Sprint's (S) CEO Marcelo Claure at Goldman Sachs Communacopia 2016 Brokers Conference Transcript

| About: Sprint Corporation (S)

Sprint Corporation (NYSE:S)

Goldman Sachs Communacopia 2016 Conference Call

September 20, 2016, 10:30 AM ET


Marcelo Claure - President and CEO


Brett Feldman - Goldman Sachs & Co.

Brett Feldman

Welcome everybody. We're going to go ahead and get started. Happy to welcome back for the third time Marcelo Claure, the President and CEO of Sprint. Marcelo, welcome back to Communacopia.

Marcelo Claure

Great. Thanks for having me here. This is actually the third time and one of the few that I do, so happy to be here.

Brett Feldman

Great. All right. So two-plus years now as the CEO of Sprint and you've implemented some pretty significant changes across the company, and just to recap, the really big ones as we've been keeping track, meaningful changes across management and the work structure, a lot of changes to how you go to market, meaningful changes to how you approach your network, and you've even been addressing the balance sheet and the cost structure.

So with that as a backdrop, at this point, do you feel like you've implemented all the major reforms that the company needs? In another words, are you mainly focused on executing against these reforms or are there still some strategic changes you want to make in the company?

Marcelo Claure

So it's been two years out of the five-year plan that we have. We've been clear and took us a while to put together our plan, but we have a very clear plan with goals with how we measure pretty much on a weekly and on a monthly basis.

I'll say we're 40% there. It's been two years. I could tell you that I am very happy with all the accomplishments and all the goals that we have reached. I think one that was very worrisome for me at the beginning was to have a stable topline. When you've been losing millions of customers for such an extended period of time is quite hard to get your topline stable, so we're there. We're getting back to growth.

I think we made a really meaningful improvement in our network, which is our product, obviously the most important piece and doesn’t matter which way you look at the network, we've made improvements in coverage. We've made improvements in speed, we’ve made improvements in reliability, and it's not also saying that by the -- I don't know if you saw the latest JP Power Associates, they rank our network number two in the nation, or PC Magazine or RootMetrics or pretty much everybody has noticed a meaningful improvement.

So I am happy where we are from a network perspective. The second piece to our five-year plan is taking costs out. We're committed to taking $1.5 billion on year one. We did that. We're committed to take $2 billion in run rate savings this year. We're doing it and we're looking already at where we're going to take costs years three, four, and five. We have a very clear plan, and we're executing pretty good.

Next piece we wanted to start gaining was gaining share and putting a good value preposition that our customers will come. I think our marketing has been quite different. I think it has been very effective. We have reduced our marketing spend by more than 30% while increasing our sales in our postpaid business.

We have a solid value proposition. We were net port positive against all three carriers for the first time last quarter. We're net port positive against all three carriers this quarter in our handset, in our postpaid handset business. We said we were going to add handset net adds. We're doing that. We've worked at getting close to profitability.

Last quarter, we had operating profit, which is something that Sprint hadn’t had in many years. We started generating adjusted free cash flow, which is something that we haven't had in many years and we've built a great team.

So pretty much we have a set of initiatives that we follow and we pretty much look at results on a weekly basis. So its execution, but you got experience sometimes changing depending on a competitive environment.

Brett Feldman

Got it. So last year, right before you came to this conference, there was a change in your incentive comp structure. You basically said, I won't take any more increases in salary and bonus and there was a large stock grant, which had most of its valued stock at over $8 a share, which is less of a spectacle than it was a year ago.

So my question is now that you have the company all focused on executing against the same plan, how are you incentivizing the rest of Senior Management and even further down the ranks to make sure that everybody goes after these ambitious objectives?

Marcelo Claure

Yes. Now taking a paid plan that it only becomes effective when the stock is $8. It seemed like a good idea exactly last year, but then when the stock hit $2 on January, didn't seem such a good idea. So things are looking bit more promising now.

I believe in having an aligned, not only Management Team, but an aligned employee base. So what we did two months ago, we decided to pretty much replicate my pay to every single Sprint employee.

So if you are a person shipping phones in the warehouse or you are a sales associate in our store in Harlem, you have the exact same obviously different amount but every employee has a turnaround incentive package, and I’ll tell you that has changed the way Sprint functions. People are starting to behave more entrepreneurial with the founder's mentality.

