Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Steven Elfman - President of Network Operations & Wholesale

Joseph Euteneuer - Chief Financial Officer

Daniel Hesse - Chief Executive Officer, President, Director and Chairman of Executive Committee

Yijing Brentano - Vice President Investor Relations

Analysts

John Hodulik - UBS Investment Bank

Philip Cusick - JP Morgan Chase & Co

Jonathan Chaplin - Crédit Suisse AG

Simon Flannery - Morgan Stanley

Michael Rollins - Citigroup Inc

David Dixon - FBR Capital Markets & Co.

David Barden

Brett Feldman - Deutsche Bank AG

Jason Armstrong - Goldman Sachs Group Inc.

Sprint Nextel (S) Q1 2011 Earnings Call April 28, 2011 8:00 AM ET

Operator

Good morning. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprint First Quarter [2011] Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Yijing Brentano, VP of Investor Relations. Thank you, Ms. Brentano, you may begin.

Yijing Brentano

Thank you, Carmen. Good morning, and welcome to Sprint Nextel's first quarter 2011 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, Joe Euteneuer, will cover the financial aspects of the quarter. Before we get underway, let me remind you that our release and the presentation slides that accompany this call are both available on the Investor Relations page of the Sprint website.

Slide 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 and, when filed, Part II, Item 1A Risk Factors of our quarterly report on Form 10-Q for the quarter ended March 31, 2011.

Turning to Slide 3. Throughout our call, we will refer to several non-GAAP metrics. Reconciliation of our non-GAAP performance and liquidity measures to the appropriate GAAP measures for the first 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 loss per share results. Basic and diluted loss per common share for the first quarter were $0.15, compared to $0.31 in the fourth quarter 2010 and $0.29 in the year ago period.

The improvement in loss per share as compared to the fourth quarter 2010 was partly due to drivers that also impacted the sequential change in adjusted OIBDA, which Joe will discuss in more detail later on the call.

In addition, loss per share improved sequentially due to a reduction in depreciation and amortization and interest expense. The reduction in interest expense was driven primarily by an increase in amount of interest capitalized, which is related to our intention to deploy certain spectrum licenses as part of Network Vision, that were not previously utilized. We expect full year capitalized interest related to these spectrum licenses to be approximately $400 million.

Looking ahead at depreciation and amortization, the successful testing of push-to-talk technology on the CDMA network as part of the deployment of Network Vision in our test markets during the remainder of the year is expected to result in accelerated depreciation and amortization on certain assets.

We recorded a net tax expense of $37 million in the first quarter of 2011, primarily due to the temporary difference associated with amortization of our spectrum.

For tax reporting purposes, the spectrum intangible is amortized. So for financial reporting, it is considered an indefinite life asset with no associate amortization. Therefore, rather than expressing our income tax expense as a percentage of pretax loss as we did at year end and prior, we're now providing our expectations in terms of net tax expense to provide a clearer view of our tax outlook.

For the full year 2011, we expect our net tax expense to be approximately $200 million.

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

Daniel Hesse

Thank you, Yijing. And good morning and thanks for joining us. First, our thoughts and prayers are with the people in the Southern United States in the wake of the tragic tornadoes that have touched down there and Sprint will do all we can to help with that tragic situation.

Well, this is my 13th quarter at Sprint and it sure beats reporting the results after my first quarter on the job, which was the first quarter of 2008. Driven by customer service and sub-prime issues, that quarter I reported the worst postpaid churn since the Sprint Nextel merger, 2.45%.

By contrast, this quarter, I'm reporting the best quarterly postpaid churn in Sprint's long history. We continue to make slow but steady progress with respect to our goals of improving the customer experience, strengthening our brand and generating cash.

This quarter's performance is particularly noteworthy because of the unique changes in the first quarter's market dynamic. Verizon announced its iPhone and AT&T responded with price as even a duopoly provides more competition than device monopoly.

Even with these headwinds, because of our relentless focus on improving the customer experience, we felt we could increase our price for data on smart devices so that we could maintain Sprint's unique, customer friendly, unlimited and worry-free data plans.

Our strengthening brand helped us mitigate what otherwise would have been difficult to navigate, increasing our price in the face of a new iconic competitive device and widespread industry price pressure.

Going to Slide 4. Beginning with our first goal, the customer experience, I am pleased to report our 13th consecutive quarter of improved customer satisfaction with Care and First Call Resolution. It's a tough streak to keep going as the bar keeps getting higher. Our top box and bottom box satisfaction scores also reached best ever levels according to the Advanis survey.

In spite of the increased complexity in inherent customer questions generated by smartphones which reached an all-time high of 73% of quarterly CDMA device sales and 54% of the base, calls to care per customer decreased yet again to another all-time low, achieving industry best in class levels.

We were recently named the J.D. Power 2011 Customer Service Champion, one of only 40 U.S. companies to earn this distinction across 800 companies assessed across 12 industries.

Also in the quarter, a very well-known third party report evaluating our CDMA service rated us best in the industry in customer service satisfaction, and we also maintained our number one ranking for data network satisfaction. Based on internal metrics, our iDEN network achieved best ever performance for blocks and drops.

