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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

Timothy Horan - Oppenheimer & Co. Inc.

Simon Flannery - Morgan Stanley

Michael Rollins - Citigroup Inc

David Barden

Brett Feldman - Deutsche Bank AG

Jason Armstrong - Goldman Sachs Group Inc.

Sprint Nextel (S) Q2 2011 Earnings Call July 28, 2011 8:00 AM ET

Operator

Good morning, my name is Brenda, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Sprint Second Quarter 2011 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Yijing Brentano, Vice President of Investor Relations. Ma'am, you may begin.

Yijing Brentano

Thank you, Brenda. Good morning, and welcome to Sprint Nextel's Second 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 June 30, 2011.

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

Next, I would like to cover our loss per share results. Basic and diluted loss per common share for the second quarter were $0.28 compared to $0.15 in the first quarter and $0.25 in the year ago period. The current period loss per share includes $0.20 in equity losses of unconsolidated investments and other. Net of the effect have increased the valuation allowance. Loss per share increased sequentially due to higher equity losses in unconsolidated investments and other, as well as higher net tax expense. We recorded a net tax expense of $99 million in 2Q '11, including a $52 million expense, resulting from cumulative effects on changes in Michigan's corporate income tax law enacted in the second quarter.

For the full year 2011, we now expect our net tax expense to be approximately $200 million to $250 million, which is higher than our previously communicated expectation of $200 million, due to the Michigan charge I just discussed. Also, please keep in mind that Clearwire second quarter 2011 results from operations have not yet been finalized. As a result, the amount reflected for Sprint's share of Clearwire's results of operations for the quarter ended June 30, 2011, is an estimate, and based upon the finalization of Clearwire's results may need to be revised if our estimate materially differs from Clearwire's actual results. Changes in our estimate, if any, would affect the carrying value of our investment in Clearwire, net loss and basic and diluted loss per common share, but would have no effect on Sprint's operating income, OIBDA, adjusted OIBDA or consolidated statement of cash flows.

The carrying value of Sprint's investment in Clearwire as of June 30, 2011, was approximately $2.1 billion. Clearwire's stock price is subject to significant volatility, and currently their estimated fair value based on their quoted first share value is below Sprint's per share carrying value. Although we have determined that the excess of our book value over the estimated fair value of our investment is the result of a temporary decline, there is significant risk that the estimated value of our investment in Clearwire does not improve. And accordingly, we could face significant non-cash charges up to the full amount of our net carrying value. Similar to the first quarter, we recognize the capitalized interest of approximately $100 million related to certain previously unutilized spectrum licenses, which we intend to deploy as part of Network Vision. We continue to expect full year capitalized interest related to these spectrum licenses to be approximately $400 million.

As we discussed on our last earnings call, the successful testing and deployment of Network Vision is expected to result in accelerated depreciation expense, primarily associated with iDEN-related assets due to changes in our estimates of the remaining useful life of certain long-lived assets, and the expected timing of asset retirement obligations. As of June 30, 2011, the remaining net carrying value of iDEN-related assets was approximately $4 billion, with a composite estimate useful life of 4.5 years, resulting in depreciation expense of approximately $800 million annually.

Successful completion of Network Vision earlier than the end of 2015 would result in an acceleration of these depreciation costs. Assuming the completion of successful testing of push-to-talk and finalization of a migration plan for push-to-talk customers, accelerated depreciation could begin in late 2011 or early 2012.

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

Daniel Hesse

Thank you, Yijing, and good morning, everyone. I'm pleased to report once again we've made progress with respect to each of our 3 key objectives: improving the customer experience, strengthening the brand and generating cash.

If you would turn to Slide 4, the customer experience has steadily improved for 3.5 years. In the quarter, the American Customer Satisfaction Index or ACSI not only had Sprint tied for the top spot in the industry for overall satisfaction, but Sprint was the most improved U.S. company across all industries over the past 3 years. I'm also pleased to report Sprint's 14th consecutive quarter of improved customer care satisfaction. Our top and bottom box customer satisfaction results were all-time bests.

Turning to Slide 5. In addition, Vocalabs rated Sprint's call satisfaction best in the industry, and yet another very well-known independent research firm also rated overall satisfaction with Sprint-branded services best ever and data satisfaction unbeaten in the industry. The customer experience is an important factor for churn, and postpaid churn reached 1.75%, an all-time Sprint record. Sprint's best 5 quarters for churn in history have been the last 5. Prepaid churn also reached its lowest level in almost 6 years. The number of calls per customer to customer care in the quarter, once a glaring Sprint weak spot, achieved an all-time best in the quarter, and is now among the best-in-class in the industry. We strive to provide a customer experience second to none.