We tell people there are rules for you to spend money, but there are absolutely no rules for you to save money. And it’s amazing what people will do to save money and contribute to the wellbeing of the company. So I say we have a very well aligned company. We get hundreds of ideas on how to save money.

Because we're not going to be able to affect this turnaround unless we take costs out of the business, and you have a company that is determined to take cost out of the business and that’s reflected with our employees all being potential shareholders because nobody gets an equity grant until the stock hits a certain number, so everybody is I think motivated by the right incentive.

Brett Feldman

Actually across the whole employee base, there’s an equity component to this.

Marcelo Claure

Every single employee -- over 30,000 employees, we did 30,000 grants. So every single employee has the exact copy of what I -- of my incentive package, meaning no equity until the stock hits $8.

Brett Feldman

And this is the first quarter that that has been implemented across the company.

Marcelo Claure

Yeah. Yeah. I had a lot of my executives on that pay plan. Now we have every employee in that pay plan. So it's exciting.

Brett Feldman

So last year at this conference, my last question was what are we going to be talking about next year? And you said and this is quote, that you would be gaining handset subs - quarter-after-quarter, and since then you have had four consecutive quarters of growth in your handset subs, so I guess first of all congratulations.

Marcelo Claure

Thank you.

Brett Feldman

So the obvious question is, is it sustainable? And so along these lines, if we go back to your conference call, you said two encouraging things. You said, last quarter you would net port positive on a postpaid basis against the three national operators and you even said July was a remarkable month. And so, the question is what you can tell us about the momentum of the business so far through the third quarter?

Marcelo Claure

Okay. When we started just a simple thought of becoming handset net add positive was a daunting task right. If you go back, we were losing millions of customers on a quarterly basis. I remember net port ratios were negative, two negative, three against some carriers.

So what John John Legere used to tweet was truthful, what the customers used to take from us. And we put -- we looked at a business that was confusing. We had wholesale. We had prepaid. You have tablets. You have mobile broadband. You had M2M.

And we said, we’re going to basically put a lot of our attention towards handset net adds and handset net adds is important, because when you have a customer paying you in excess $70 a month versus a $1 a month, all the profitability of this business or 80% of the profitability of the wireless business resides on handset net add positive. So we put the entire company to just pay attention to that metric and really worked.

And it took a lot for us to actually becoming handset net add positive. We've done it for four consecutive quarters. We're going to do it again this quarter. July was one of the best months that we've had in many years. August was solid, September is solid. So I am happy with where the company is going in terms of attracting customers. Make no mistake, this is a steady -- we are running a company, I would like to call it a steady progress.

We're not going to explode from one day to another, but we are in the business of just getting better month-after-month and quarter-after-quarter, and you've seen that in the last four quarters and you're going to see it again this quarter in terms of a company that just continuously gets better, our value proposition gets better.

And I think another area that has contributed a lot is basically our churn. You go back to two years ago, our churn was I think 2.5 or a number on that magnitude. Last quarter’s handset churn was 1.39, and the last six quarters have been record churn in Sprint’s entire 21-year history.

And that's quite important because customers come, there is lot of skepticism towards Sprint in terms of perception of the quality of our network. But then once they come, they stay and they like it and that’s why you see this good churn numbers and that’s what allows us to be handset net add positive.

And I think that's the right way to grow our business because you can always spin and bring -- it's easy to bring a lot of customers, but if you don’t have the right service, they're going to leave us fast as they come. You have a spinning door, and today customers are coming. They are staying. Our customers are more satisfied and they're staying. Now we have a long way to go, but I think we're making really good progress.

Brett Feldman

You've also talked about making sure you're winning the right kind of customers, customers who intrinsically are going to be more loyal to a provider if they're happy. And you've said most of the gross adds that you're getting are coming from AT&T and Verizon, who not only have the most customers, but who generally have the highest credit quality customers in the industry.

Is it fair to say that the credit quality of the customers you're adding, your gross adds is higher than the average embedded base of the business right now?

Marcelo Claure

We have a really good base of prime customers. That's a big differentiator between us and another carrier. It's all based -- it's quite solid of prime customers and we also attract a good -- great percentage of prime customers.