If you'd please go to Slide 5, our brand continues to strengthen. For the fourth consecutive quarter, the Sprint brand was the fastest-growing national postpaid wireless brand in the country as measured by net subscriber growth. The Sprint brand added 310,000 net postpaid subscribers and our entire Postpaid business was net port positive versus our competition for the second consecutive quarter.

Last quarter was the first time our Postpaid business had ever achieved being net port positive come including the Nextel brand. Unlike last quarter, the gains in Sprint brand customers did not fully offset the decline in Nextel customers, but our postpaid subscriber loss number improved 80% versus last year.

Our total company net adds of 1.12 million versus the net loss one year ago was our highest number in 5 years in our retail net adds of 732,000 was also a 5-year best.

The quarter's MVP was churn. We registered our best postpaid churn number ever and the best year-over-year improvement we've made in quarterly churn in 5 years.

In Sprint's entire history, if you were to pick the four best individual quarters for churn, those 4 would be the last 4. Prepaid churn was also strong hitting our lowest level in over 5 years.

Turning to Slide 6. As you know, subscriber performance depends upon a strong brand. The Reputation Institute is a very well-respected research organization that publishes its findings on corporate reputation each year in Forbes Magazine. Their extensive research has found that seven factors drive a company's reputation, which is arguably synonymous with a holistic measure of a company's brand.

These seven factors are: Performance; products and services; leadership; governance; the workplace; citizenship; and innovation.

We recently learned that of the 1,500 large companies that the Reputation Institute includes in its worldwide survey, they found that from 2009 to 2010 Sprint's corporate reputation was the most improved of any company in the world and Sprint showed one of the largest gains they've ever seen in any year by any company.

We are seeing other brand metrics improve as well, with purchase consideration and first brand preference achieving best ever levels in the quarter.

Our net promoter score according to our recent Yankee Group study improved far more than for any carrier over the past year, which is consistent with the results of another very well-known third-party study.

Our brand stretches beyond the consumer market. ATLANTIC-ACM recently ranked Sprint the #1 brand for the first time for U.S. wholesale excellence and for global wholesale excellence. Sprint achieved additional #1 rankings for U.S. provisioning, network and customer service and for global voice value.

Moving onto prepaid, which is on Slide 7. We achieved our best ever quarter for prepaid net adds, 846,000, with each of our brands, Boost, Virgin and Assurance posting positive gains. And as I mentioned, our best prepaid churn in over 5 years.

Boost won the 2011 J.D. Power Customer Satisfaction awards for non-contract or prepaid services. Purchase Consideration for both Boost and Virgin were also at best ever levels last quarter.

Our device leadership is also key to the brand, as is the innovation and citizenship demonstrated through our green initiatives. The new Samsung Replenish pictured on Slide 8, our fourth green phone, sets a new benchmark for renewable devices. It's made with 82% recycled materials, housed in recycled plastics and it's energy-efficient and built with far fewer environmentally sensitive materials than a typical smart phone.

We're pricing this Android 2.2 touch qwerty smartphone at only $49. We're also making available another technical breakthrough, a back panel that's a solar charger as a $29 accessory.

Our green products do well, but they haven't reached mainstream status. So to take Green mainstream, we're lowering the monthly rate for this smartphone only by $10 a month for new or existing customers.

Sprint has launched or announced 22 4G devices, the largest 4G portfolio of any wireless carrier in the U.S. During the first quarter, Sprint launched its third 4G phone the HTC EVO Shift 4G and the Overdrive Pro 3G/4G Mobile Hotspot by Sierra Wireless.

In addition, we announced the upcoming availability of two 4G tablets, the BlackBerry 4G PlayBook and HTC EVO View 4G, as well as two more handsets including the HTC EVO 3D and the Nexus S 4G from Google.

Sprint dominated the device recognition coming out of the recent CTIA show in Orlando. You've got to see the no glasses 3D screen on the new EVO 3D to believe it.

Turning to Slide 9 and our final priority, cash. Adjusted OIBDA was $1.514 billion and represented the highest sequential percentage improvement in OIBDA in over 5 years and the first year-over-year increase in OIBDA in over 4 years. The main reason for this improvement beyond normal seasonality is ARPU, mainly postpaid, but also prepaid. Postpaid ARPU showed both its biggest year-over-year gain and largest sequential increase in over 5 years. Wireless service revenue grew sequentially 2.9%, the highest increase in 4 1/2 years. Cash flow remained positive and in the first quarter, we paid off all of 2011's remaining maturities.

Finally, I'd like to make some comments about the proposed acquisition of T-Mobile USA by AT&T. It's a well-known fact that innovation and competition go hand-in-hand. Innovation and customer choice would be threatened if a duopoly were created.

As investors in this industry, I bet there are a few listeners on this call that would like to see wireless prices rise which would be more likely in a duopoly structure. But I believe these industry benefits would be more than offset by industry health risks like the decline in innovation and creativity that could result from a duopoly.

Sprint's innovative influence on this industry demonstrates why the wireless industry is much better off by having a strong #3 player. I think there's little doubt Sprint's leadership in rolling out the first national 4G network greatly influenced Verizon's decision to pressure the industry suppliers to accelerate the market availability timetables for the LTE standard in Verizon's own timetable to rollout 4G services, which in turn, accelerated AT&T's deployment timetable for 4G.