Please turn to Slide 6, if you will. Perhaps, the best indicator of brand strength is subscriber performance. Driven by improvements in churn, we achieved $1.1 million net adds in the second quarter, an improvement of $1 million from last year's second quarter, and this was our third consecutive quarter with over $1 million total net new subscribers. The Sprint brand was net add positive for the seventh consecutive quarter, and net port positive for the fifth straight quarter, which means more customers switched to Sprint-branded postpaid services from our competitors than switched from Sprint to our competitors. Growth in the Sprint brand was not enough to offset losses with the Nextel brand this quarter, but we achieved year-over-year postpaid net add improvement for the eighth consecutive quarter. To be net add positive for all of 2011, an objective we still maintain, Sprint will need to improve year-over-year net add performance by 855,000 versus last year. Through two quarters, we're 2/3 of the way there. Key second quarter third-party measures of brand health like first brand preference and most want to investigate, reached best ever levels. And like last year, we again showed the most year-over-year improvement among major carriers in our net promoter score.

We launched a number of new devices in the quarter, including the HTC EVO 3D, the industry's first 3D phone and the HTC View, America's first 4G tablet. We added several Motorola devices to our portfolio. These devices included the Motorola Xoom tablet; the Motorola XPRT, Sprint's first Android world phone that offers enterprise-level security features; the Motorola Titanium, which combines push-to-talk and Android on an iDEN network; and the Motorola PHOTON 4G, our first international 4G smartphone, which will be available next week. 76% of Sprint-branded devices sold in the quarter were smartphones, bringing the smartphone percentage of our Sprint branded or CDMA customer base to 58%. Our 4G momentum continues as we sold $1.7 million 4G devices in the quarter, our highest quarterly number ever.

Moving to prepaid in Slide 7. Driven by our best churn performance in nearly 6 years, we had 674,000 prepaid net adds, our second best second quarter, which benefited from -- second quarter of 2009, which benefited from the relaunch of Boost, and that ends in our best. The Boost brand received yet another lift with today's announcement by J.D. Power and Associates for the #1 ranking in customer care for non-contract Wireless Services.

If you turn to Slide 8, in addition to being known for simplicity and value, the Sprint brand is increasingly being associated with sustainability. It was a privilege last week to share the stage with EPA Administrator, Lisa Jackson, to discuss Sprint's industry-leading reuse and recycling practices. Also in the quarter, the Samsung Replenish was awarded UL Environment's first ever Platinum level certification for a mobile device. And for the second year in a row, Sprint received the Sustainability Leadership Award from the International Electronics Recycling Conference and Expo. ForestEthics evaluated paper-use practices across 3 major industries, and the evaluation included Sprint, Verizon and AT&T. No company in any industry was given higher than a C+ except for one, Sprint, which was awarded a solid A.

Moving to Slide 9. With respect to our final priority, cash, we generated positive free cash flow of $267 million in the second quarter. For the second consecutive quarter, we also generated positive operating income. Wireless Service revenue increased sequentially and year-over-year for the third consecutive quarter, driven by the largest year-over-year improvement in postpaid ARPU in over 7 years. Postpaid Service revenue grew sequentially for the third consecutive quarter.

Adjusted OIBDA was down sequentially as the benefits of better postpaid ARPU and prepaid subscriber growth were offset by higher cost of service and postpaid subsidy expense, mainly attributable to going from mail-in rebates to instant rebates to simplify the customer experience, but also partly due to a higher mix of smartphones, especially 4G devices. June though, was by far our best postpaid net subscriber month of 2011, so we believe these investments and the customer experience and in our competitive position will pay off in the long run. Joe will discuss our financials in more detail.

Please turn to Slide 10. Sprint continues to differentiate itself with customers and with wireless ecosystem partners because of our unique adoption of an open strategy. We launched the Samsung Nexus S 4G in the quarter, the first 4G device with an embedded NFC chip. This enables Google Wallet, a mobile capability currently offered only by Sprint, rather than push our customers toward a carrier-controlled mobile payments platform, we want to provide our customers with choice, whether it be Google Wallet, Sprint Wallet or American Express' Serve digital wallet platform. Sprint ID is uniquely open, in that it allows a third-party like ESPN, Youdagames or MTV to shape the user interface. Sprint shows its openness yet again by being the only wireless carrier to provide Google Voice, launched in the quarter, which lets the end-user and a third-party rather than the carrier create a calling and voice mail experience. Sprint is taking the concept of openness even further by introducing the innovative concept of spectrum hosting, which today's announcement of our agreement with LightSquared shows.

Our first priority is the customer experience. Therefore, our 4G strategy began with our Network Vision plan to enhance our customers' network experience including coverage, quality and speed improvements through the deployment of new multi-mode network technology that supports both 3G and 4G, utilizing multiple spectrum bands.