You not only want to attract high quantity of customers, but you want to bring high quality of customers. There is a tremendous difference between prime and subprime customers.

Now just putting perspective, a prime customer will stay with you about two and half times more than a subprime customer. A subprime customer goes shopping right after the contract expires. A subprime tends to stay with you anywhere between five to six years.

So there is a reason why our marketing campaign targets one specific carrier which is the biggest one. There is a reason why our spokesman has a great way of incentivizing Verizon customers to switch and that is because Verizon has large amount of families that are prime.

And if you could capture that, which is what we want, prime families that come – that are more than individuals with a single line, you start seeing the business provide a very different customer life value and profitability changes.

Brett Feldman

And we can't see that reporting ratios. They just tell you the numbers. Are you seeing that as you win customers from a carrier like Verizon, you are in deed pulling over families and not just individuals?

Marcelo Claure

What we mentioned is the average number of lines of our new acquisitions and that continues to grow month-after-month and quarter-after-quarter. Verizon and AT&T have a large number of families that is what you'll see when T-Mobile and ourselves were always advertising four lines or three lines.

There is a reason for that and that is it's much nicer when the whole family comes. It has a complete different churn profile. It's hard for them to switch, but once they switch, they stay with you for a long time.

And the savings are pretty extraordinary for a family that's with Verizon, compare AT&T that a family that comes to both Sprint and T-Mobile.

Brett Feldman

You're sticking with the competitive environment, it certainly seems like the launch of the iPhone 7 drove a lot more competition back into this sector. It felt like the first half of the year would may be benign relative to what we've seen recently. And so first of all, do you agree -- do you really feel like since that phone has come out, everyone’s kind of sharpened their knives a little bit.

Marcelo Claure

I think we're living in a pretty competitive environment. If you look at Verizon's advertising, it's turned a bit aggressive. They hire people to talk bad about the Sprint network, and for also you would be following Verizon, they have not done that I think.

If I remember being a kid and watching Verizon's commercials, I don’t remember them trying to hit somebody else as hard as they're trying to hit us. So it's quite competitive from that angle.

There is once a year where there is a big launch of iPhones, and we all try to basically put up the best offer. I think this year, we are very little creative. I think we all went with a free iPhone. So therefore there is no competitive advantage. So it's interesting to see Verizon and AT&T react fast. Usually it take them -- they're used to taking a bit longer, perhaps both T-mobile and ourselves announced a free iPhones obviously with a trading of a device.

So therefore, trading of an iPhone success which is worth about $400 to $450 in the open market as a used phone. So it's free if you're returning a device. I was quite surprised to be quite honest to see AT&T and Verizon react that fast. That gives you an idea of the competitive environment, but I think it just shows -- shows we're all in the iPhone war who can get more pre-orders and then after that, we all go and we continue with our strategy.

Brett Feldman

If you think about the pre-announcement you made or the announcement you made around how strong those pre-orders were relative to what you've seen in the past, a lot of people assume while you're giving away a lot of free iPhones, but you've spent a lot of time trying to encourage your customers to get into plans that we give them reasons to upgrade their phone.

And so is there anything you can use help us un-tap why you had so much initial success. Was it the upgrade plans taking hold and doing what they were supposed to do or is it just people looking for free iPhones?

Marcelo Claure

No, it's a combination of three factors. When we had a record, because there were record pre-order. It was close to 4x last year. So that’s a lot of -- we were surprised to be quite honest when the order started coming in. We are much better digitally.

There are not -- whenever you have the chance to go to sprint.com, it’s a whole different experience. And I’ll talk to you a little more about the digitalization of Sprint in a few minutes. But we have three things going for us. First is we launched iPhone Forever last year and iPhone Forever means you get an iPhone every time a new iPhone comes out as long as you’ve had your phone for at least one year. So we had a lot of people early adopters who wanted to come get their new iPhones.

And to us that’s encouraging because what we're doing is, traditionally in this industry when a customer finishes his contract your churn explodes for that specific customer. Churn goes up to pretty high numbers. So what we are trying to do is if a customer is in a 24-month contract or an 18-month contract, if you don’t let the customers get to the end of their contract, but you actually give him the chance to operate every 12 months, we call it internally a product called a zero churn program and that is can we actually move customers to a 0% churn if you always give him when he buys ahead of contract expiration. Interesting to say, surprised how many came. So very happy on that end.