As a result, after losing global wireless technology leadership when Europe introduce 2G with GSM, the U.S. has regained wireless network technology and innovation supremacy because of America's leadership in 4G. If Sprint had not been a legitimate high ARPU postpaid customer competitive threat, the U.S. would still be a wireless also-ran.

Our leadership in pricing and in simplicity has led others to follow too. AT&T recently enacted a rate plan in response to losing their iPhone monopoly, which looks eerily similar to Any Mobile, Anytime, the rate plan introduced by Sprint in 2009.

Many of you on the phone are analysts and investors thinking about the macro impact of such a merger on our industry. It seems that some believe that a duopoly and the inherent price stability that might result for marginalizing the innovative #3 competitor is a good thing for carriers, anyway, if not for other wireless industry suppliers and participants, based upon the increases in the AT&T and Verizon stock prices since the proposed merger was announced. But I don't think enough thought has been given to the likely reduction in wireless innovation, the possibility of more regulation to make up for the loss of competitive market forces and the influence more regulation could have on diverting away investment dollars from wireless, to say nothing of the impact a carrier duopoly could have on other industry players like network infrastructure or handset suppliers or app developers.

Sprint is pro-competitive and our investment thesis is that all boats will float higher in a vibrant and innovative industry especially in the industry that has the unbridled potential of wireless.

Now I'd like to turn the discussion over to our new Chief Financial Officer, Joe Euteneuer, who wasn't here in the first quarter but who has come up to speed remarkably quickly, who will discuss our financial performance in more detail. Thank you.

Joseph Euteneuer

Thanks, Dan. And good morning, everyone. I'd like to start out by saying how excited I am to have joined Sprint. In my short time here so far, I have been very impressed by the team that Dan has assembled and I look forward to helping Sprint realize the full potential of the opportunities ahead of us.

Moving onto Slide 10. I'd like to begin by discussing revenue performance for the first quarter. Sequentially, total consolidated net operating revenues grew slightly as growth in wireless service revenues were offset by declines in wireless equipment revenue and Wireline revenue.

Total consolidated revenues grew by 2.8%, compared to the year ago period, primarily due to higher ARPU in postpaid and prepaid subscribers, growth in the number of prepaid subscribers and higher wireless equipment revenues, partially offset by net losses of postpaid subscribers and lower Wireline revenues.

Wireless service revenues which include retail, wholesale and affiliate revenues improved by 2.9% as compared to the fourth quarter 2010, and 3.7% as compared to the year ago period.

The sequential and year-over-year improvements were primarily due to higher postpaid and prepaid ARPU and growth in prepaid net subscribers.

Postpaid ARPU improved by nearly $1 as compared to the fourth quarter 2010 and as Dan mentioned, this was the largest sequential improvement in over 5 years.

Postpaid ARPU benefited sequentially from higher monthly recurring charges, primarily related to the $10 premium data add-on charge which we have applied to all smartphones activated since January 30. We expect sequential growth in postpaid ARPU in the second quarter due to continued growth in smartphone sales and the $10 premium data add-on charge.

Prepaid ARPU improved sequentially driven by growth in Boost Mobile ARPU, an improvement in rate plan mix among our Virgin Mobile Beyond Talk customer base.

Looking forward, shifts in the mix of our prepaid subscriber base among our brands can cause overall prepaid ARPU to fluctuate in the short-term. In 2011, we continue to expect wireless service revenues to grow, Wireline revenue to decline and total consolidated net operating revenues to be flat to slightly higher as compared to 2010.

Moving on to Slide 11. I'll talk about the drivers of consolidated adjusted OIBDA. As Dan mentioned, consolidated adjusted OIBDA for the quarter was slightly over $1.5 billion, up $199 million sequentially and $36 million from the year ago quarter.

Consolidated adjusted OIBDA grew year-over-year for the first time in over 4 years. Adjusted OIBDA margin improved 230 basis points sequentially, the largest improvement in almost 4 years. Wireless adjusted OIBDA grew sequentially primarily due to growth in wireless service revenues and reduced net subsidy and sales cost driven by fewer postpaid gross adds and upgrades.

Wireless cost of service was slightly higher sequentially as the benefit related to the change in intercompany rates was offset by higher cost, including increased 4G wholesale cost from growth in a number of 4G smartphones and the settlement of the pricing dispute with Clearwire, which I'll discuss in a moment.

Wireline adjusted OIBDA declined as compared to the fourth quarter 2010, primarily due to lower revenue associated with the intercompany rate change and the migration of wholesale cable Voice over IP subscribers off of Sprint's Wireline platform.

As a reminder, each year, we update our intercompany rates for transactions between our Wireline and Wireless segments to better reflect market-based pricing.

The change has no impact on consolidated adjusted OIBDA, but does have a positive impact on wireless cost of service and an equally offsetting negative impact on Wireline revenue as compared to prior periods.

As previously communicated, debt impact is expected to be slightly less than $250 million for the full year 2011 and was approximately $60 million sequentially for the first quarter.