Our second priority is to maximize the utilization of and return on our existing assets and investments. This means optimizing the use of our existing 1.9 and 800 spectrum as part of the Network Vision deployment. It also meant negotiating a new wholesale agreement with our existing 4G partner, Clearwire, that ensures we can provide our customers with high-quality 4G service. And also, that we would be supporting Clearwire by committing to purchase and resale services through at least the end of 2012.

Today, we are announcing the next piece of the plan. Sprint will further leverage its core investment in Network Vision by entering into a spectrum hosting agreement with LightSquared, where Sprint will build and operate a 4G LTE network and deploy the 1.6 megahertz spectrum owned by LightSquared. This spectrum hosting leverages the Network Vision platform, while it improves Sprint's cash flow. Sprint will receive cash payments, and also receive wholesale purchase credits worth a total of approximately $13.5 billion if Sprint chooses to resell capacity generated by the LightSquared spectrum. The OIBDA margin impact is expected to be positive and is one of the ways we will improve our margins. Now some of you are aware that LightSquared has made a proposal to the SEC to resolve concerns about potential GPS interference. As a provider of GPS-based services ourselves, Sprint wants this issue to be resolved, and we will not turn on the network until this issue is resolved.

So in conclusion, we continue to oppose AT&T's proposed takeover of T-Mobile U.S.A. Sprint has been the most visible leader of those that oppose the proposed takeover, but opposition is beginning to come from all corners. Just last week, Senator Kohl, Chairman of the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights, sent a strong letter urging the takeover be blocked. Subcommittee member, Senator Franken, sent a letter opposing the merger this week.

In addition, other key members of Congress like Representatives Markey, Conyers and Eshoo are making their voices heard along with state attorneys general, consumer groups and antitrust experts, influential business editors and columnists, competitors and most importantly, tens of thousands of customers and consumers. There have already been more comments filed at the SEC largely in opposition to the proposed acquisition than with any other transaction ever appealed by the agency. The California PUC has likewise opened investigation to explore the impact of the deal on its constituents, and several other PUCs are reviewing the transaction.

The big 2 have grown their collective postpaid market share and industry dominance every year since Sprint began keeping market share records in 2004, and we don't expect 2011 to slow down this problematic trend. We intend to continue to ensure that the dangers of this takeover and the negative impact it will have on our industry continue to be heard. The spectrum hosting agreement with LightSquared provides one more piece to our network evolution plan. We will meet with the investment community in New York on October 7 to describe this network evolution plan in more detail, and the additional time between now and then will allow us to complete more pieces to our plan.

I'll now turn the call over to Joe, who will discuss our financial results in more detail. Joe?

Joseph Euteneuer

Thanks, Dan, and good morning to everyone. I want to start the call by thanking the Sprint team for their hard-working and execution during the second quarter in a very tough, competitive environment.

If you move onto Slide 11, I would like to begin by discussing revenue performance for the second quarter. Today, consolidated revenues grew by 4% compared to the year ago period, primarily due to higher Wireless Service and equipment revenues, partially offset by lower Wireline revenues. Sequentially, total consolidated net operating revenues were flat, as growth in Wireless Service revenues were offset by lower Wireline revenues. Wireless Service revenues, which include retail, wholesale and affiliate revenues, improved by almost 5% as compared to the year ago period, and by approximately 1% as compared to the first quarter of 2011.

The year-over-year sequential and sequential improvements were primarily due to higher postpaid ARPU, and growth in net prepaid subscribers, partially offset by net losses of postpaid subscribers. Postpaid ARPU improved sequentially to $57, and grew by nearly $2 as compared to the second quarter of 2010. This was the largest quarterly year-over-year increase in over 7 years. Strong smartphone sales and the related $10 premium data add-on charge continued to drive sequential postpaid ARPU growth in the second quarter, and we expect the $10 add-on charge will lead to additional postpaid ARPU improvement in the second half of this year. Prepaid ARPU declined sequentially due primarily to a higher mix of relatively low ARPU assurance customers.

Looking forward, and as we stated previously, shifts in the mix of our prepaid subscriber base among our brands can cause overall prepaid ARPU to fluctuate in the short term. We are also focused on improving revenue by growing the subscriber base. We are very pleased to have added over 1 million net wireless customers in the second quarter and nearly 4 million over the last 4 quarters, representing an 8% increase in the size of the total subscriber base as compared to the second quarter of last year.

It is also important to note that we added more than 1.4 million Sprint-branded postpaid customers over the past year. As Dan mentioned and shown on Slide 12, we faced a number of competitive headwinds that became more pronounced in the second quarter. This includes the first full quarter both major competitors offered the iPhone, aggressive pricing on the iPhone, as well as a variety of other handsets. We continue to be encouraged by the improvements we are seeing in key brand and customer-service metrics, and we feel that our standing in the marketplace continues to progress and momentum is with us.