Secondly, we had our two-year lease upgrades that we launched when I started this job two years ago. So those are coming back. And then we continue to have momentum of customers that want to give it a shot to Sprint. The new iPhone carries 3CA for those who are take -- if you follow our test on 3CA we are at 240, 250, 260 megabits per second. That’s good. It’s amazing what you can do at those speeds. So people are seeing; hey, Sprint has a really fast network. Sprint brings a good value proposition. Why not give it a shot.

So it’s a combination of those three. We're sold out of most models. So it makes that difficult to see; hey, is this sustainable for long run or you know, we can wait for Apple to ship us more devices. So we can see exactly what is the true demand of the iPhone once you have all your stores loaded or your channel or your channel is loaded.

Brett Feldman

Got it. Another factor that has been driving your postpaid phone that as recently -- you have the 50% off promos, we'll give you 50% off the rate plans that the other carriers have. And I am just curious how do you think about that promo fitting into your pricing strategy, particularly as some of your peers are now moving away from your pricing plans and back towards unlimited?

Marcelo Claure

Okay. So, that scenario that we've had to come back and discuss a lot with analysts and everybody, is nobody could understand how in the world is Sprint increasing their average billing per user, while at the same time bringing millions of customers with a 50% off?

So there is a couple of interesting points. One is a lot of the customers who come, they don’t want 50% off, they want to pay the exact same thing they're paying, but they want to be able to get double or twenty half times data. So that obviously helps in terms of bringing these customers at a certain ARPU.

Secondly is we've had great unlimited rate plans that customers love to load. So we know that we have to get out of 50% off once we reach a certain point and we started doing a lot of research. So we asked tens of thousands of customers, said if you could go and develop the perfect rate plan, the dream rate plan, what would it be?

And the vast majority say, give me one bill, with a fixed amount that I don’t need to try to figure out how many gigabytes, how many megabyte -- maybe you guys are smarter than me, but I don’t know how to use a gigabyte. I don’t know what it really means, if you download a nice, a high definition or its not high-definition, it's so hard to and customers don’t like that.

So we decided to come up with a program called Unlimited Freedom and Unlimited Freedom is an attractive rate plan that basically you're only going to get one bill and we mobile optimize your streaming. And then some customers told us that’s great but I also like -- I don’t like it to mobile optimizing. So we said great, so we're going to have unlimited premium that we don’t mobile optimize and streaming. So we are going to potentially move to only three rate plans.

We will get out of the 50% off most likely, I say most likely because we are trying new things as a fast company. So if we try new things and don’t work, but 50% is to work make no mistake we're really good at getting in and out of things, we've had a problem, but our plan of record is we want to get off of 50% up.

We want to increase a little the ARPU and the ARPU that we're bringing in new customers and we want to massively simplify our business by moving to three rate plans, an entry plan, an Unlimited Freedom and an unlimited premium.

Why can we do that? Now is where our vast spectrum holdings come into play. We have more capacity per subscriber than any other carrier in the world. So therefore now that we're indentifying our network, now we start putting our network to work and that’s been always part of the strategy.

So we believe the more amount of consumers that actually know about unlimited, we believe that we can continue to grow and the ARPU that you're loading in unlimited is significantly higher.

While at the same, the cost reductions that you have by offering a very simplified value proposition in your retail stores, on the web, on carrier, today is hard to carriage and with the amount of rate plans that we have is confusing.

So we want to move to one way in which a buyer release a phone with three simple rate plans and we’re going to get there and we're going to be very disciplined, do a lot of testing to make sure that we do it at the right time to make sure we're not leaving anybody on the table.

Brett Feldman

Do you have a rough idea as to how long you think it takes to get that level of efficiency?

Marcelo Claure

We're not there yet. I am looking at my loading and unlimited every day. I am surprised, how quick people jump in. So I would say, it's moving in the right direction. But I am not sure I want to get off of 50% off throughout the holiday season. We’ll figure out if it's after the holiday season, because I think we have a really good value proposition, save 50% off or jump into unlimited.