We previously expected a sequential decline in the first quarter in Wireline adjusted OIBDA of $25 million related to the cable Voice over IP migration. However, this sequential impact was less than expected due to migration delays by our wholesale partner. In addition, cost reductions offset some of the sequential decline in Wireline adjusted OIBDA.

Due to the timing of migrations, we now expect the full year 2011 impact of the migration of cable Voice over IP customers to cause Wireline adjusted OIBDA to decline by approximately $150 million for the full year 2011 as compared to our previous expectation of slightly less than $200 million for 2011. We continue to expect the cable Voice over IP migration to last through 2014.

Again, we are pleased with the consolidated adjusted OIBDA results for the quarter given that we faced a number of postpaid competitive pressures in the first quarter, including device launches as well as service plan and device pricing changes.

We expect the competitive environment to remain challenging in 2011. However, we are encouraged by the consistent improvement we have seen in the Sprint brand and continue to focus on making further progress on postpaid subscriber results.

We expect for the full year that improvement in postpaid ARPU and growth in the number of prepaid subscribers will benefit adjusted OIBDA. However, we expect those benefits to be offset by negative impacts of entering 2011 with fewer postpaid subscribers, the projected decline in Wireline cable Voice over IP revenues and higher wireless costs of service driven by data usage and higher subsidies associated with the highly competitive handset pricing environment.

As a result, we expect for the full year 2011 adjusted OIBDA to be relatively flat with 2010, excluding incremental operating expenses associated with Network Vision, which we expect to be between $200 million and $250 million.

Now moving onto slide 12. We ended the quarter with approximately $4 billion in cash, cash equivalents and short-term investments. We also had $800 million of borrowing capacity under our revolver for a total liquidity position of $4.8 billion as of the end of the first quarter.

We repaid the $1.65 billion note in January 2011 which was our only note maturity due in 2011. Our next note and loan maturities totaling $2.25 billion are not due until March of 2012.

Going forward, we plan to continue to maintain adequate liquidity to support a balanced fiscal approach allowing for repayment of debt, investing in capital expenditures, and future growth. Our accrued capital expenditures excluding capitalized interest were $555 million in the first quarter, compared to $608 million in the fourth quarter of 2010 and $419 million in the first quarter of 2010.

Capital investment in the first quarter continued to focus on wireless quality and capacity. We continue to expect the full year 2011 capital spending will be approximately $3 billion, excluding capitalized interest, driven largely by CDMA capacity and Network Vision.

We generated $178 million in free cash flow in the first quarter. This was down from the $913 million in the fourth quarter, primarily due to a one-time federal tax stimulus refund of approximately $153 million received in the fourth quarter of 2010, approximately $150 million in higher cash interest payments, which is typical for the first quarter of each year, a $100 million pension contribution and other working capital changes. We intend to make additional pension contributions during the remainder of 2011, totaling approximately $35 million.

Looking ahead, we expect to continue to generate positive free cash flow for the remainder of 2011. However, our 2011 annual free cash flow is expected to be substantially lower than in 2010, due to the rollout of Network Vision.

Now moving onto Slide 13. As a reminder, the goals of our Network Vision initiative are to enhance voice and data services for our customers, create network flexibility, reduce operating costs and improve environmental sustainability.

With this project, we believe we will be installing new equipment and software, including multi-mode base stations, allowing for the flexibility to offer multiple technology standards using a range of spectrum brands.

As part of Network Vision, we also intend to repurpose some of our 800 megahertz spectrum for CDMA service to enhance coverage for customers and launch the next generation of push-to-talk services in 2011 on the CDMA network. As previously stated, it is expected that iDEN cell services will be phased out beginning in 2013.

The Network Vision project progressed well through the first quarter. We will continue to conduct testing in the laboratory and in the field and we expect to begin initial deployment in 8 of the largest metro markets following successful testing in early fourth quarter.

Our expectations of the costs and benefits related to Network Vision are unchanged since the program was initially announced. As previously stated, the Network Vision project is expected to yield $10 billion to $11 billion in net benefits over a 7-year time frame.

The total incremental cost to the Network Vision program over the estimated 3- to 5-year deployment period is expected to be between $4 billion and $5 billion. We project that slightly 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 for the remainder of 2011.

As part of our 4G strategy, we have amended our agreement with Clearwire for wholesale pricing. The agreement resulted in simplified data usage base pricing structures. As previously disclosed, we have agreed to pay Clearwire $175 million in prepayments for 4G wholesale services to be used in 2011 and beyond and minimum usage commitments of $300 million in 2011 and $550 million in 2012.

Additionally, we look forward to expanding our 4G capabilities through custom network solution deployments and re-wholesale-ing services which will be possible under this new agreement.

In February, we shared that we would provide our long-term 4G strategy by mid-year. We are still on target to provide our plans within this timeframe. With the flexibility to use our own spectrum and network assets and also to deploy spectrum owned by others, Network Vision provides us the opportunities to provide 4G services that were not available in the past.

Before I conclude, I will cover our forecast for 2011, which we have reconfirmed today. The company expects postpaid subscriber net additions for the full year 2011 and to improve total wireless net subscriber additions in 2011 as compared to 2010.

We expect full year capital expenditures, excluding capitalized interest, to be approximately $3 billion. In addition, the company expects to continue to generate positive free cash flow for the remainder of 2011.