A key contributor to our improvement in postpaid subscriber performance has been the popularity of the HTC EVO line of handsets. We launched the latest marquee HTC EVO device, the 3D, late in the second quarter. And although we didn't have the benefit of a full quarter sales of the HTC EVO 3D, we are pleased with the early sales results. At the same time, the HTC EVO, the nation's first 4G phone, continues to be the best-selling device in our history. As we look to the second half of the year, we recognize the importance that device selection has on our ability to attract and retain quality customers, and we will remain focused on providing a strong lineup, including the highly anticipated Motorola PHOTON, which will be available next week. In 2011, we continue to expect Wireless Service revenues to grow, Wireline revenues to decline and total consolidated net operating revenues to be flat to slightly higher as compared to 2010.

Moving onto Slide 13. Consolidated Adjusted OIBDA declined $200 million sequentially, and $187 million year-over-year to slightly over $1.3 billion for the second quarter. This includes the estimated incremental impact of approximately $120 million from customer acquisition and retention expenditures to remain competitive in the marketplace and $73 million related to the speeds and settlements, including the $18 million settlement with Clearwire and ongoing Network Vision expenses of approximately $24 million. As Network Vision expenses continue to grow, we plan to start reporting these costs separately, so that investors can track the progress of Network Vision and the operating business separately.

During the second quarter, we took a series of actions to compete in the marketplace to minimize market share loss, which had an impact on our Adjusted OIBDA results. In the second quarter, we saw price reductions on the original HTC EVO and a full quarter of instant rebates, which put pressure on our postpaid net subsidy rate. We felt this incremental investment of approximately $120 million was necessary, and helped mitigate the subscriber impact from competitor actions, given the highly competitive environment of the second quarter.

Total net subsidy remained relatively flat sequentially as lower overall prepaid subsidy was offset by higher average subsidy rate for postpaid handsets. Wireless cost of service increased sequentially, primarily due to increased data volume, primarily related to 4G, higher service and repair costs and Network Vision-related costs. Higher service and repair costs were related to increased mix of smartphones in the subscriber base, which on average, have a higher replacement cost as well as fewer refurbished HTC EVO devices available for replacements.

Selling, general and administrative costs were flat sequentially, as lower sales and marketing cost were offset by higher bad debt. Wireline-adjusted OIBDA declined sequentially as expected, primarily due to lower revenue, resulting from the migration of wholesale cable voice over IP subscribers off of the Sprint's Wireline platform. Cost reductions partially offset some of the sequential decline in Wireline revenue. We continue to 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 of 2011.

Our full year adjusted OIBDA outlook is unchanged from what we communicated on our first quarter earnings call. We continue to 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 the negative impacts of entering 2011 with fewer postpaid subscribers, the projected decline in Wireline cable voice over IP revenues, and higher Wireless cost 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 compared to 2010, excluding the incremental operating expenses associated with Network Vision, which we expect to be between $200 million and $250 million. As a reminder, seasonality generally drives higher third quarter cost of service expenses, including roaming and service and repair. In addition, we also expect typical seasonal increases for postpaid churn in the third quarter of this year.

Now moving onto Slide 14. We ended the quarter with a total liquidity position of approximately $5.2 billion, including $4.3 billion in cash, cash equivalents and short-term investments, and $900 million of borrowing capacity under our revolver. Our next note and low maturities totaling $2.25 billion are due in March of 2012. Going forward, we plan 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 capitalize interest, were $640 million in the second quarter compared to $555 million in the first quarter, and $437 million in the second quarter of 2010. The sequential and year-over-year increase in capital investment was primarily driven by higher data capacity spend. We continue to expect that full year 2011 capital spending will be approximately $3 billion, excluding capitalized interest, driven largely by CDMA capacity and Network Vision. We generated $267 million in free cash flow in the second quarter. This was up from the $178 million in the first quarter, primarily due to lower cash interest payments and pension contributions, changes to certain vendor payment schedules, and a $90 million prepayment received from LightSquared for spectrum hosting, offset by a decline in OIBDA, higher capital spending and increased device and accessory inventory. Additionally, we received $200 million from LightSquared early in the third quarter for a total of $290 million received year-to-date. We made pension contributions of $12 million in the second quarter and early in the third quarter, and we intend to make a similar contribution in the fourth quarter of this year.

During the second quarter, our device and accessory inventory balance increased by over $400 million. Over 60% of this increase resulted from 5 of the new devices we added to our handset lineup during the quarter as we build inventory prior to handset launches. Approximately 1/3 of the increase in those new device inventories resulted from the HTC EVO 3D, which we launched near the end of the quarter, and was one of Sprint's best-selling devices for first weekend sales. The remaining increase in inventory was associated with devices we felt could add delivery issues relating to the global parts shortage. We expect by the end of the fourth quarter our ending inventory balance to be more consistent with prior quarters.