The only thing I don’t like is, it's a bit too complex for consumers and our sales people to understand, but I've made a commitment to my team that we're going to simplify our value proposition.

Brett Feldman

The customers that are already on the 50% off will be moving off it at some point as the way the promo is set up. Do you feel good that the unlimited freedom offer or maybe the other plans added here where they can maybe move laterally and it doesn’t disrupt your revenue from that customer in a meaningful way?

Marcelo Claure

One thing that we've done is for any of you who is a Sprint customer and sign-up for 50% off is we message you every month and let you know; hey, you're in promotional rate. Your rate is going to double after two years. So we -- there is not going to be a simple customer -- single customer after 24 month that gets surprised when their bills goes up.

Now we don’t want to do that. So what we plan to do, is there is a good cohort of customers who actually would want to move to unlimited because it make sense. So we're going to start messaging them, ahead of the 24 month and I think that could also be a potential value creation in terms of moving those customers. But there will be some that the rate will go up, but I think most people would eventually move to unlimited and that is very accretive for Sprint.

Brett Feldman

You earlier noted that your churn has been coming down because the network experience hasn’t made your customers happy and they're willing to stay. So first, what have you done so far that has made your network perform better and then we can start talking about some of the incremental things you've been talking about with small cells?

Marcelo Claure

Okay. So what have we done? First thing we've done is we’ve optimized what Sprint did between 2013 to 2015 and for those of you who remember that was called network vision. So basically network vision we spend a lot of money. We spend the highest percentage of CapEx to sales of any carrier in America.

And what that gave us is a very solid foundation that allowed us to optimize the utilization of 800, 1.9 and 2.5. While that was a tough move every time we play, so you have to optimize and get the network better. The software team in Japan, we have Tiger team, Swat team and we actually optimized our network.

Secondly is when you have a really good base that where things get interesting is when you kind of start doing things that have come from software. So we did our 2CA and people were surprised with speed. Now we're doing our 3CA. So we call it, is being massive, is mainly optimizing our network and making software enhancements to our network.

And again I go back and I say read any report, the one that I enjoy the most is PC Magazine, because I thought the editors of PC Magazine really hated us, they were bashing Sprint for years and if you read PC Magazine today, they have done an awesome piece that basically shows why, yet Sprint is not better than Verizon yet, but we are the story. We're the comeback story. We're more reliable than Verizon in certain markets. We're faster than Verizon in other markets.

So that tells you and then you get all the other companies and make your living by ranking networks, all of them have to say networks -- Sprint network is pretty good.

The important message to take away from this is, Verizon’s marketing hugely gone right. The T-Mobile network is good. Our network is good. AT&T network is good. So we're all within fighting distance. Now in some places they're better, we’re better, but that’s gone. Now what comes now is the most exciting part and that is when you have so much capacity, when you have -- look at highway lane where you can put 60 cars and it's half empty, well that's going to give you two basic things that customers like, capacity and speed.

How do you get there by densifying your network? If you look at the foundation of 5G, it's pretty clear that it's also having a very dense network and suddenly this strategy that we started discussing a year, a year and half ago that everybody made fun and now everybody is chasing, installing small cells on probably utility poles why, it's faster and it's cheaper.

And why Sprint can do it better than anybody else? We have a lot of spectrum and we have choices whenever we want to put a small cell whether we use wireless backhauling which you don’t need to connect to fiber or whether you use fiber.

So you're going to see our network get progressively better. For every single time we put a small cell in any city, you go there and the speed and capacity that you get is amazing. And so this is going to be a progressive enhancement for a network which tend to be high that by end of 2017, 2018, I want to see Sprint network being number one and number two in every market in 80% of the markets where we play.

Again it's not that we're smart than the rest, but we have more spectrum than anybody else and if you put a spectrum to work, you're going to deliver an amazing experience.

Brett Feldman

Can you put some scope around the project, how many sites are in your network today and how do you amplify that? What kind of numbers can we expect as you move through this small cell deployment and I guess as part of that, where are we in that project cycle right now?

Marcelo Claure

So it is -- we have always said that it's a massive densification of our network and we're talking about tens of thousands of gear. And again it is not only small cells, there is micro cells, there is small cells, there is Phantom cells. It's a combination of different structures.

