Good morning. My name is Rishaira, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprint Nextel Fourth Quarter Earnings Conference Call. [Operator Instructions] And now I'd like to turn the call over to Ms. Yijing Brentano, Vice President of Investor Relations. Ma'am, you may begin.
Thank you, Rishaira. Good morning, and welcome to Sprint Nextel's fourth 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. Bob is joining us remotely today due to family reasons. Before we get underway, let me remind you that our release and the presentation slides that accompany this call are both available on the Investors 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 Part I Item 1A Risk Factors of our annual report on Form 10-K, Part II Item 1A quarterly reports on Form 10-Q and when filed, Part I Item 1A of our Form 10-K for 2010.
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 fourth quarter can be found on 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.
Next, I would like to cover our EPS results. Basic and diluted loss per common share for the fourth quarter were $0.31 compared to $0.30 in the third quarter 2010 and $0.34 in the year-ago period. Net tax expense for the full year 2010 was $166 million. In the fourth quarter, we reported a net tax benefit of $5 million, primarily due to resolution of state tax matters, which caused our full year tax expense to be lower than we have projected at the end of third quarter. We expect that for the full year 2011, we will record a net tax expense of approximately 10% to 12% on pretax loss. I will now turn the call over to Sprint's CEO, Dan Hesse.
Thank you, Yijing, and thank you for joining us this morning. The momentum Sprint has been showing in recent quarters continued in the fourth quarter, and Q4 represents a good way to cap our turnaround efforts throughout 2010.
Sprint's three key priorities have remained unchanged for three years. Number one, the customer experience is the foundation of building; number two, a strong brand, which leads to attracting and retaining customers; fundamental three, improving our cash position.
At the beginning of 2008, I told you on my first call at Sprint that the turnaround would not be quick and that there were no magic bullets. I'm not declaring mission accomplished yet far from it. We are not even close to reaching what I think Sprint is capable of, but as I'll describe, our progress has been significant and we're on the right track.
Let me begin with the customer experience on Slide 4. Bob Johnson and his team have completed their first three years of our journey with their 12th consecutive quarter of improved satisfaction with customer care and First Call Resolution, according to the Advanis survey. Both numbers achieved all-time best results. Our top box and bottom box satisfaction scores were also best ever. This progress was corroborated by Vocalabs, independent survey that was completed three weeks ago, where Sprint move into first place in the industry for both overall call satisfaction and First Call Resolution in the fourth quarter from last place just one year earlier. In the recently released J.D. Power survey, Sprint was the only carrier to show a double-digit improvement in their care customer satisfaction score over the past year. In consumer reports, Sprint was the only major carrier to improve in each of the past two years, so much so that we moved from last place two years ago into a statistical tie for first as the best overall choice. In calls to care per customer declined 10% from last year, reaching both an all-time best and achieving industry best in class.
Please turn to Slide 5. A leading independent survey rated customer satisfaction with Sprint's data service best in the industry in November and in December. In the same independent source rated customer satisfaction with Sprint's CDMA and iDEN networks both best ever. In addition, our CDMA and iDEN networks both achieved best-ever results for blocked calls. As a result, our fourth quarter postpaid churn was our best fourth quarter ever, contributing to our best-ever annual churn performance. Fourth quarter prepaid churn results represent our best quarter in five years, and our prepaid annual churn was at its lowest level in five years.
Please turn to Slide 6. I'll talk about the brand. These customer experience improvements has strengthened the Sprint brand. Our brand health metrics, which are most want to investigate, purchase consideration, first brand preference and positive brand momentum all achieved best-ever results in the second half.
In a well-known independent survey in the third and fourth quarters, Sprint improved its number of promoters and detractors significantly in each of the past two years, and the combination of these two, the net promoter score for the Sprint brand or CDMA, is up a whopping 24 points in two years, and we're the only major U.S. carrier to show any gain. We've moved from a distant fourth to a strong number two in just two years. Turning to Slide 7, I'm pleased to report these improvements in the customer experience in the brand helped us deliver 1.1 million total net adds, and we were also postpaid net add positive for the quarter. Both results are our best in almost five years.
The fourth quarter was also the first quarter where our entire Postpaid business has been net port positive, that is, more customers switched to the Sprint and Nextel brands than switched from Sprint and Nextel. It was also the first time that the Sprint brand, which was net port positive for its third consecutive quarter was net port positive against every major competitor.
The Sprint branded postpaid subscriber base, which increased by another 519,000 customers in the fourth quarter, is the fastest growing in the country among major wireless carriers as the Sprint brand was net add positive for the fifth consecutive quarter. Our postpaid's share of gross adds improved year-over-year for the sixth straight quarter and was up over 300 basis points year-over-year and up 460 basis points for all of 2010 versus 2009.