We previously communicated that we expected rebanding spent in 2011 to be similar to the same level spent in 2010, which was approximately $450 million. We now expect 2011 rebanding spend of $300 million to $350 million due to additional time needed by public safety licensees to complete their reconfigurations.

Looking ahead and consistent with our previous forecast, the company expects to generate positive free cash flow for 2011 and for the second through the fourth quarter of 2011. For the third quarter, we expect that free cash flow will be negative due to higher CapEx, interest payments and a decline in accounts payable. In the second quarter, the accounts payable balance increased resulting from device purchases near the end of the quarter, and it's expected to return to a normal lower level in the third quarter. We expect free cash flow to be positive in the fourth quarter.

Now moving onto Slide 15. The Network Vision project progressed well through the second quarter, working with our 3 vendors, Alcatel-Lucent, Samsung and Ericsson. We reached a number of milestones, including the successful completion of 1x voice calls and 1x data and SMS transmissions in both the 800 and 19 megahertz bands, as well as EVDO in 1900. We have started zoning and permitting work on over 20,000 sites, and expect to complete deployment on a small number of those cell sites by the end of the fourth quarter. As we stated on our first quarter earnings call, 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.

We are in the process of renegotiating our master agreements for cell site leases with the major tower companies in connection with Network Vision, and have executed agreements with 3 of those tower companies, including amendments to important contracts with Crown Castle, impacting over 10,000 of Sprint's cell sites.

These agreements establish uniform rates for deploying all Network Vision sites rather than negotiating tower contracts on a site-by-site basis. This provides a high degree of cost predictability to Sprint as our network evolves and grows. The lease renegotiations completed through June 30, 2011, resulted in an incremental increase to future lease commitments related to cell sites totaling $2.3 billion. Once the migration of existing iDEN customers to a single network platform under Network Vision is complete, we expect our cell and switch site lease commitments to decline.

For the second quarter, we recorded additional noncash rent expense of $10 million as a result of these new agreements. Our expectation of the cost and benefits related to Network Vision, excluding spectrum hosting, are unchanged since the program was initially announced. With the flexibility to use our own spectrum and network assets and also to deploy spectrum owned by others, Network Vision provides Sprint the opportunity to offer 4G services that were not available in the past.

As Dan mentioned, we will hold the meeting in New York on October 7, in which we will outline our plans to leverage this innovative architecture to enable our 4G strategy. We plan to discuss our technology and spectrum roadmap, including the potential for additional spectrum hosting.

Now turning to Slide 16. As Dan mentioned, consistent with our Network Vision plan, we have entered into a 15-year agreement with LightSquared that includes spectrum hosting, 4G wholesale and 3G roaming services. This agreement leverages our core investment in Network Vision to provide flexibility and access to spectrum that we may choose to use in the future. Obviously, this agreement is also a benefit to LightSquared as a result of avoiding having to build a greenfield network. From Sprint's perspective, as a result of the work we expect to do for LightSquared during the 8-year initial performance period under the contract, we expect to receive approximately $9 billion of cash. We also expect to receive LTE and satellite purchase credits, which are currently estimated to be valued at approximately $4.5 billion. We expect to receive the benefits of the cash and the credits over an 11-year period as a result of the staggered bill, and assuming we use 100% of the credits earned.

This $13.5 billion is expected to be recorded in revenue over the 11-year period. The OIBDA and margin impact is expected to be positive and is one of the ways we may improve our margins. It is also expected to be free cash flow accretive over the same 11-year period. This transaction has no current impact on Clearwire. We will continue to operate under our existing wholesale agreement with Clearwire, which includes 4G purchase commitments through 2012 and at our option, could continue to wholesale arrangement indefinitely. Sprint may have discussions with other spectrum owners regarding spectrum hosting. Any future agreements could provide Sprint additional 4G capacity to further improve our margin, while allowing a spectrum partner to reduce cost and time-to-market to deploy their own 4G services.

The LightSquared arrangement contains contingencies related to the resolution of interference issues with LightSquared spectrum, including the right of Sprint to terminate the agreement if certain conditions are not met by the end of 2011. If Sprint exercises its termination right, only those payments received from LightSquared that have not been contractually earned, including amounts not expended or contractually committed to support hosting services, will be required to be refunded to LightSquared. During the term of the arrangement, Sprint has the option to purchase up to 50% of the expected 4G LTE capacity. In the event the arrangement is terminated for LightSquared's material breach, nonpayment or insolvency, Sprint maintains a second lien on certain of LightSquared's spectrum-related assets.

Before I conclude, I will cover our forecast for 2011. Today, we reconfirmed our forecast for 2011 as provided in the forecast section of our first quarter 2011 earnings release, dated April 28, 2011. The company expects net postpaid subscriber additions for the full year 2011 and to improve total net wireless 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 generate positive free cash flow for 2011 and for the second to the fourth quarters of 2011.