Technology has changed. The old way of building a network is basically go put a bunch of micro sites, contract with the power companies, outsource the way you mange -- outsource the way we deploy the network, that's what we did in Network Vision.

Today we have a complete entrepreneurial drive to build our network. Every single structure comes into a control tower in which we basically figure out what is the most cost efficient and the fastest speed that you can deploy a structure.

So you're looking our tens of thousands, first phase was to basically design a network. My Chief Network Masa played a very, very key role in helping us define the network. We had a lot of Japanese and American engineers all being led by Masa and John Saw and Günther. And we really -- it's the first time that I think these teams work so well together and we designed an awesome network that's going to be great.

Next step we filing applications and permits. We're in the process of doing that. We filed a lot and we're getting a lot of approvals and we're starting to put some on air to some cities in the U.S. that already have them on air. When the time is right we're going to announce how many we have.

We don’t like and I spoke to you earlier about this is it's not that we don’t want to disclose what our network plan is. We believe that we have a competitive advantage in how we're deploying our network and what is our cost to basically put a new gear and what's our cost to operate a network that we feel is not being good but just basically exposing our plan. It's very different than the way our competitors have deployed networks.

Brett Feldman

But is it fair to say that your CapEx spend is inevitably you're going to have to go higher as you ramp this deployment of small cells because that's been the big debate which is that your level of capital intensity right now sustainable.

Marcelo Claure

This is an interesting industry. People criticize you when you spend too much and then people criticize you when you spend too little. We've proven, you can -- you don’t need to spend the crazy amount of building some dollar to build an amazing network.

Look at our network today, it's the lowest CapEx. Now as we densify our network, yes we're going to increase our CapEx and yes we're going to increase our OpEx. But never to the tune of the way it's been done in the past. There is way too many new technologies today. We have way too much spectrum and we’ve been real smart on how we deploy our network.

We are determined. We have a five-year plan. We need to -- Sprint is a company that has a tremendous amount of potential for a tremendous amount of cash flow generation and profitability. So we are going to very disciplined to make sure that we are building a great product, attract new customers while at the same time, don't over invest. Be smarter how we invest our money.

Brett Feldman

Got it. And one more question I want to ask just to wrap this up, but we are going to save some time here and take questions from the audience. So if you have a question this would be a good time to raise your hand, some over the microphone, we'll find you and then we will come back right after this last one.

And so really just a tie all up, we started this dissuasion of network with churn. It certainly sounds like you believe your network is only going to continue to get better. Is it fair to say that you feel comfortable that the improved trends you've seen in churn are likely to sustain for a period of time here?

Marcelo Claure

Well we're going to try hard to do it. There is three basic fundamentals in wireless churn is our record lows. Number one and more importantly, customers are coming and they like what they get out of Sprint. Secondly is the quality of customers that we're bringing in from a credit perspective are customers that have the ability to pay their bills, which is something that we didn’t do too much of that in the past. So we bring customers that are credit qualified and therefore they stay.

And third is we're getting better at customer experience. The whole company, part of their bonuses or net promoter score and everybody tries to satisfy their customers. So when you put those three things together, you've seen a very nice decrease in churn.

Now market is competitive. We're all trying to take customers away from each other. So how to predict the future, but I think if you do the fundamentals, the thing -- the basic thing right and that is give customers the value -- give customers value for what they're paying, customers will stay.

So that's why I think we have one of the lowest or one of the biggest drops in churn that you've seen in such a short period of time.

Brett Feldman

If I had asked you just a few years ago even before your time what was the biggest driver of churn, it would have been poor network experience. So now that you've correcting and you're continuing to correct that, what is the number one reason you're losing customers right now?

Marcelo Claure

You're always going to lose customers because it's highly competitive. There is a lot of promotions going back and forth and you cannot be everything to everyone. There are certain people, there are certain places where our network is going to run for or somebody network is going to be better and there are certain places where we are going to number one.

The key is you want to lose less customers than the ones you gain meaning -- and secondly, you want to make sure that there is something that measure every week and that is we actually grab the value that we're creating to the gross adds minus the value that we are destroying for deactivation.

And as long as that number remains positive meaning we're creating more value than destroying value, than basically it's accretive and we look at that every single week and so far looks good.

