 2.5 gigahertz network vendors have received financing approvals from their government agencies. Although we can’t assure you that we will close on each facility, we look forward to continuing to work with them in the coming months to reach an agreement and thereby diversify our funding sources. We also expect to enter an agreement shortly relating to the securitization of some of our service-related accounts receivable.

Capital expenditures of $1.1 billion in the quarter were lower both sequentially and compared to the year-ago period. As I mentioned to you last quarter, we expected a sequential decline in CapEx as many of the construction-related milestones for the legacy network upgrade had been reached as we move into the final stages of the project. Our capital spend will ramp through the year as we continue to expand LTE on 800 megahertz and 2.5 gigahertz spectrum to enhance the customer experience.

Free cash flow was negative $1.1 billion for the quarter compared to negative $495 million for the year-ago period and negative $2.8 billion last quarter. The sequential improvement was driven by the higher EBITDA and lower CapEx as we discussed as well as favorable changes in working capital. We do expect some impact to working capital from installment billing with the magnitude being dependent upon the level of adoption.

Now I would like to provide an update on guidance for calendar year 2014. We made strides during 2013 in terms of improving our adjusted EBITDA margins and have continued that momentum into 2014. We expect to continue to take additional costs out of the business this year as well as seeing the financial benefits of the network modernization.

However, the gains in our core wireless margins are partially offset by the significant declines in wireline adjusted EBITDA. Therefore, we are increasing our expected calendar year 2014 consolidated adjusted EBITDA guidance to between $6.7 billion and $6.9 billion. In addition, based on the projected depreciation and amortization, we expect to continue to generate positive operating income in 2014.

From a capital perspective, we will continue to make investments in the network as we wrap up the bulk of the remaining rip-and-replace activity and additionally focus on the expansion of Sprint Spark throughout the year with the 2.5 gigahertz LTE overlays being weighted to the second half. Therefore, we expect capital expenditures to be approximately $8 billion for the calendar year 2014.

In closing I’m proud of what the Sprint team has been able to accomplish thus far, but there is still more work to do and I am confident their continued hard work and dedication will make us successful this year and beyond. I’ll now turn the call back over to Brad to begin Q&A.

Brad Hampton

Thanks, Joe. In just a minute, Tony will instruct our listeners on how to queue up for the question-and-answer session. I want to point out that you may access an audio replay or a webcast of our presentation on Sprint.com/investors.

We will now open the line for your questions. Tony, please instruct our participants.

Question-and-Answer Session

Operator

Yes sir. (Operator Instructions) Your first question comes from the line of Jennifer Fritzsche with Wells Fargo.

Jennifer M. Fritzsche – Wells Fargo Securities LLC

Great thank you very much for taking the questions. Joe, I just want to thank you for the disclosure also in markets that have had that change of service or network upgrades for the past 10 months. Just some question on the gross adds there. The churn disclosure was great, but are you seeing in areas like Chicago an improvement in gross adds just in core not including tablets? Are you seeing a change in customer behavior there?

Daniel R. Hesse

Hi, Jennifer this is Dan. There is lag with gross adds, so I gave actually an example of the markets that have been 70% complete for 10 months or more, and in four large ones. On the consumer side, we are seeing an increase or improvement in gross add performance there. As you know, on the corporate liable side, there is not only kind of more of a lag, but their purchasing cycle is longer, they only do it periodically, so we haven’t seen it yet, but we believe it will come, but it will just lag a little bit more.

So the results I described, you know we begin to see churn improvements after a few months and then it takes longer for gross adds, but this is encouraging that is in the markets with 70% complete for longer than 10 months, if you add a few more months to it, we are beginning to see some positive trends in gross adds on the consumer side.

Jennifer M. Fritzsche – Wells Fargo Securities LLC

Great, thank you.

Daniel R. Hesse

Thank you, Jennifer.

Operator

Your next question comes from the line of Amir Rozwadowski with Barclays Capital.

Amir Rozwadowski – Barclays Capital, Inc.

Thank you, very much. I was wondering if we could touch a bit more on the competitive landscape perhaps, Dan. Thinking about sort of how the trajectory has been with some competitors willing to absorb ETF fees and some other competitors relying on pricing as a means to differentiate sort of their services. I’d love to hear your thoughts in terms of your positioning and how you expect to compete from that perspective once sort of the Spark Network is up and running nationwide?

Daniel R. Hesse

Well, there is more to come, and even though that it is a fairly competitive pricing environment right now, I think -- part of it, I think is, optically, it looks more that way because the major change we’re seeing is the movement to more installed bill, so the customers are paying for their devices separately, so the rate plans look a little bit more aggressive than they are.

Our real focus right now really are two fold: One on the network and improving the network, and as our network perception improves and we get Spark rolled out, we’ll clearly have network become a larger and larger part of our message, and I think we will go over time from network being a disadvantage to network being an advantage, but our real platform for growth from a marketing perspective is Framily. We think it has and later today we will be describing kind of the next evolution of Framily. It’s a foundation upon which there is a lot that we can do with it.