In conclusion, one of the things that impressed me the most about the predecessor has -- his relentless focus on controlling costs. You can expect the same for me. Sprint has clearly shown progress on improving revenue trends over the last several quarters and we have a place -- a plan in place with Network Vision which we believe will significantly improve the cost structure of the business over the longer-term.

As I look forward to remainder of 2011 and beyond, maximizing shareholder value and cash flow will be a primary objective for the business.

Again, I'd like to reiterate how excited I am about the opportunities ahead for Sprint and I look forward to talking to all of you more in the future.

I'll now turn the call back over to Yijing for Q&A.

Yijing Brentano

Thank you, Joe. And welcome to the team. In just a minute, Carmen 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 the Sprint website.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from the line of David Dixon. [FBR Capital Markets & Co.]

David Dixon - FBR Capital Markets & Co.

I wanted to ask a question on your spectrum DNA. It Looks like you're settling around the 800 band, the 1600 band, the 1900 band the 2500 band. And I know you haven't –- you’re not at the point yet where you can outline your 4G plan. But what's the flexibility to alter your spectrum DNA as we forward? I look at the 1600 band for example and I say we want to go to 5 by 5 band there. I just would like to get a sense of the flexibility that Sprint has as we go forward with respect to spectrum usage.

Daniel Hesse

David, way to start off the morning with a technical question.

David Dixon - FBR Capital Markets & Co.

I think it's an important one if you look forward to 4G though.

Daniel Hesse

Yes. I think what you're highlighting is the Network Vision allows Sprint to do is it allows us to flexibly use the spectrum that we currently have as well as it does gives us the potential to host spectrum on our cell sites that others may own and want to more cost effectively deploy by entering the spectrum hosting arrangement with us. So I don't know what else I can add to it at this time because we are going to, as you indicated at the beginning of your question and Joe indicated in his remarks, by the middle of the year, we're going to lay out kind of a comprehensive spectrum plan with respect to data services in 4G. Steve, I know you're on the phone from far way. Do you want to add anything to that or would you rather not?

Steven Elfman

I think we talked about this quite a bit and we will lay something out by midyear and I understand your point on the amount of spectrum we've got. But we do have the flexibility to use various spectrums, ours and others, and I think that as we lay it out, we can be fairly clear on what we'll use, how many megahertz in each one of the spectrum bands for you.

David Dixon - FBR Capital Markets & Co.

I guess the other thing I'm noting is that as you look at the standards going forward, it looks like you can start to couple non-continuous bands. Is that something that you're looking to take advantage of out of the gate?

Steven Elfman

Well, not necessarily right out of the gate, but yes, we're working with the standards bodies on that. So I think that's something that I would prefer that we discuss once we're ready to lay it out in detail.

David Dixon - FBR Capital Markets & Co.

All right.

Operator

And your next question will come from the line of Jason Armstrong. [Goldman Sachs Group Inc.]

Jason Armstrong - Goldman Sachs Group Inc.

Maybe just a couple. First on ARPU. Obviously some really good progress in the quarter. I'm wondering if you can talk through the $10 add-on plan on smartphones, just maybe the percent of subs that were sort of impacted incrementally, if not changed, i.e., didn't have that plan in place before and had it pushed on them and the specifics of how that contributed to the ARPU after the course of the quarter? And then second on churn. Good progress there as well this quarter. I guess the pushback would be the prime customer percentage has moved down a bit. So people might question whether voluntary or involuntary churn is actually contributing to this. I'm just wondering if you can help us think through those two.

Daniel Hesse

Jason, Dan here. A couple of things. First, we don't disclose the specific numbers with respect to the $10 smartphone benefit to ARPU. Clearly, it clearly benefited ARPU in the quarter and that it will benefit postpaid ARPU next quarter because it basically was put into place at the end of January in Q1. It's not pushed on customers. The existing customers don't get an increase in price, it's only customers, in essence, gross adds or customers that upgrade to one of the smartphone devices that carry the data, the premium data charge that are affected. Second, with respect to churn and your comment about sub-prime, still in essence, last quarter, it rounded. It was $83 and change it rounded out to $84. This quarter, it's $83 and change, it rounds down to $83. There really is not a significant change at all in terms of our -- it continues to be very solid prime mix. We have seen significant improvements in voluntary churn and actually the last two quarters, we look at really what affects churn is on contract and off contract. And what we can tell -- with respect to our off contract churn, which really tells you a lot about how your customer service and loyalty is resonating with customers. The last 2 quarters have been our lowest 2 quarters -- our best two quarters ever for off contract churns. So we feel good about the progress that we've been making in churn. And it's -- churn's going down for all the right reasons.

Operator

And your next question will be from the line of Phil Cusick. [JPMorgan]

Philip Cusick - JP Morgan Chase & Co

Just a couple. First, following up on Jason's question. Contract expirations in previous years have sort of declined in 2Q and that led to sort of a seasonal drop down in churn. Dan, is that still valid for this year?

Daniel Hesse

Can you ask your question one more time? I want to make sure I understand it.