Brett Feldman

And is that mostly looking at the ARPU; is it billing per month or are there other inputs there that are important?

Marcelo Claure

If you look at the customer like value, look at the profitability per customer, so that is a metric that we use a lot. It's an internal management metric that we use to make sure. You always want to make sure that you're creating value versus the value you're destroying and in a competitive environment certain customers are going to leave you.

Brett Feldman

Got it. So I'll stop now. If anyone has a question please raise your hand and they can bring the microphone over. We have one back there and we are going to do one over there next?

Question-and-Answer Session

Q - Unidentified Analyst

There has been a lot of talk about net neutrality and the streams network for having the zero reading features with some of your competitors and your role as CTIA, is there something you want to address one way or the other?

Marcelo Claure

Net neutrality is an interesting topic, I don’t know, for those of you who don’t know I just became the Chairman of CTIA. So that's different hat that you wear because you're representing the industry and you're not necessarily representing your company. So it's quite an interesting one.

Net neutrality has been a topic that to be quite honest we've had a disagreement among carriers, Sprint was the first one that endorsed net neutrality because we believe that when you're a smaller company, it is not such a bad thing to have the government look over and in many competitive practices that or bigger competitors do. So that was one of the basic things behind it.

There was a lot of talk about our competitors saying, hey if net neutrality passes, we're going to stop investing, nobody has stopped anything. We're all investing. Everybody is doing best thing investing over the network. So this one is touch issue that as Chairman of CTIA, we have to find a common ground among all carriers in terms of how do we represent the industry going forward.

I think there are other topics as being the chairman of CTIA where I want to put a lot of my attention and my drive is basically to make sure that U.S. doesn’t lose the edge that we had in 4G as we move to 5G. And there are three basic areas that we need to put a lot of attention to.

Number one is spectrum. I think the SEC has done a really good job in terms of allocating it's spectrum to 5G that's great and what's even greater is that it looks just like Sprint spectrum in high band. So our spectrum looks quite good there.

Secondly is transport, how do we track on a backhaul. That's a contested area as you know. I think some of us like that the Government basically regulates the price of backhaul and others especially want it to be more competitive, some of us don’t.

And then thirdly, which is the most important part is the whole zoning and permitting for us to put our gear. We have some great cities and some great Mayors and cities who understand the economic progress they can make by having a connected city.

So therefore they encourage us to go put our macro cells or small cells and there are some cities that don’t. So we would like the Federal Government or the SEC to play a more active role in terms of figure out a way. So it is not a hit or miss depending on what city or what account that you go to.

Brett Feldman

Got it. I want to ask a question about costs, and then I'm going to come back and see if we have another question. But if we look at what you've been doing just last quarter, your cost of service was down $300 million year-over-year. Your SG&A was down almost $300 million year-over-year. You talked about trying to get to $2 billion of annualized savings at the end of this fiscal year, which is your March quarter.

It would certainly seem like you're running ahead of plan. And so can you just give us a view here on where you are being most effective, and bigger picture, what do you think the cost profile this company could get to over time?

Marcelo Claure

So we look at every line item and these are tedious exercises that happen every Wednesday at Sprint where I sit with my each line manager and we sometimes go for 14 hours and we look at every single line item and identify savings after savings after savings. A company of this magnitude will spend so many billions of dollars every round that you do and Tarek is my partner in crime in this.

Every review you do you find money. There is just money to be found pretty much in every way you spend or there is longer terms with vendors, there is ways to just save money. When you look at the next round of transformation is by no means are we stopping after this $2 billion. We're going to continue to go, but now it's a different way to look at the businesses. How can you truly transform the way you operate as a company right?

I told you I was going to talk to you a little about digitalization. When I arrived at Sprint I think it was 3% to 4% of our sales were digital right. Today, I am happy to say, that we have already surpassed double digit in our sales in digital. Digital sales give you the lowest cost per gross add. So therefore, we are going to continue to digitalize Sprint and we want to make sure that our customers are upgrading their phones via website or via our mobile site and we encourage you to test experience because it is really, really good. That’s one.

Secondly it's carrier. When you have tens and tens, and tens of thousands of employees in Philippines and other places answering phone calls, and it’s just a complex world in terms of how many rate plans we have and all that. As we move to basically three rate plans, we expect our carrier cost to dramatically change right, it’s a big bet.

Three, is you know how you can get operational efficiency from your channel. We have some stores that do 5x store that's a mile away and then why, you go deep and you realize that the management of the store does 5x is significant better, then you start looking at how did they do it? Will they are train better. They pay their people better etcetera.

So now they're basically harmonizing to make sure your company on stores and your dealer channel behave like one. You let them use your system. We let them use our inventory. We let them use our trainings. So now and these are just examples. We have this transformation office and each of these ones are big. So when you look at the next round, it's basically, it’s a lot more transformation than just trade cost cutting.

Now that doesn’t mean we don’t look at every dollar that leaves the company. We have to. Sprint’s turnaround is predicated of a continuous reduction of cost. And also you know we got to bring new customers. We got to increase the ARPU. We are doing all those things, but I’ll tell you this company's profitability can get enhanced by us basically continuing to take cost out of the business.

Brett Feldman

Got it, I think there might have been one question on the side of the room, there is one right back there.

Unidentified Analyst

Yeah Marcelo, could you discuss the sale-leaseback on the 2.5 gigahertz spectrum? In the market, I believe it's marked at $0.26 per megahertz. But I'm wondering if you have any updates or thoughts with respect to the sale-leaseback, and when we can expect to see a transaction completed and what that would do for your financial position.

Marcelo Claure

So are you referring to spectrum lease-co where we discussed it? Well obviously we can't share lot of details. We're working tirelessly to make sure that happens. And I elaborate a little more is traditionally while Sprint -- the way Sprint was financed was; hey, we needed money. We went to the high yield market and I was shocked.

The first time we needed to raise money, it was just pick up the phone and issue a couple of billion dollars of bonds, but you pay dearly because then you look at the interest spend that we have today and it's a pretty largely interest expense.

So we're determined with Tarek to find better ways to finance Sprint. We've done it with handsets as we have done first set or couple of tranches of handset Lease-Co out of which we're able to finance our business below the high yield market.

We've done and we network Lease-Co which we are able to do that and in the next round is Spectrum Lease-Co right. We have a lot of spectrum and we're right now -- our goal would be that before the end of the year we're able to potentially basically be able to use spectrum in order to finance the company.

Brett Feldman

The calendar year or your fiscal year?

Marcelo Claure

One of the two.

Brett Feldman

Okay. I think…

Marcelo Claure

The sooner, the better.

Brett Feldman

There may have been one more question I think I saw. We've one right down here.

Unidentified Analyst

Thank you. In light of your spectrum position Marcelo, can you comment on your expectations for the outcome of the broadcast incentive option, and also what you think will happen with Dish's spectrum?

Marcelo Claure

With what?

Unidentified Analyst

With the Charlie Ergen spectrum.

Marcelo Claure

So I don’t have a lot to say about the 600 megahertz spectrum. We decided we don’t need it. We have enough spectrum. We don’t have to participate. So we watch what is going on. It's quite interesting. Charlie -- you can never read them, you have no idea what's next. So I have no idea what Charlie will do with his spectrum. If we didn’t have a spectrum, we would be looking at this to a lot closer. We have sufficient high quality spectrum network going to work.

Brett Feldman

I'm going to end by asking the same question I finished with last year, which is you've talked a lot about what you've accomplished over this last year. When we are having this conversation next year, what do you think you're going to be highlighting as the key accomplishments and really what are you going to be focusing on going forward from there?

Marcelo Claure

So this is an execution play, right. We have our game plan. I'm pretty much -- we have six areas that we put all of our focus on to and that we want to make sure that we hit.

You are going to see the network continuously getting better and we can use any metric to basically look at that. We're going to continue to take cost out of the business. We plan to continually add handset net adds in the postpaid business which is where the money is.

And we will hit what we committed to the market is it relates to cash flow generation and our EBITDA target that we have. So those are four basic areas. That's where we work on and we're going to continue to basically get better. This is a story about continuous execution where if you've been following Sprint, I think it's been eight quarters that each quarter gets better and we're going to continue to try to do that by basically doing the basics right.

Brett Feldman

Great. Well, thanks for coming back. Appreciate it. Thank you very much.

Marcelo Claure

Thank you.

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