In conclusion, in the second quarter, we continue to build momentum in several key metrics, but we are particularly pleased with the growth in Wireless Service revenue. After the revenue decline the company experienced a few years ago, reporting a third consecutive quarter of sequential growth in Wireless Service revenue is encouraging. We look forward to sharing more on our strategic network and operation plans in October. I'll now turn the call back over to Yijing for Q&A.

Yijing Brentano

Thank you, Joe. In just a minute, Brenda 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 www.sprint.com/investors.

We will now open the lines for your questions. Brenda, please instruct our participants.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Michael Rollins.

Michael Rollins - Citigroup Inc

Dan, I was wondering if you could talk a little bit more about the teaser you made about June net adds. And if you could put back in the context of the full year expectation to be back to positive, and maybe contrast that with the expense of getting those better net adds. In other words, you said there was $120 million of extra promotions in the quarter. Did that relate more to June, or was it priming the pump to get to June?

Daniel Hesse

Michael, well, basically, Q2 was almost a tale of 2 halves, if you will, where we had the first half of the quarter and the second half of the quarter. So we felt confident in reaffirming our -- as you mentioned earlier, our previous guidance with respect to being postpaid net add positive for the year based upon the way we exited the quarter. And they were based upon actions we took in the quarter. The one thing that's kind of changing in terms of, we'll call it, the economics of our industry, is that with the advent of smartphones, actually, customer lifetime value per customer is going up, is improving. Because as you know, there's 4 elements to drive the profitability of a customer, and the most important 2 are churn and ARPU. Those are both improving, but the subsidy expense and the cost of service, the expenses are higher. So in essence, it's slightly, if you will, the customer financials have a little more risk in them. But they have more long-term benefits. So the cost of, if you will, of adding new customers early on is higher. So as we mentioned, we took some actions in the quarter that -- and we had some new devices launched, let's say, later in the quarter. In this quarter, the bigger, by the way, the largest increase in cost or subsidy cost really had to do with changing, as I mentioned in my comments earlier, changing from a mail-in rebate to an instant rebate. That is much more consistent with the simplicity that we're trying to provide our customers, and there was basically a cost to do that. So that's really -- I think I hope I have answered your question. That is the relationship to, we'll call it, our guidance for the year that we saw improving performance through the second quarter, particularly, and we had a pretty strong June. June was our best month of the year. So that's why we felt we were exiting Q2 more strongly, and it was as a result of some of the actions that we took. And the largest and most significant was going to the instant rebates.

Operator

Your next question comes from the line of David Barden.

David Barden

I guess the first question I have, Dan, is just -- or maybe Joe, with respect to the LightSquared relationship, could you talk about kind of the sequencing of that relationship? Obviously, you've received money from them presumably as a prepayment to start building out sites for them. Is that how we should think about the relationship working, is that this is going to be a consistently cash flow positive kind of prepaid relationship with the company? And if that's the case, kind of -- obviously, you have a second lien on the spectrum, but we're not really sure what spectrum is really there to be used and what kind of first lien room is ahead of you in that company. Could you elaborate a little bit on kind of your comfort level with their funding situation and how far you're willing to go down this path and maintain your comfort level?

Joseph Euteneuer

Sure. So a couple things. So first off, we've gotten the $290 million, and let me just point out that from a cash basis versus the accrual basis on the books will be different. So obviously, we will be getting pre-funding of any work that we would be doing for LightSquared. But from a book perspective, we will be accumulating those cash payments and deferred revenue, and then they will get recognized as we turn on segments of the network. So understand that there will be a difference between cash recognition and book recognition. I think Dan mentioned in his remarks that we need clear GPS spectrum before we go forward. So we can get started with a lot of the planning and those things, but we need to get clearance on the spectrum before we start any heavy construction.

David Barden

And just quick -- following up on that Joe, beyond the SEC approval, assuming that they do get it, again, how far again are you willing to go down this path? Is there any funding contingencies on this? Because, I guess, LightSquared thinks that they need about $3.5 billion more money through their peak funding period in 2013 in order to kind of have the business they want to have. Are you kind of going to do this, and I guess how far are you willing to go down the path without any incremental funding announcement?

Joseph Euteneuer

Well, the arrangements are all prepaid. So we're hoping that during this period of time that they are trying to achieve clearance, they're going to be out in the marketplace going to raise money. So we should have plenty of runway room before anything gets committed.

Operator

The next question comes from the line of Phil Cusick.

Philip Cusick - JP Morgan Chase & Co

I guess for Joe, can you go through a little bit for me, the $73 million in disputes and settlements, is that all sort of one time, and so we should really look at that as not really in the jumping off point for 3Q? And then second for Dan, can you talk about your confidence in the company's ability to grow for the year, sounds like June was positive. But we talked about a little higher churn in the third quarter. Where do you expect the gross add share to really come from? Is this the better handset selection? Do you expect more marketing events and things like that, or are you relying on a little reduction in the competitive level of the industry?

Joseph Euteneuer

Sure. In regards to the items that we talked and the $73 million, we'll always have settlements. So trying to refer to them as one time is probably inappropriate. But we obviously, anytime we have settlements on anything, we'd love to be giving the Street a little heads up before they happen. I was brand new. I wasn't able to do that, so we just wanted to call them out, that they weren't really part of what I'll call the ongoing operations of the business.

Daniel Hesse

Phil, I think number one, as I mentioned earlier, it's just that -- it's the trend line. Secondly, from a competitive environment, the second quarter was really the first full quarter for some key new devices and markets. So for example, the iPhone at Verizon, it was the first full quarter for that, same with AT&T's $49 iPhone. Also, Verizon launched 3 new LGE devices in the quarter, launched a number of new 4G markets. So there was just a tremendous competitive intensity in the quarter that made it more challenging. We do intend to also to have a stronger handset lineup in the second half of the year. And I think our new advertising and our distinct position in the market of being the only unlimited player is going to help us as well.

Operator

Your next question comes from the line of John Hodulik.

John Hodulik - UBS Investment Bank

Guys, maybe just a couple of follow-ups on the -- some of the expense items. I guess, Dan, you said that the instant rebate program was the biggest driver, the $120 million. Now just to be a little more specific with that, when did that start? And I guess I would imagine that would -- is going to continue into the future. Do you see those $120 million growing into the third quarter? And then I guess the other one is being the cost of services with more handsets out there, or 4G handsets out there and the new agreement with Clearwire, how's that going to trend quarter-to-quarter? I'm just trying to get a sense of the margin trajectory here in the Wireless business, given what we saw sequentially in the second quarter.

Daniel Hesse

Let me take the first part of your question, and I'll leave any, what sounds like additional financial guidance, or lack thereof, to Joe. We changed the rebate plan on the 1st of April. So basically, it was new for the quarter. So that's why we took a fairly large hit, if you will, in this quarter.

Joseph Euteneuer

Yes. I think the instant rebate was one of the things that drove a lot of the cost in the quarter, represented about $75 million. So it was the biggest portion of it. The porting credits, obviously, were a lot less. They were actually less than 10%. So I think as we go forward, we continue to modify how we look at it.

John Hodulik - UBS Investment Bank

But that shouldn't grow, you don't think, that $120 million going into the third quarter? I mean, I guess, the concern is that, like you said, Dan, you're seeing more 4G competition as Verizon and eventually, AT&T will start lighting up these 4G networks, and you're going to need to maintain competitiveness going forward to be postpaid positive. But does that -- do you think that $120 million that you spent is a good number going forward?

Joseph Euteneuer

No. I think, actually, going forward, it won't be that bad. This was a unique quarter because of the intense competition. We made some conscious decision in the controlling the levers to make sure that we didn't get killed on a market share basis when you have Verizon, and with the full quarter of the iPhone in the market with AT&T lowering it to $49. So we think we took unique measures to try to protect our momentum that we had going on in the marketplace. And as we exited the fourth quarter, and you saw the performance of the HTC EVO and the 3D gave us confidence in going into the third quarter, but probably not at the same rate across.

Operator

The next question comes from the line of Jason Armstrong.

Jason Armstrong - Goldman Sachs Group Inc.

Maybe a couple of questions. First, on Network Vision, some of the recent tower agreements, obviously, coming together, you put out the release yesterday with Crown Castle. I'm just wondering, what flexibility do you have in these agreements as it relates to spectrum hosting? Is this included in these agreements? And specifically, the LightSquared deal has spectrum contingencies built in before you move forward. Just wondering if that means you secured the tower agreements to be able to do this when you get comfort around the spectrum, or if that's another step you'll have to take through subsequently? And then quickly on Prepaid, good quarter in what is usually a tough seasonal period. Just wondering if you could help shed a little light on that. Is this predominantly Assurance opening up a new space? Is it share gains, or it's just seasonality, sort of less impactful than historically?

Daniel Hesse

Jason, Dan here. I'll take the second half, and then let Steve Elfman answer the first part of the question. But in Q2, the real MVP was Assurance. So the growth, you can really attribute to a strong quarter from Assurance Wireless on Prepaid. Steve?

Steven Elfman

Steve Elfman. We announced the Crown Castle and 2 others this past week. And they both -- they provide flexibility for different spectrum, and I would also just like to say that there have been good deals for both. It's a win-win for the tower company and for ourselves.

Operator

Your next question comes from the line of Brett Feldman.

Brett Feldman - Deutsche Bank AG

There's been a lot of chatter about whether you guys might get the iPhone later this year, and I understand you can't really comment a whole lot of that specifically. But maybe within the context of your experience with iconic devices. I mean, if we were to see a product like that in your lineup, at some point in the next couple of months, how should we expect that to impact your operating trends? Is those types of devices typically result in share gains from a gross add standpoint? Or at this point, is it mostly just another tool you can use to drive churn to lower levels?