Philip Cusick - JP Morgan Chase & Co

So in previous years, we've talked about how contract expirations sort of slowed down in 2Q and that led or was at least part of the driver for seasonal reductions in churn from 1Q to 2Q. I wonder if that -- as you project contract expirations over the next couple of quarters, is that still fair and we can look for churn to come down over the next quarter?

Yijing Brentano

Phil, as we look at the seasonal trends, first quarter to second quarter, traditionally, we have seen a decline. However, this year, we don't expect to see as big of a decline given that we beat seasonal trends from fourth quarter to the first quarter already.

Philip Cusick - JP Morgan Chase & Co

Okay, that helps. And then for Joe. Can you talk about the balance sheet a little bit? You're running a big cash balance, I know you just got in, but we don't have any maturities over the next year, but you do have a couple of pretty big maturities in '12 and '13. What do you think about refinancing those, the potential for paying them down early and taking some of this cash balance? When the previous CFO came in a couple years ago, revenue was declining very quickly, now we've got a fairly stable revenue base and do you really need $4 billion in cash on the books?

Joseph Euteneuer

No problem. Look, you're exactly right. I just got here in 30 days and getting my arms around the roll out of Network Vision and the rest of our maturities going forward. The good news is that the performance to date has allowed the company the ability to access the markets because of the stability. Its broadened its operation and its consistency in execution. So over the next 30, 60 days, as I get my arms around this, we'll come back to you with more detail on what's going to happen to capital structure.

Philip Cusick - JP Morgan Chase & Co

Okay.

Operator

And your next question will come from the line of John Hodulik. [UBS Investment Bank]

John Hodulik - UBS Investment Bank

Great. I guess getting back, just two things really. Just getting back to the $10 surcharge. Dan, did that have an effect on the upgrade rate in the quarter and as a result, you're not -- you just not get the benefit from the ARPU standpoint, but also from a margin standpoint. Because you’re disincent-ing people to upgrade to smartphones, number one? And then so if you could give that number they upgrade in, and maybe talk about smartphone penetration? Then number two for Joe, as it relates to the guidance, the EBITDA grew to 2.5% this quarter. You had some easier comps in the second half, it sounds like you got some of the ARPU momentum with $10 surcharge. How -- can you maybe walk me through why you think flat is a good sort of starting off point without the Network Vision numbers in there? I would have just expected that the underlying trends to give you a little bit growth so that even with the Network Vision, you might be in the flattish range.

Daniel Hesse

Sure. This is Dan, I'll take the first part of your question. It actually had a much smaller impact on upgrades or slowing down upgrades than we had anticipated might be the case. We didn't know. So it actually did not slowdown upgrade rate, the upgrade rate significantly, that is the $10 surcharge. And again, you look at the numbers I just gave with respect to smartphone sales which is a combination of gross adds and upgrades. That's 73% for the quarter, a very healthy percentage of smartphones sales and upgrades this quarter.

Joseph Euteneuer

And in regards to what you were asking, I mean, with the smartphones sales, it really is a competitive environment. And really, the cost to gain that next subscriber, it's usually competitive out there and we're watching it and with the continued mix on the smartphones, we have to look at that cost and we can come back to you in the second quarter as we see what second quarter performance looks like.

John Hodulik - UBS Investment Bank

Okay, all right.

Operator

Your next question will come from the line of Brett Feldman. [Deutsche Bank]

Brett Feldman - Deutsche Bank AG

You alluded to earlier some thoughts around spectrum hosting. I know you're not prepared to outline specific plans yet but maybe we could just talk about the criteria that you might be using to evaluate those opportunities. For example, would spectrum hosting just be a new line of business for you and if you are able to achieve certain levels of revenue and EBITDA from a relationship that would be sufficient? Or is it somewhat mandatory that they need to be more important strategic benefit to you guys to actually allow someone else to use a portion of your network?

Daniel Hesse

It's a good question. We actually take a very holistic view of the economics to us of potentially doing network hosting with respect to another company in their spectrum. So we do -- first of all, we will look at the economic impact to us. What are the cash flows associated with it? We'll look at the value to us if there is to use of that spectrum, and the value of that capacity to us. So we'll take a very broad view of evaluating it. It's too early to say whether we would run it as a -- or think of it as a separate line of business, not yet. But it could potentially be that at some point in the future. But we haven't crossed that bridge yet.

Brett Feldman - Deutsche Bank AG

And just to be clear, if you do decide to pursue a spectrum hosting model, that would be incremental to what's already contemplated in Network Vision?

Daniel Hesse

Yes. There would be -- exactly, the Network Vision numbers that we've talked about do not anticipate spectrum hosting as part of those numbers. So those numbers could change, the cash flows could change, both positive and negative in terms of capital deployment and cash coming in from a hosted company if we were to host someone's spectrum.

Operator

And your next question will come from the line of Michael Rollins. [Citigroup Inc.]

Michael Rollins - Citigroup Inc

Dan, I'm curious what your perspective is in terms of the iPhone. You've mentioned in the past you would see a blip upon the initial launch and then things will settle down. Should that still be the case now going into the second and third quarters of the year? Then if I could just follow up to that, are we any closer to seeing a Sprint logo potentially on an iPhone?