And it’s a great offer, and it kind of breaks the traditional, if you will, boundary of a family plan being one bill -- one person is responsible for all of it, and you pretty much have to live in the same place would be blood relatives, and I think there is a lot of flexibility here, so stay tuned. But, as I indicated a little bit in my comments, network is obviously a crucial foundation for being competitive. It almost doesn’t matter what your offer price is if your network is not considered to be strong.

And again, we want to move that into the position of it being an advantage, but Framily has a lot of legs, and I think today will just be the beginning of what you will be seeing moving forward in terms of what we’re able to do to leverage Framily really as an innovation marketing platform.

Amir Rozwadowski – Barclays Capital, Inc.

Thank you very much for the incremental color Dan.

Daniel R. Hesse

Thanks, Amir.

Operator

Your next question comes from the line of Adam Ilkowitz with Nomura Securities International.

Adam Ilkowitz – Nomura Securities International

Thank you very much. A question on the EBITDA and the cost side. The EBITDA improvement that you put out for guidance for the full year, how much of that is due to increasing adoption of Easy Pay? And then on the underlying operating costs, it appears that you stepped up a bit on marketing in the first quarter selling expenses as you mentioned, is this a new run rate to be using for the full-year or will it continue to accelerate and what other costs are going to come down over the course of the year to offset that at the EBITDA line? Thank you.

Daniel R. Hesse

Sure, I think in regards to the EBITDA, remember in 2013, we did have double-digit growth year-over-year, and we did have real growth double-digit in the first quarter. So, although a portion of our EBITDA growth during the year will be as a result of the Framily Plan. There is more to come as we get out later in the year.

In regards to selling expense, we did try to divert some of the savings we had from cost takeouts in other areas to help bolster our efforts. I think it’s a competitive environment out there, and we want to continue to support it, but I think we will progress as we see how the marketplace unfolds in the latter part of the year.

Adam Ilkowitz – Nomura Securities International

Thank you

Daniel R. Hesse

Thanks.

Operator

Your next question comes from the line of Kevin Smithen with Macquarie.

Kevin Smithen – Macquarie Research

Thanks a lot. I wondered if you could go through the $0.59 sequential decline in postpaid ARPU. How much came from tablets, how much came from the new EIP plans, and then what was the total EIP benefit to EBITDA in Q1?

Brad Hampton

Yes. Kevin, this is Brad. We are not giving those specific details in ARPU. Both of those factors, you are right, are pressuring ARPU rate, both the mix of devices sold, tablet versus smartphones as well as EIP, and as Joe said, even when you excluded the installment billing impact to EBITDA in the quarter, we did have double-digit, year-over-year wireless EBITDA growth. Going forward, we will give directional visibility to take rates on EIP, and it’s very difficult as it becomes a big part of our business to truly carve out and discretely identify with any degree of confidence to that impact. So, we won’t be giving those specific numbers, but we’ll be happy to share the trends as we --.

Kevin Smithen – Macquarie Capital, Inc.

In Q1, sort of directionally, was the EIP impact greater than the tablet impact or vice versa?

Joseph J. Euteneuer

We are not giving that much specifics, sorry.

Kevin Smithen – Macquarie Capital, Inc.

Okay.

Operator

Your next question comes from the line of Phil Cusick with JPMorgan.

Phil A. Cusick – JPMorgan Securities LLC

Hi, guys thanks. I guess two questions. First Dan, as you think about positive adds in the second half, can you help us, is that positive adds in the quarter, positive adds for the full second half, or just think it is at some point in the second half you get back to positive? And then second of all, could you update us on your M&A comments? The FCC continues to make statements preferring four players, there has been some chatter about spectrum rules lately, if you can just give us some thoughts? Thank you.

Daniel R. Hesse

Yes Phil, thanks. First the new forecast we’re giving is that for the second half, we would be positive postpaid net adds, so if you add our total net adds for Q3 plus Q4 of calendar year 2014, that would be a positive number. So, the second half would just be positive net adds for -- if you will, for the last six months of the year. Secondly, I can't really comment on M&A other than to say that we continue to believe that some consolidation in this industry would yield a more competitive industry and would be good for consumers and good for the industry.

Phil A. Cusick – JPMorgan Securities LLC

Thanks Dan.

Daniel R. Hesse

Thanks, Phil.

Operator

Your next question comes from the line of Jonathan Chaplin with New Street.

Jonathan Chaplin – New Street Research LLP

Great, thank you very much. I wondering if you can tell us at the end of the quarter what percent of your markets were 70% complete, and what that figure was at the end of 4Q last year? And then also is it the case that at the end of 2Q, it will be -- virtually 100% of markets will be more than 70% complete? Thank you.

Brad Hampton

Hey, Jonathan it’s Brad. We are not giving the specific percent complete by market, and I will be happy to let John chime in on where we will be at the middle of the year in terms of overall.

John Saw

I think we have said Jonathan by middle of the year we expect to be substantially complete with the 3G network build. So we expect most of the markets to be substantially done.

Jonathan Chaplin – New Street Research LLP

And substantially means more than 70%, I am assuming, right John?

John Saw

Absolutely, yes.

Jonathan Chaplin – New Street Research LLP

Got it. Awesome, I guess one quick follow-up then. The chart on churn was extremely helpful, but it stipulates specifically voluntary churn. How much of the 2.1% churn this quarter was voluntary versus involuntary?

Daniel R. Hesse

Jonathan, we don’t break out or disclose voluntary versus involuntary, but I think the key point here is that more than all of the churn increase impact that you’ve seen -- you see from us versus our historical levels is related to the network.

Jonathan Chaplin – New Street Research LLP

Got it. Thank you very much, Dan.

Daniel R. Hesse

Thanks, Jonathan.

Operator

Your next question comes from the line of John Hodulik with UBS Securities.

John C. Hodulik – UBS Securities LLC

Okay, great, thanks guys. So you guys saw some increasing take rates on the installment plans, 29% of device sales. How do you expect that to trend through the year, I mean it was a big uptick from last quarter, and then maybe is there any meaningful difference in terms of percent of sales, whether it’s tablets or smartphones? And then, I guess similarly on the Framily side, 10% of the postpaid base, how does that progress through the year, if you could sort of in round numbers, just trying to get a sense there of the sort of pressure on ARPU? Thanks.

Joseph J. Euteneuer

So listen, on your first question, look we’re very optimistic about Framily planning and things that we can do with it in the future as Dan mentioned. We haven’t given much more specifics other than to watch it grow here for the future. So, we’ll come and give you more color as we get more -- get out there, but I mean you are talking about really four months into it with more to come, so let us get back to you with more on the next call on that. Your last part of your question, I think was --.

John C. Hodulik – UBS Securities LLC

Well, sort of the same thing on the Framily, just trying to sort of from a modeling standpoint get a sense for the pressure that that is going to have on ARPU. It sounds like there is new Framily pricing coming later today, and we’re just -- what is in the guidance for ARPU? What kind of penetration of Framily is sort of included in that number for year-end?

Daniel R. Hesse

Yes, I think what we’ve to look for is the attachment rate, like on the insurance plans has been really good as result of Framily plan. So there’s a number of things we’re starting to test and look at that can help mitigate some of the pressure you get on ARPU as result of the Framily plan, but remember as much as you’re focused on the top line on ARPU, please be focused on the overall benefit to EBITDA because the fact is equipment revenue is going up and you’re getting the benefit in the net subsidy line, and if we can move this industry to where people are starting to pay for their phones, it does put some more of the control back in our shop versus in the manufacturer’s shop, and we could believe that’s a good thing for us.

John C. Hodulik – UBS Securities LLC

I completely agree, I thought -- that’s why I asked the first part of the question, the 29% of the device sales, when should that move up, I mean are you guys making a conscious effort to try to drive your sales into the installment plans to get that EBITDA lift?

Brad Hampton

Yes, we’re not, and it’s Brad. We’re not commenting on the effective take rate going forward. I mean, obviously you’ve seen us roll it into some new sales channels just recently, and we don’t have enough experience yet in what the uptake will be in the national third-party channels, but we definitely think it is a good offer, and as we said, it is EBITDA accretive. It’s also customer lifetime value accretive when you look at the lifetime value of a customer on Framily and Easy Pay compared to the traditional subsidy model.

Daniel R. Hesse

John, this is Dan, just one more comment just because you said that or you made a comment that you are expecting price changes to Framily later today. What I talked about earlier was Framily as an innovation platform, and you should not read into that that there would be a change in the rate card.

John C. Hodulik – UBS Securities LLC

Okay. Got it. Thanks guys.

Brad Hampton

Operator, we have time for one final question please.

Operator

Your final question is a follow-up from Jennifer Fritzsche with Wells Fargo. Ms. Fritzsche, your line is open.

Jennifer M. Fritzsche – Wells Fargo Securities LLC

I’m sorry I was muted. I had forgotten to ask about the auction, Dan. Verizon had a meeting last night, and they seem particularly excited about the AWS 3 auction. I was just wondering what you have publicly said about that. Obviously, you don’t have a lot of AWS, but are you –as you look at these two auctions coming up in the next 18 months, do you expect to participate in both?

Daniel R. Hesse

Well. Jennifer, I appreciate the question. We’ll evaluate any spectrum opportunities as they present themselves. So, we really aren’t commenting yet on what we’ll participate in and what we won’t. I will say that – yeah, go ahead.

Jennifer M. Fritzsche – Wells Fargo Securities LLC

Great. Thank you.

Brad Hampton

Thank you everyone for your participation today. If you have additional questions, please contact Sprint’s Investor Relations team at 1-800-259-3755. This concludes our call.

Operator

Thank you for your participation. This does conclude today’s conference call. You may now disconnect.

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