We improved our share of gross adds while the percentage of postpaid customers that carry a prime credit rating remains at a strong 84% as of the end of 2010. Prepaid net adds were up by a 175,000 sequentially, delivering our best prepaid Q4 net add performance ever. Our Boost, Virgin Mobile and Assurance brands also a positive net adds in the quarter.
Sprint launched 4G service in 16 new cities during the quarter including New York, San Francisco, Miami and Los Angeles6. Sprint 4G is now available in 71 markets reaching more than 110 million people. We had strong growth in our dual-mode 3G/4G customer base, driven by our industry-leading device lineup. The EVO and Epic continue to garner even more awards and accolades in the quarter, and the announcements of the HTC EVO shift and the exclusive BlackBerry 4G PlayBook brings our industry leading 4G device lineup to 18. The EVO 4G is our fastest selling new device ever.
Moving to Slide 8. On the cash front, we maintained a strong liquidity position by generating $913 million in free cash flow for the quarter and $2.5 billion in free cash flow for the year. Quarterly adjusted OIBDA was $1.32 billion as ARPU gains were offset by the investment costs associated with more postpaid and prepaid adds and upgrades.
Net operating revenue grew sequentially and in calendar year 2010, for the first time since 2006, our fourth quarter operating loss of $139 million showed a 74% improvement year-over-year and our annual operating loss was better by 57% versus 2009. Also in 2010, we significantly exceeded our synergy targets for the Virgin Mobile and iPCS acquisitions that we made in late 2009.
The first year of our network advantage outsourcing project with Ericsson met or exceeded its performance in financial savings objectives. Also during the fourth quarter, we announced our network vision blueprint, a multi-year initiative to enhance voice and data services, create network flexibility, reduce operating costs and improve environmental sustainability.
We have selected Alcatel-Lucent, Ericsson and Samsung to install new network equipment software, including multi-mode base stations over the next three to five years. The project will bring together a different spectrum bands onto a single-base station and will allow for the flexibility to offer new technologies using a range of spectrum bands.
We intend to repurpose some of our 800 megahertz spectrum for CDMA service which will enhance coverage and in particular, the in-building experience for our customers. We also expect to launch the next generation of push-to-talk services in 2011 on the CDMA network, offering customers subsecond call set of time along with robust data capabilities. It is expected that iDEN cell sites will be phased out beginning in 2013.
Currently, we are conducting laboratory testing and expect to begin field integration testing around the middle of the second quarter. We expect the first upgraded cell sites to go live with the new equipment in eight of the largest metro areas beginning in the August time frame. This will allow us to deliver performance improvement to as many of our customers as quickly as possible, and this will also set the stage for cost reductions starting in 2012.
We expect that Network Vision will provide us with additional flexibility to potentially use our own spectrum and network assets to provide additional 4G capacity or use other spectrum that may be available to us in the future over our network to create further 4G capacity. If Clearwire utilizes our modernized network, there could be significant economic benefits for both companies.
So in conclusion, I'm pleased with the progress we made in the fourth quarter and all of 2010. Sprint's customer experience, brand and subscriber performance all strengthened throughout the year and we generated strong cash flow too.
Chart 9 shows the change in major carriers postpaid net subscribers versus the previous year. Sprint's annual improvement of 2.7 million net subscribers versus the previous year is unprecedented in the history of our industry. If I were to pick a sports analogy, it would be 1999's Indianapolis Colts or Arizona Diamondbacks, both which registered record-breaking turnaround years and Peyton Manning's rookie season the Colts finished 13 and three after finishing three and 13 the previous year, a 10-game improvement. And after going 65 and 97 in 1998, Diamondbacks' owner Jerry Colangelo added Randy Johnson and a number of new free agents. In 1999, they won 100 games in their division. Both teams lost in the first round of the playoffs, so in spite of their improvements, they finished the season far from satisfied but their enormous progress signaled better things to come.
In spite of very strong competitive pressures in 2011, we expect to generate positive postpaid net adds and to improve total net adds this year as compared to 2010. The company expects full year capital expenditures to be approximately $3 billion and we expect to continue to generate positive free cash flow during 2011.
I would now like to turn it over to our CFO, Bob Brust, who will talk about our financial performance in more detail. Bob?
Thanks, Dan, and good morning to everyone. Moving on to Slide 10, I would like to start out by discussing revenue performance for the fourth quarter and full year.
We are pleased that total consolidated revenues grew sequentially for the second consecutive quarter. Revenues improved by 1.8% as compared to the third quarter of last year and were up 5.5% compared to the year-ago period. The sequential and year-over-year improvements were driven by higher equipment and wireless service revenues, partially offset by lower Wireline revenue. Acquisitions completed in the latter part of the fourth quarter of 2009 also contributed to the year-over-year improvement.
Wireless service revenues grew sequentially, primarily due to a higher average revenue per user for postpaid. Growth in the number of prepaid subscribers also drove sequential improvement in wireless service revenues. Postpaid ARPU, while still rounding to $55, benefited sequentially from higher monthly recurring charges, including a $10 premium data services add-on, an improvement in care cost partially offset by lower usage base charges.
We expect postpaid ARPU to grow in 2011 due to continued growth in smart phone sales and the $10 premium data service charge, which now applies to all smart phones activated since January 30. We project prepaid ARPU will decline slightly in 2011 due primarily to the continued success of Assurance wireless and our Boost with Shrinkage program, which we announced last October.
Boost with Shrinkage allows customers to reduce their bills in increments of $5 after six on-time payments to as low as $35 per month. We believe the program will lead to higher price satisfaction amongst our customers and lower churn.
Postpaid subscriber losses in 2010 slowed significantly as compared to 2009, improving by nearly 2.7 million on a full year basis. Although we still lost postpaid subscribers for the full year, we are very pleased with the improvement we saw throughout 2010, including the net addition of 58,000 postpaid subscribers during the fourth quarter.
The improvement in postpaid subscriber results and continued growth in prepaid subscribers, along with fourth quarter 2009 acquisitions, have been the key drivers in stabilizing revenue in 2010. In 2011, we expect wireless service revenues to grow, Wireline revenue decline and total consolidated operating revenues to be stable to slightly higher as compared to 2010.
Moving to Slide 11. As Dan mentioned, we had a good quarter in terms of free cash flow, generating $913 million during the quarter. This was up from $384 million in the third quarter, due in part to favorable working capital changes, a one-time federal tax stimulus refund of $153 million and lower sequential scheduled interest payments.
For the full year 2010, we generated a total of $2.5 billion of free cash flow, which was approximately $300 million lower than last year. The decrease in free cash flow was roughly equal to the increase in CapEx between the two years.
Looking ahead, we expect first quarter free cash flow to be lower sequentially. The primary reasons for the projected sequential decline includes scheduled higher interest payments and the expected reversal of other working capital changes, which benefited the fourth quarter. Additionally, the tax stimulus refund received during the quarter is not expected to recur and we intend to make pension contributions totaling approximately $150 million, with the majority of it occurring in the first quarter. We expect to continue to generate positive free cash for the total year 2011.
We ended the quarter with $5.5 billion in cash, cash equivalents and short-term investments. At the end of 2010, we repaid a $1.65 billion note that came due in January 2011. That was our only note maturity during 2011.
In January, we amended our export development Canada loan to extend the maturity on a portion of the $750 million originally due in the first quarter of 2012. We extended $500 million of this facility through December of 2015, while the remaining $250 million will still mature in March of 2012. As a result, 2012 maturities decreased from $2.75 billion to $2.25 billion.
Capital expenditures were $608 million in the fourth quarter compared to $462 million in the third quarter and $554 million in the fourth quarter of 2009. Total capital expenditures for 2010 were slightly over $1.9 billion compared to $1.6 billion last year. Capital investment in 2010 focused on wireless quality, coverage and capacity to maintain our competitive position and data services and network quality. As Dan talked about earlier, we expect that full year 2011 capital spending will be approximately $3 billion, including about $500 million of incremental spend due to the Network Vision program.
Originally, we had planned to spend about $2.5 billion in CapEx in 2011, including expenditures to add data capacity. Some of the capital assumed in the original plan will be substituted with spend through the Network Vision program. Keep in mind, the $500 million I referenced is incremental spend. Total capital expenditures related to Network Vision in 2011 will likely be higher than $500 million.
The total incremental cost of the Network Vision program over the estimated three- to five-year deployment program is expected to be between $4 billion and $5 billion. We expect that just over 50% of the incremental cost will be capital, while the remainder will be operating expenses. We plan on ramping up capital expenditures related to Network Vision in the second half of 2011, with the highest levels of capital investment taking place in 2012 and 2013.
We spent approximately $450 million on re-banding for the full year 2010 and are targeting to spend a similar amount in 2011. Some spend that was originally expected to occur in 2010 will likely occur in 2011 due to the timing of certain licensee reconfigurations.
Moving on to Slide 12. I will talk about the drivers of the sequential change in consolidated adjusted OIBDA. As Dan mentioned, consolidated adjusted OIBDA for the quarter was $1.315 billion, down $24 million sequentially and down $94 million from a year ago. Adjusted OIBDA margin declined 50 basis point sequentially.
Adjusted OIBDA declines sequentially primarily due to a higher net subsidy and sales and marketing costs, which were partially offset by higher service revenue and lower cost of service. SG&A increased sequentially, primarily due to higher fourth quarter media spend and selling expenses associated with stronger retail, gross adds and upgrades. Retail gross adds increased by approximately 5% as compared to the third quarter. The sequential increase in net subsidy was driven mostly by a higher postpaid and prepaid handset sales and also higher postpaid subsidies per device sold due primarily to the continued growth in the smartphone mix.
Cost of service was lower sequentially due largely to the effects of seasonally, including lower service seasonality including lower service and repair and cell site utility expenses. Wireline contribution to adjusted OIBDA was relatively stable sequentially as the revenue decline was mostly offset by a decline in cost of service. Revenue was lower primarily due to lower voice volume, which also drove the improvement in the positive service. Looking ahead, we are forecasting Wireline adjusted OIBDA to decline significantly in 2011.
The schedule migration of wholesale camera VoIP customers off of Sprint's Wireline platform is expected because Wireline adjusted OIBDA to decline by approximately $25 million sequentially in the first quarter and slightly less than $200 million for the full year 2011. We expect the migration of our largest VoIP customer to last through 2014.
At the beginning of each year, we re-established intercompany rates for transactions between our segments, which are generally dependent based on market rates. Over the past several years, there has been an industry-wide trend of lower rates due to increased competition of other Wireline and wireless communications companies as well as cable and Internet service providers. The change for this year will have no impact on the consolidated adjusted OIBDA but is projected to result in a decline to Wireline OIBDA of approximately $250 million for the full year. The sequential decline in first quarter is expected to be approximately $60 million.
On a full year basis, we are pleased with our cost managing results resulted in significant consolidated operating expense savings in 2010. Headcount reductions in 2009 resulted in savings of approximately $150 million last year. We also realized service and repairs savings of about $150 million, primarily driven by a focus on repairing customers’ handsets and using refurbished devices instead of using new devices for replacing. We saw an improvement in our marketing productivity as well as lower customer care costs as we continue to reduce call volumes, primarily due to fewer calls per subscriber. As a result of these savings, we were able to offset some of the increased costs associated with higher retail gross add and growing subsidy expense.
As Dan mentioned, our consolidated net operating revenues grew by approximately $300 million year-over-year, and operating expenses declined by approximately $500 million in 2010, resulting in a greater than 50% reduction in the company's operating loss. As I stated earlier, despite pressure related to scheduled migration of cable VoIP customers, we expect total consolidated operating revenues to be stable to slightly up in 2011. Growing revenues and improving our cost structure is key to improving long-term margin.
The Network Vision project significantly improved our cost structure and is expected to yield $10 billion to $11 billion in net benefits over a seven-year time frame. We should start seeing benefits from reduced roaming and backhaul cost in 2012 with expected margin expansion starting in 2013. We expect that 2014 will be the first year in which benefits should more than offset the incremental OpEx and CapEx. We currently assume that the project should breakeven on a cumulative cash flow basis in 2015.
We expect that subsidies and growth in data usage will continue to place pressure on margins through 2011 and anticipate that postpaid ARPU growth and continued focus on cost management should offset some of that pressure. Consolidated adjusted OIBDA in the first quarter will likely be relatively stable sequentially.
In summary, we are pleased with the recent improvements in subscriber and revenue performance. We look forward to focus on revenue growth and cash in 2011. Looking back on my time at Sprint, I'm encouraged by how far the company has come. When I joined the team about three years ago, the company was in a very difficult position. However, despite sizable economic headwinds and tough competition, the team managed to stabilize and even began to grow the business.
Sprint will continue to face new challenges down the road. However, as I prepare to return to the beach, I am confident that the company is in good hands. Now back to Yijing for questions.
Thank you, Bob. We'll miss you. In just a minute, Rishaira will instruct our listeners on how to queue up for the question-and-answer session. I want to point out that you may access an audio replay or webcast of our presentation on www.sprint.com/investors. We will now open the lines for your questions. Rishaira, please instruct our participants.
[Operator Instructions] Your first question comes from Philip Cusick.
Philip Cusick - JP Morgan Chase & Co
So let's start on the subscriber trajectory. So now that we've passed to positive postpaid for everybody. CDMA seems to be doing really well. What's the indication on iDEN losses? How do you think about where that base starts to sort of ease off in terms of losses and what's being done there? And then second, Bob, if you could talk a little bit about EBITDA for the full year on a consolidated basis as well given Wireline reductions, that would be great.
Phil, this is Dan. As I said in my comments, we are actually going to begin migrating some of our iDEN postpaid customers to the CDMA network once we develop those really robust new capabilities on CDMA that I described. I will say though that we have, as I mentioned in terms of network performance, the iDEN network is performing at its best levels ever, and actually, iDEN postpaid churn is better than it's been in many, many years. So we're providing a great service, our service experience to our iDEN customers. So we have done a lot to mitigate and reduce churn. And so iDEN's improvement is actually been a big contributor to our overall improvement in overall postpaid churn.
Hey, Phil, it's Bob. Your question was the outlook for earnings of this year. A lot of moving parts going on, especially with the commencement of the Network Vision. I think we will remain in a stable position with earnings this year versus last year as we did last year. And as we said in the comments, we should see improvements starting at 2012 with the backhaul and the roaming from the Network Vision and some upward pressure from more volume. So I'll look for another stable year this year.
Philip Cusick - JP Morgan Chase & Co
So wireless improves a little bit offsetting some of that Wireline...
Yes, something like that. It's hard to tell. Part of the Wireline's a reallocation across the part of it is true drop in revenues. So we have to deal with the drop in revenue, but we'll continue our cost improvement efforts this year and I would look for a stable year.
Your next question comes from John Hodulik. [UBS]
John Hodulik - UBS Investment Bank
Dan could you talk a little bit about sort of maybe sequential trends. Obviously, it's a lot of change in the market these days with Verizon getting the iPhone and some of the 4G launches. I mean, how do you expect -- I thought the positive postpaid guidance was very positive. How does that sort of play out through the year especially with the seasonality you've seen in the first quarter? And also, what kind of lift are you getting from sort of non-voice devices like tablets or hotspots, those kinds of things?
John, your question's kind of looking back on 2010 or more going forward?
John Hodulik - UBS Investment Bank
No, more going forward. It's looking in the first quarter and the seasonality and the sort of change in the competitive landscape.
Well, clearly, as you point out, there is clearly seasonality in our business. I think one thing one trend that we're going to continue to see in 2011 is that we'll probably see in the industry more growth in prepaid versus postpaid. And so I think that's kind of one of the overall trends. Clearly, today is a big well-known new device launch with a competitor. And we have actions in place to kind of respond and try to mitigate that impact. But as we said in our forecast, we expect to be net add positive on postpaid this year. And we intend to continue to differentiate ourselves in the market with simplicity and value through a very, very strong device lineup and to continue the improvements in the customer experience and continue to strengthen the brand. So as you think of the postpaid business going forward, and we talked about this a little bit in the comments, we've made a lot of improvement in terms of churn, both on the postpaid side and prepaid side in 2010, and that will be a major area of focus of ours going forward in 2011, so expect to continue to see churn improvements in the company as, really, we'll call it the primary vehicle and that will maintain our subscriber performance.
Your next question comes from Michael Rollins. [Citigroup]
Michael Rollins - Citigroup Inc
First, can you just give us -- I'm not sure if I heard the percent of the postpaid basis now on smartphones and the percent of sales that were smartphones. And then secondly, could you talk a little bit about Clearwire and how the need to expand 4G fits into your capital budget with Network Vision and what should the buy side expectation be for expansion of your 4G coverage footprint for 2011?
A couple of things. First of all, with respect to smartphones, for our CDMA base, 69% of the devices that we sold both new, if you will, the new plus upgrades in Q4 were smartphones bringing, if you will, the total CDMA customer base up to 50% at the end of the year on smartphones. Secondly, we're still working with Clearwire, and we're still working depending upon what we do with Clearwire will impact what we do, if you will, in terms of our own capabilities on our Network Vision with respect to 4G. So that's still work in progress. So we intend to make more comments in that regard in the future once they're solidified.
Michael Rollins - Citigroup Inc
And just one other thing for Bob. You mentioned before your goal to keep $4 billion I think in cash for the end of 2011. You earmarked a couple of changes to debt maturities, CapEx. What's your new target or is it the same target to exit the year with a certain cash position?
I think, Mike, we need to have a substantial cash position with the $2.2 billion of debt maturities next year and the Network Vision process going on. But it will be substantial. We have the new CFO coming on shortly, and then, it'll be up to he and the company and Dan as to what that position will be. But it will probably be somewhere where it's been.
Your next question comes from Mike McCormack. [JPMorgan]
Just thinking, Dan, about the situation in Q1 and obviously you talk about a significant launch today. How should we frame the sort of control in SG&A thought process as we go through Q1? I think, as a Sprint customer, I have been offered a pretty aggressive upgrade policy. What are the changes in that you've made or the actions that you've talked about to respond to the iPhone launch?
Look, Mike, as I said earlier, I think the key for us is just to continue to provide a very strong customer experience and the brand strengthens and what have you. We also announced in our results in the fourth quarter, we upgraded 10% of our base. So we've had a fairly substantial, and we'll call it aggressive, upgrade plan for our customers to get customers on contract. We're seeing -- actually, what's helpful to us is we're seeing, on the churn side, over time and in last year, a significant improvement in voluntary churn and in particular also, an improvement in off-contract churn, which is important in terms of showing us that the customers are more and more loyal to Sprint. With respect to Verizon, obviously, our customers not only have a strong device lineup, but they got a lot of value with what we provide them. So I'm not saying there won't be any impact when Verizon has the iPhone, but we're doing what we can to make sure that our customers stay with us and continue to have attractive offers out in the marketplace.
Dan, just a follow-up on the CapEx side, putting some parameters around the network vision spending, but what should we be thinking about as we exit this year assuming gross adds continue to hold up pretty well, sort of core CapEx as a percent of revenue on an ongoing basis?
Well, we haven't provided, if you will, forecast or guidance with respect to CapEx as a percentage of revenue. What we've said is that, this year, expect CapEx to be roughly $3 billion, which is up over last year. And roughly $500 million of that is associated with Network Vision and roughly -- the other half is just improving capacity and coverage for our -- especially on the Sprint side growing customer base on CDMA. The big spend though on Network Vision, it really kind of ramps up in the second half of this year and really the next two years of the largest spend year, if you will, 2012 and 2013. So you should expect on the CapEx side to see a slightly higher spend in those two years and then coming back down.
Your next question comes from Jason Armstrong. [Goldman Sachs]
Jason Armstrong - Goldman Sachs Group Inc.
First, on the recent price hike that you put in on Any Mobile, Anytime. I'm just wondering, is there something specific to that plan, maybe the marginal economics of it that drove the rate increase or do you think you have the opportunity to do this across more parts of your base? And then secondly on Clearwire, Dan, I think historically, you've talked about sort of limitations on incremental funding from your perspective really attached to their approach in the network or their approach to a retail strategy. It seems like there's been some positive movement there. I'm just wondering, should we interpret these as signals that you've sort of work out differences and are prepared to move forward with funding?
First of all, the increase that we've added to our Any Mobile, Anytime and our other, if you will, Everything Plans of $10 a month, originally, we have them on our two very high-end smartphones and we expanded that to all of our smartphones. And fundamentally, what drove it was that smartphone users used a lot more of our network than non-smartphone users. And so our cost of service, if you will, was higher for smart devices that non-smart devices. So we very much wanted to keep our differentiation in the market and what keeps our customers satisfied and what we know they want, which is the simplicity of unlimited. And to be able to maintain that, we felt this was the right thing to do rather than go into a metered approach for those higher-end users. So that was really the driver. And I wouldn’t signal at this point looking at doing it for other devices but, again, your question was really what drove it and it was really the additional cost of service on smart devices because the usage has been increasing fairly substantially year-over-year. Second, with respect to Clearwire, we have very good discussions and negotiations going on with Clearwire with respect to, if you will, resolving some of the differences in view between the companies. You mentioned one of them. We're discussing -- it's very public. We have good discussions going back and forth, good faith discussions with respect to wholesale rates and wholesale pricing, but I would not read anything more into that with respect to funding. We are not at that point where we've made any decisions in that regard moving forward. We're very pleased with the fact that Clearwire was able to secure additional external funding in the fourth quarter. And if they need more, that will be a bridge that we cross at that time.
The next question comes from David Barden. [BofA Merrill Lynch]
Maybe, Bob, I wanted to try to understand the moving parts a little bit better, so it kind of feels like the revenue picture on a consolidated basis is kind of flattish up for wireless a little bit. But on the margin front, as you say, lots of moving parts. If we're spending $500 million of incremental capital on Vision, it seems like a healthy percentage of the amount of operating expense we're looking for over this process, I guess, $2 billion to $2.25 billion is probably going to be coming out of over that time. So it feels like in the Wireless business, there's going to be, I don't know, $200 million, $300 million, $400 million of incremental expense coming in the second half. But then I guess I think I also heard you say that you're going to change the cost allocations where wireless is going to be paying the Wireline business about $250 million less, and that's going to start at the beginning of the year. So could you kind of try to walk us through how spending more on Vision, reallocating costs and then whatever other cost initiatives are going on gets us to the kind of flattish EBITDA in 2011 versus 2010, because I guess it feels like we should probably be anticipating a little bit more downside with the spending that's going to go on here?
Well, I think, like you said, there are a lot of moving parts. First of all, there is a relatively intense continually cost reduction effort going on as there has been. We expect, as I said in my talk, the stability in revenue is caused by a downward pressure in Wireline and an upward pressure in wireless. The wireless' upward pressure on revenue also helps us with our expense position and especially with reinvesting in our market and sales costs. So we are prepared with trying to keep these things stable this year, the anticipation of the benefits we're going to get from the Network Vision. So I'd say relatively stable, could be up a little bit, could be down a little bit. It's too early to call and I'm not going into those details with you right now, we're at the early part of the year.
Just, Bob, on that, so maybe help us understand the linkage then between the CapEx half of the $4 billion to $5 billion and then how the expenses get layered in. If you're going to spend $500 million of incremental CapEx in the second half of this year, what kind of OpEx incremental expense goes along with that?
I don't think we disclosed that yet. Have we Steve? Steve, are you on?
Yes, actually, I can help you out on this one. If you think about 50% of the incremental spend is OpEx over the period, and the way I’d look at that is break that into two halves. First half, and that is, when we are at cell sites and for a few months at each cell site, we're going to have an overlapping rent. So that increase happens, and it is really as we're building out over time, so not loaded into this year at all. Second thing to look at in terms of the expense is actually the migration of our iDEN customers and the cost of that. And that's quite back-end loaded because, of course, we're having -- iDEN's still going to be around until 2013. We're doing a lot of work in terms of migration now but we're not spending a lot of OpEx. And so we're anticipating in the 2013 period to be looking at migration cost. So that's the way I would sort of characterize the 50% OpEx spending.
And David, this is Dan. You're exactly right to point out that 2011, with the additional spend on the network and what we already disclosed with respect to Wireline, we'll require some things to improve in order to keep OIBDA relatively flat. But as I mentioned earlier, ARPU, we expect that to improve in postpaid churn. We expect that to improve in both postpaid and prepaid. We'll obviously continue to be relentless on the cost management side. And prepaid, its profitability will continue to improve because of the subscriber and revenue growth, if you will, on the prepaid side of the business.
Your next question comes from Brett Feldman. [Deutsche Bank]
Brett Feldman - Deutsche Bank AG
When you were talking before about the $10 add-on and how you came around to decide and then go ahead with that. You mentioned that you want to stick with unlimited as opposed to going into some type of metered or tiered structure. I was just wondering if you're in a position to offer unlimited at a lower price than your peers, why wouldn't you just tier and offer lower tiers at a lower price than your peers as well since that could potentially accelerate the improvement in your subscriber growth?
Well, first, there's a lot of complication or complexity in additional cost whenever you increase the number of offers that you have out there. We've reduced the number of rate plan combinations we have over the last two and a half years by about 90%. And that has a lot to do with our lower cost our lower calls to care, our improved performance at retail. So simplicity is very, very important for a lot of reasons. Secondly, as you add in more tiers, there's actually the potential of dilution where people will move down to lower ARPU levels as well as some of the positive potential that you outlined. So we will continue to look at this and watch this. We talked to our customers a lot. We have a pretty good handle on the market and where the competitors have their offers in the market versus ours. And we like the simplicity in value that we currently offer. But given the usage characteristics, the changes in there that are taking place at a fairly rapid rate in the market as well as competitive price moves, we may make a change sometime in the future, but we actually like the simplicity of the rate card that we currently have.
Your next question comes from Simon Flannery. [Morgan Stanley]
Simon Flannery - Morgan Stanley
You talked about 4G a couple of times within the context of the Sprint network. First, can you talk about your thoughts on LTE versus WiMax at this point? And do you have the spectrum, if you reformed the iDEN to do both CDMA down there and also maybe put in some LTE? I think you'd referred also potentially some other options for getting spectrum, perhaps you could expand on that?
Simon, we haven't said yet what we will do. But as part of the Network Vision project, as you know, part of the, if you will, the RFP part of the project was the ability to put LTE should we decide to do so on our network. We haven't reached a conclusion yet. We're still in the process of determining what we want to do in terms of 4G and deployment. Part of that is definitely looking at WiMax versus LTE. We do have the ability and the capability with Network Vision, and we do have the spectrum to put LTE on our own spectrum should we decide to do it, not for infinite period time, but we have the ability to do that should we decide to do that. And we, as I mentioned earlier, when we are ready to explain more about our 4G plans, we'll do so going forward. As I also said, we clearly are working well with Clearwire as well.
Simon Flannery - Morgan Stanley
So is that sort of a midyear process?
Either midyear or possibly even earlier in terms of telling you what we might do. Not midyear in terms of implementation but in terms of describing more to the investment community what our plans are with respect to 4G. It's likely we'll tell you something before the middle of the year.
Your next question comes from Greg Larsen. [Piper Jaffray]
Christopher Larsen - Piper Jaffray Companies
I just want to clarify, Bob -- and also thank you for your service and wish you luck in your retirement. On the Wireline side, the $200 million on the cable is in addition to the $250 million on allocation just to be clear, and that's just -- a little bit of that is accounting but there's also the Wireline pressure, so it's a total of $450 million. And then Dan, you've had a great decline in churn, do you feel like you need to keep growing your SoGA or do you feel this is a year where you can reap that harvest that you've sort of sown on the churn declines? And maybe you can talk a little bit about the impact to your gross adds from increasing -- the $10 increase. Do you feel like you've got cost structure right for your SoGA, for your SAC, et cetera?
The first question on Wireline, you have that right. You did the math properly. So I'll turn it back to Dan.
Chris, there clearly was an understanding on our part that there would be some, if you will, SoGA growth impact by increasing our prices, but we still thought it was the right thing to do in terms of our cost structure and profitability going forward. So as we look at our improved year-over-year postpaid performance, more of that will come from continued improvements in churn. We would hope that we could see some slight improvement in SoGA in 2011 versus 2010 and we will endeavor to do that. But the lion's share of the improvements will come, we believe, by continued improvements in reducing postpaid churn.
Christopher Larsen - Piper Jaffray Companies
And then on the cost structure, your SAC cost structure, how do you feel you stand there? I noticed that you did -- you clamped down a little bit in your upgrades. Was that an effort to not upgrade as many people that already had a smartphone that they got 12 months ago to get a new one and really just to help that migration of ARPU but reduce the OpEx there or can you talk a little bit about that?
Both. We still have, if not the best, one of the best loyalty programs in the business. We did look at the cost of our loyalty program and it was, if you will, running us more than we wanted it to, if you will. So we did look at making some adjustments to do the Sprint loyalty program, which again, we think is very strong competitively. But that was, if you will, a cost-driven change. It was costing us too much in upgrades.
Your next question comes from Timothy Horan. [Oppenheimer]
Timothy Horan - Oppenheimer & Co. Inc.
Just on the EBITDA, a clarification, are you talking about stability of this quarter or for the full year? It matters a little bit. And then, Dan, just two strategic questions. Any more thoughts maybe on your long-distance network? Does it maybe make sense to make that a separate company or part of a separate company strategically? And secondly, do you see the ability to do any more tuck-in acquisitions out there? It seems like the Virgin tuck-in has kind of worked out fairly well and given your network capacity or do think that's something you would look at down the road?
On the stability question, it's mostly into the first quarter. As you put a budget the together, you put a lot of assumptions in it. And stability means within -- a percentage of this year could go up or down 5% to 10%, it still be relatively stable. But it's mostly aimed at the first quarter, should be fairly stable with the board.
Hey, Timothy, Dan here. With respect to Wireline business, it's clearly very important to our overall business, not only in terms of the overall solution set that we offer to our enterprise customers. But increasingly just being able to carry larger amounts of traffic from one market to another. But that being said, we are not opposed to finding a better business combination with respect to Wireline. And we have a very open mind in that regard, but it's got to make good financial sense for our shareholders. So it's possible, but I don't want you to read anything into that. But we are not opposed to that. You had one other question...
Timothy Horan - Oppenheimer & Co. Inc.
You see the ability to do any more wireless tuck-in acquisitions out there? The ones you've done here recently worked out pretty well.
Well, if something presents itself, it's always possible. But there are none that we are currently contemplating.
And your final question comes from Jonathan Chaplin. [Credit Suisse]
Jonathan Chaplin - Crédit Suisse AG
So I'm wondering if I could just dig into the EBITDA question again. If we take out the two one-time impacts of Network Vision and then the transition of costs, Wireline costs, out of the business, if you just look at the organic trends in the business as subscribers start to grow, ARPU grows and revenue grows, what would the impact on EBITDA margins in the Wireless business be just from an organic impact of growth plus operating leverage? Would you see margins expand or is the cost of more smartphones in the base offsetting all of that organic margin expansion? And then, I know the question's been asked a couple of times, but it's still unclear to me how much of an EBITDA impact there's going to be in 2011 from Network Vision?
As Steve said, the impact of 2011 is not going to be that great because a lot of the costs are back-end loaded in the program. And we're just starting this thing, and so we'll have to see how it plays out. But it would look like most of the operating expense is later in the program. The trends on margins, all the things you've said, should put some upward pressure on margins; the $10 premium, growth in wireless and all that. But we have a lot of things that are going on in the company with regards to continue to keep the growth going on, a higher subsidy expense, whatever's going to happen with our competitors. So yes, I think as the company ends up with a stable year on earnings, it will have done a very good job this year so that would be my hope.
Jonathan Chaplin - Crédit Suisse AG
Bob, f I could just follow up on that. The $450 million in revenue that comes out of Wireline, what's the EBITDA impact for that?
The $450 million is not revenue. That's adjusted OIBDA. $200 million is due to revenue decline and the other $250 million is due to the allocation.
Thank you for your participation today. If you have any questions, please contact Sprint's Investor Relations team at 1(800)259-3755, and this concludes our call this morning.
This concludes today's Sprint Nextel Fourth Quarter Earnings Conference Call. You may now disconnect.
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