Daniel Hesse

Well, nice try on the second question. What is like? The 55th time I've been asked that one I think? Something like that. And of course, we can't comment on any potential discussions with any of our suppliers. I think what we've said historically, with respect to the iPhone, is, and I wouldn't call it a blip, we do we typically see a significant impact upon the launch of a new device or in this case, the iPhone 4 on a new carrier Verizon. But it continues to be -- the iPhone does continue to be a significant, if you will, competitive threat to us. First, in the hands of AT&T and then in the hands of Verizon. The additional impact of the iPhone has had on us recently and continues to have it is, AT&T is pricing the iPhone 3Gs at $49. So you have to think about both Verizon's iPhone 4 and of course, AT&T's response to that, which I alluded to in my opening comments, not only continuing to offer the iPhone 4 but offering a lower-priced 3Gs. So the iPhone continues to be, quarter after quarter, a successful device and one that provides very strong competition to Sprint. But needless to say, Verizon's introduction of their new iPhone in Q1 this past quarter did have a notable impact on our net add performance for the quarter.

Operator

Your next question comes from the line of Simon Flannery. [Morgan Stanley]

Simon Flannery - Morgan Stanley

Joe, a couple of questions on the OpEx line. Can you just go through the new Clearwire agreement? And given it was sort of Q sign in Q2, how does the accounting work? Is there sort of prior period adjustments? Is there anything for the new agreement in Q1 and how should we think about that sequentially? And then on the network base, when you talked about an extra $200 million and $250 million of costs in this year, how should we think about that [indiscernible]? Is that really Q3 and Q4 where we’ll see some of that starting to come through in Q2?

Joseph Euteneuer

So in regards to the capital, you're exactly right. It'll be more towards the last half of the year, although you will see some in the second quarter. In regards to the Clearwire agreement, I mean, basically, there was a $28 million charge in the first quarter and then the rest gets allocated over the quarters coming forward on a predefined schedule.

Simon Flannery - Morgan Stanley

So $28 million, is the -- it was the total amount paid to Clearwire or that was the adjustment?

Joseph Euteneuer

That was the amount for the first quarter.

Simon Flannery - Morgan Stanley

Okay. And does that reflect the new agreement or not?

Joseph Euteneuer

Say that one more time, Simon.

Simon Flannery - Morgan Stanley

Is that under the old, old accounting or is that reflect the agreement, the new wholesale agreement?

Yijing Brentano

Simon, so the $28 million, part of it is related to the settlement of the 2010 rate. And part of it is related to the rights that we're getting for re-wholesell-ing as well as the CNS ability to provide CNS services. So that is a book that now will be amortized, but the other one, it's basically a cost of service increase.

Simon Flannery - Morgan Stanley

Okay.

Operator

Your next question is from the line of David Barden. [Bank of America Merrill Lynch]

David Barden

First question would be, just following up on that point on the Clearwire side. Is that the reason why year-over-year, Joe, we're seeing this ramp downward potentially from a 1Q EBITDA rate that's like run rating at kind of $6 billion, but really targeting before division expenses, a full year number that's closer to $5 billion, $6 billion? Is that really the big delta in the numbers year-over-year? And the second question I guess relates to just kind of the incremental pricing competition that we're seeing from the T-mobile. Obviously, you guys and T-mobile seem to have swapped positions in the market with T-mobile taking a page out of the Sprint playbook trying to boost demand through attracting the lower priced customers. And I was wondering if there's been any kind of sense that the net positive porting rates that you've been seeing against everybody might be drifting more towards parity as a result to some of the competitive activities that have been going on?

Joseph Euteneuer

So I'll take the first one for you. Remember, Dave, you got the $150 million impact on the Wireline pressure. You've got subsidies, you've got a little bit of impact on the Clearwires. You got a number of moving parts that are affecting the numbers and that's why we're being cautious as we look up for the remainder of the year.

Daniel Hesse

I think it's too early to tell, David, whether there's going to be any change in the kind of competitive or price dynamic in the market. Or the positions that the various carriers have played. As I mentioned on the call, kind of what we did in the first quarter because we really are focused on the investments that the company's going to need to make going forward and things like Network Vision to truly take -- you have to spend some money to get your cost structure really competitive and to provide great service. We have done some things in Q1 in the market like the $10 data add-on fee, the premium data charge that we mentioned beginning April 1. So in the second quarter, our loyalty programs aren't quite as rich as they were in the past. And of course with Verizon's launch of the iPhone, it did -- in essence, what we saw was AT&T getting more aggressive in pricing T-Mobile, particularly on the device side becoming more aggressive from a price perspective as well. Kind of all, if you will, moving into not only in the first quarter but moving into the second quarter. So we'll just -- we're not expecting there to be a significant change, if you will, beyond what we've seen so far, in terms of the brand position and pricing position in the industry. I don't know if I'm answering your question with respect to the T-mobile adequately. Did I? Is there something else that you...

David Barden

No. That's helpful, Dan. I mean, the question is about the interest towards the changes quarter-over-quarter on kind of the porting pressures and changes. And I think you kind of highlighted a lot of the changes that are taking place. If I could just do a quick follow up on back on, Dan, your comments on the AT&T, T-Mobile merger. One of the things that's been so interesting about the deal is that AT&T has really put together this very kind of compelling sales pitch about union jobs and coverage for rural markets and spectrum utilization efficiency and all these kind of hot button issues that the politicians are being invited to grab onto as reasons to support the deal. You kind of highlighted innovations or the lack there of potentially as being the issue that is the reason not to approve the deal. Do you guys have kind of a deeper, more quantitative pitch that you're really kind of using as your argument why this deal shouldn't be approved?