Daniel Hesse

Brett, this is Dan. Fortunately or unfortunately in our industry, there's been a trend over the last few years, where iconic devices are becoming a more important element of the overall considerations that a customer goes through. There's clearly price value, network quality, retail experience, care experience, they're all important. But the device is becoming a larger and larger piece of that. So that's why we put so much focus in the last couple of years on strengthening the device portfolio, and you're right to point out that the iPhone historically for AT&T and for the past roughly quarter and a half has been an important part of Verizon's arsenal. It's both important for gross adds and for churn. I think, we, like our competitors, upgrade a substantial percentage of our customers each quarter. And it's an important retention tool to have the device that your existing customers want, as well as if you have particularly an iconic device that might be only yours or exclusive, it can help drive gross adds. So it's a crucial part of your marketing element for both acquisition and retention. And you will see them both improve or both deteriorate based upon the strength of your overall device lineup, particularly we'll call them, iconic devices.

Operator

Your next question comes from the line of Timothy Horan.

Timothy Horan - Oppenheimer & Co. Inc.

Maybe 2 questions. I might have missed this, but can you give us maybe some range of when the LTE networks might start to light up either on your own or LightSquared? And secondly, Dan, just on the net add guidance, are you not almost concerned with the iPhone 5 coming out, maybe the iPhone penetration is so high now that the iPhone 5 won't have as much impact on you guys as maybe as the Street expects?

Joseph Euteneuer

In regards to your first question, we plan on October 7, walking you through our entire Network Vision plan and operational plan, so we'll give you all of the details at that time.

Daniel Hesse

You cut out on your second question. It's something. It was about the iPhone 5, what did it -- what was it?

Timothy Horan - Oppenheimer & Co. Inc.

Do you expect that to have much impact on you? I mean, it's -- a lot of the media expects it to come out come mid-September, would you expect it to have much impact this quarter into the fourth quarter?

Daniel Hesse

Well, we don't comment on speculation. I think there's been a tremendous amount of speculation, which historically has been -- much of it's been proven to be false. So I don't want to speculate on what devices may or may not be launched when.

Operator

Your next question comes from the line of Simon Flannery.

Simon Flannery - Morgan Stanley

Dan, I wonder if you could comment on the relationship with Clearwire. You got the wholesale agreement done, but where do you stand in negotiating things like network sharing or more close interaction? You've taken your voting stake down recently below 50%. You obviously have strong momentum in your 4G devices, $1.7 million this quarter. So there is an interdependency here, and they have talked about needing cash to get through to EBITDA breakeven and free cash flow breakeven. So how does that relationship stand today? And how do you think about your options with regard to Clearwire over the next year or 2?

Daniel Hesse

Well, we don't comment about ongoing discussions or negotiations between ourselves and other companies. I think you're right to point out that we recently entered a wholesale agreement that is very substantial between now and the end of 2012. And this quarter, we gave Clearwire 1.7 million new reasons to be pleased with the relationship with Sprint. And we've described earlier the voting interest doesn't change our economic interest at all, our business relationships at all, but was done to provide some protections, which we've explained earlier.

Joseph Euteneuer

Yes, Simon, if we were to go to the marketplace to try to raise money, we didn't want any confusion about any potential cost of faults regarding their debt, and that's why we lowered our interest.

Operator

And that comes from the line of Jonathan Chaplin.

Jonathan Chaplin - Crédit Suisse AG

One quick point clarification and then a question. So on the point of clarification, I just want to clarify on the EBITDA guidance for the year. I think on the first quarter, the flat EBITDA included the $200 million to $250 million of Network Vision expense, and now it seems to exclude that expense. I just wanted to make sure that I was interpreting that correctly. And then I'm wondering if you could just give us a little bit of color on how you think margin trends should progress from here in Wireless during the course of the year. And also, churn trends, you've obviously had big year-over-year improvements. Does churn follow the sort of normal seasonal patterns from here, or could you continue to see it step down on a quarter-over-quarter basis?

Joseph Euteneuer

So on the answer to your first question, we haven't changed guidance at all. And I think if you go back and look at our remarks, we have stated it the same way. So I think you just got to double check your facts, but there have been no changes to our guidance on our OIBDA. We've given you guidance for the full year in regards to OIBDA, so that should help you sort of where you think margins are going to go for the latter part of the year. And we've talked to you about seasonal patterns in the third quarter. So I think we did make comments on all of those things that you just asked, and to give you at least some help in considering what the future looks like.

Yijing Brentano

Well, thank you for your participation today. If you have any additional questions, please contact Sprint's Investor Relations team at 1(800) 259-3755. And this concludes our call. Thank you.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect.

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