Daniel Hesse

Absolutely, we do. And we're not going to share it on the call but it's very hard to find, actually, industries that would -- that are as concentrated, healthy industries that have that amount of concentration, the top line and the bottom line, that would be created. Roughly 78% of the postpaid customers and total industry revenues and roughly 88% of the industry EBITDA in the hands of two. And there are of course many more quantitative elements of that analysis and I'll leave that to the economists.

David Barden

Okay.

Operator

And your next question is from the line of Michael McCormack. [JPMorgan]

Michael McCormack

Thinking about gross adds, guys, just trajectory obviously, there's some seasonality built from that in Q1. But maybe you could sort of identify the puts and takes. You had the iPhone launch, obviously Verizon, AT&T probably getting a bit more aggressive on retention. But just looking at your own internal stuff, did you see the price increase to have any negative impact on the gross apps share? And then secondly, Dan, maybe just sort of thinking about the hosting spectrum more holistically and thinking about sort of introducing another competitor to the marketplace, is that something that you want to do and where do you see share coming to that competitor and how do you stop cannibalization of your existing base?

Daniel Hesse

Well, on the first question, yes, there's no question that when we make a price move there's going to be some impact. And we did feel some impact, but that was not unanticipated with respect to both gross adds and, quite frankly, from a churn perspective. And I think the improvement we made in churn, which is a very unusual improvement in sequential churn when you basically box seasonality going from Q4 to Q1, shows just how strong the rest of our value proposition and customer service levels are that in the context of a price increase, when the industry is going in the other direction to have the net add performance that we did. But to answer your question, yes. There was an impact on both gross adds and churn as a result of that, but I think we mitigated those fairly significantly. With respect to the other, I just don't want to speculate on, if you will, the theoreticals. Of any particular spectrum hosting arrangement in terms how we would look at it, but I answered the question a little bit earlier and that is we would take a very holistic view of the economic issues, the strategic issues and what have you before deciding whether or not we would enter into any spectrum hosting agreement.

Michael McCormack

Dan, just a quick follow up on the first part. Did you guys get any -- I mean, I’m a customer of yours, and I've had my price increased by $20 or $30 a month and I will continue to be a customer, but have you heard any negative feedback from the price increase? Because it just seems like pricing power in this market is pretty tough to come by.

Daniel Hesse

Well, yes. First of all, existing customers they are unaffected unless they want to upgrade to a new device, but even after the $10 charge, our pricing is very, very competitive. We still -- we believe we could do that and still remain the most competitive player for customers that are heavy data users. We're the only that offered true unlimited, so if you take Any Mobile, Anytime with unlimited text and unlimited data, just the absolute price level, we still have a very competitive price.

Michael McCormack

Great.

Operator

And your final question will come from the line of Jonathan Chaplain. [Crédit Suisse]

Jonathan Chaplin - Crédit Suisse AG

Two quick questions for Joe, if I may, and this may be a little unfair given that you've only been here 30 days, Joe. But if you look at the cost structure at Sprint. Have you been able to identify a bucket of costs that you think you can take out over the course of the next year or 2? We'd estimated that there's sort of addressable costs of potentially sort of $600 million to $800 million some time ago. I'm just wondering what you think of that estimate? And then also just to get a sense of where things stand on free cash flow, I think that what happens, we've just shifted about $400 million of interest expense into CapEx, so the change should be neutral to pre-cash grow. Is that correct? And are we still on track for about $2 billion of free cash flow a year, give or take?

Joseph Euteneuer

Well, so on your last question, remember, you got to take into account the rollout of Network Vision because the capital and operating intensity of that project will clearly have an impact on cash. In regards to your capitalized interest question, you are exactly right. It is totally neutral. In regards to identifying cost and continues [indiscernible] -- remember, Network Vision is the #1 thing going on that's going to help increase profitability on an operating basis. But one thing I've been -- probably in my first 30 days here, the most impressed with is the discipline as an ongoing effort by the management team that we're constantly looking at ways to take costs out so it's something that's already going on. And for me to be able to come in and part of the management team and team up with everyone to continue to drive ways to take costs out of model, I think will -- something that will be benefiting us in the future, but I need a little more time before I put any estimates on it.

Jonathan Chaplin - Crédit Suisse AG

Joe, is it fair to say that excluding Network Vision, excluding the costs in CapEx associated with Network Vision, where it's sort of around or at least $2 billion in free cash flow a year?

Joseph Euteneuer

I don't know that I can give you that exact number right now, but that doesn't seem too correct to me. I'm brand-new, so you got to give you me a little chance.

Jonathan Chaplin - Crédit Suisse AG

Got it.

Operator

And I will now turn the call back over to Yijing for any closing remarks.

Yijing Brentano

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

Operator

Thank you for participating in today's call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Sprint Nextel's CEO Discusses Q1 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts