Sprint Nextel's CEO Discusses Q1 2012 Results - Earnings Call Transcript

 |  About: Sprint Corporation (S)
by: SA Transcripts


Good morning. My name is Susan, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2012 Sprint Earnings Release Conference Call. [Operator Instructions] Mr. Brad Hampton, you may begin your conference.

Brad Hampton

Thank you, Susan. Good morning, everyone, and welcome to Sprint Nextel's First Quarter 2012 Earnings Call. Thanks for joining us this morning and for your interest in Sprint. On today's call, Dan Hesse, our CEO, will discuss operational performance in the quarter. Then Steve Elfman, our President of Network Operations and Wholesale, will provide an update on Network Vision. And finally, our CFO, Joe Euteneuer, will cover financial results. 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 do want to point out that in our remarks this morning we will be discussing forward-looking information, which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review, including our annual report on Form 10-K.

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

Let's move onto earnings per share on Slide 4. Basic and diluted net loss per common share for the first quarter were $0.29 compared to $0.43 in the fourth quarter and $0.15 in the year-ago period. The loss per share in the current period included depreciation of approximately $543 million, or negative $0.18 per share, primarily due to accelerated depreciation related to the expected shutdown of the Nextel platform, of which approximately 9,600 sites are expected to occur by the end of the third quarter of this year. The current period also included a onetime benefit of $170 million or approximately $0.06 per share related to the spectrum hosting contract termination with LightSquared.

We recorded a net tax expense of $37 million in the first quarter. For the full year 2012, we continue to expect our net tax expense to be approximately $150 million to $200 million. I will now turn the call over to Sprint's CEO, Dan Hesse.

Daniel R. Hesse

Thank you, Brad, and thank you for joining us this morning and for your interest in Sprint. As I discussed on last quarter's call, 2012 marks the second phase in our company's turnaround effort, investment for future growth while we maintain our focus on our operations and execution of the Network Vision program.

As we will describe this morning, we've made progress against our goals. If you turn to Slide 6, please, I'll recap some of the quarter's highlights before reviewing performance across our 3 key priorities, which are generating cash, improving the customer experience and building the brand.

Adjusted OIBDA of just over $1.2 billion exceeded both our internal projections and Street consensus. Adjusted OIBDA margin of 15.2% represents a sequential improvement of 440 basis points from the fourth quarter. We delivered another successful iPhone quarter. We activated over 1.5 million devices in the quarter with 44% of those being new customers to Sprint, a continuing proof point of the strength of the Sprint brand and the compelling combination of an unsurpassed customer experience with the only truly unlimited data, talk and text plan.

I can also report another record quarter for ARPU rate growth for the Sprint platform postpaid business. Year-over-year, Sprint platform postpaid ARPU grew $4.03, the highest increase on record for any major U.S. wireless company. Today we're announcing our sixth consecutive quarter of over 1 million total net customer additions and our eighth consecutive quarter of positive net additions on our Sprint platform postpaid business. Our 56 million total customers establishes a new all-time Sprint record.

And finally, we made continued progress on the Network Vision deployment. We announced and we're on plan to launch 6 major LTE markets by mid-year.

If you would please turn to Slide 7. I'll organize the balance of my comments around our 3 overarching priorities, which I just mentioned. Let me begin with cash. We improved our liquidity position by generating $138 million of positive free cash flow in the quarter and by completing a $2 billion debt raise. Joe will provide more details on our liquidity and capital structure, and we ended the first quarter with cash, cash equivalents and short-term investments of $7.6 billion, adequate to address our short-term needs.

Higher than expected quarterly adjusted OIBDA performance was aided by strong top line growth, fueled largely by strength in our postpaid ARPU rate. This quarter represents our seventh consecutive quarter of year-over-year growth in total operating revenues and our third consecutive quarter of sequential growth. Total operating revenues are up 5% year-over-year. Sprint platform service revenues reached their highest-ever levels at $6.5 billion, an increase of approximately 16% over the year-ago period and approximately 5% sequentially, driven by the growth in the postpaid ARPU rate, as well as growth in subscribers across all areas of the business: Postpaid, prepaid and wholesale.

As I said earlier, the Sprint brand postpaid quarterly ARPU rate grew year-over-year by $4.03 or approximately 7% year-over-year and $1.33 sequentially or approximately 2% as we continue to see the benefits of smartphone adoption and the $10 premium data charge implemented in 2011.

As I transition to a discussion of our customer experience and brand results, I'd like to begin with an overview of the iPhone, which benefits both areas. Turning to Slide 8. An important near-term financial indicator of success with the iPhone is the percentage of activations that are new customers to Sprint because they represent new sources of revenue. In the first quarter, 44% of our iPhone activations were new customers, up from 40% in the fourth quarter, above our internal expectations and well in excess of our competitors' results.

Additionally, 40% of new Sprint iPhone users reported breaking a contract with their prior carrier to switch to Sprint, evidence that our Sprint brand hallmarks of value and simplicity are resonating with consumers. Our study also found that over 60% of our iPhone customers who left another carrier to come to Sprint wouldn't have considered switching to us if we did not carry the iPhone.

Longer-term, the most important indicator of success with the iPhone is the anticipated lower churn rate of iPhone customers. All of our early-life iPhone customer experience metrics are positive, potential early indicators of longer-term churn benefits. To date, we are experiencing low early-life calls to care and less than half of the returns and exchanges for iPhone users compared to other smartphone users. The evidence so far supports our decision to carry the iPhone.

Turning to Slide 9. In the customer experience, I'm pleased to report that in the first quarter we achieved a new best-ever level for customer calls to care across our customer base. Calls for postpaid subscriber are down over 10% from last year. We're also making notable improvements with our prepaid base with calls per subscriber down 19% from last year. Third-party overall customer satisfaction measures remain at best-ever levels. And we're not buying satisfaction. Customer care credits in the first quarter were the lowest or best for any quarter on record.

Third-party accolades continue to validate success across our brand and product portfolios. In the quarter, 2 of our prepaid brands, Virgin Mobile and Boost Mobile, were named 2012 Customer Service Champions by J.D. Power and Associates among 800 brands considered. And our brands were recognized 3 times by J.D. Power: Sprint, for highest satisfaction with the purchase experience among full-service wireless providers; Virgin Mobile, for highest-ranked customer service performance among noncontract wireless providers; and Boost Mobile, for highest satisfaction with the purchase experience among noncontract wireless providers. Sprint was recently recognized by ATLANTIC-ACM for excellence in our wholesale business, for network, provisioning, customer service and sales force. And finally, Frost & Sullivan identified Sprint as an excellent example of an end-to-end mobile solution provider for the small business sector.

As we discussed on last quarter's call, Sprint platform postpaid churn remained elevated in the first quarter at 2%, largely due to the involuntary churn impact of some acquisition activities in the second and third quarters of 2011. We continue to expect a step-down in Sprint platform postpaid involuntary churn beginning in the second quarter and improvements in voluntary churn longer term driven by the ongoing improvements in our customer experience, the iPhone and the fact that our percentage of postpaid base on contract is the highest it has been in 4 years.

As we discussed last quarter, Nextel platform churn is ramping up as we inform customers of our plans to decommission the Nextel platform. In the first quarter, we recaptured 46% of the postpaid customers who left the Nextel platform for our Sprint postpaid platform, better than our expectations. Unique Sprint Direct Connect devices and other Sprint devices give customers strong choices as they make their decision to leave the Nextel platform.

We're also pleased to report that prepaid churn for the quarter is down both year-over-year and sequentially and at 3.61%, represents our best prepaid churn performance in 6.5 years.

Turning to Slide 10. As I've mentioned before, perhaps the most important brand metric is the Net Promoter Score. In a well-known independent survey, Net Promoter Scores again indicate Sprint is the only 1 of the 4 major wireless carriers to show improvement year-over-year. One of the most tangible proof points of our brand improvement is our net porting position for the Sprint platform postpaid business. Being net port positive means more of our competitors' customers switch to Sprint than switch from Sprint to a competitor. Before the third quarter of 2010, the Sprint platform had never been net port positive, and now we've done it for 7 quarters in a row. We were also net port positive for our entire postpaid business for Sprint and Nextel, and we've now achieved being net port positive for all of our postpaid business for 4 of the last 6 quarters, the only 4 quarters of postpaid net port positive performance in company history.

Please turn to Slide 11. Driven by the improvements in the customer experience in the brand, Sprint platform postpaid net adds of 263,000 represent our eighth consecutive quarter of positive net adds. Sprint platform postpaid gross add performance is also particularly noteworthy. The first quarter represents a 10% year-over-year growth and our 11th consecutive quarter of year-over-year improvement. Even though the iPad contributed materially to Verizon's and AT&T's postpaid performance, barring an unanticipated number from T-Mobile U.S.A., our first quarter Sprint platform postpaid share of gross adds or SoGA is the company's best quarter ever. We're also pleased with the continued growth of our prepaid business with Q1 being our ninth consecutive quarter of over 2 million gross adds.

Finally, we had another quarter of strong growth in our wholesale business with our fourth consecutive quarter of at least 500,000 net adds. Our total company net adds of 1.1 million in the quarter brings us to over 56 million customers served, another all-time company record.

Turning to Slide 12. Another pillar of the Sprint brand is innovation. We recently announced the upcoming availability of some impressive new devices, including the LG Viper 4G LTE, a feature-packed ULE platinum, eco-friendly smartphone that will operate on our new LTE network; ZTE Fury, a kid-friendly Android phone at a compelling price point of $19.99; and of course, the HTC EVO 4G LTE, with the first-ever HD voice capability.

We also continue to innovate in business solutions, evidenced by the recent launch of Sprint Complete Collaboration, a cloud-hosted unified communications offering for our enterprise customers. This quarter we also created New Ventures, an organization focused on bringing new solutions with successful open ecosystem platforms to the wholesale and global marketplace. We recently announced an agreement with Chrysler to act as a strategic wireless partner for the Chrysler Group LLC's Uconnect Program.

A Q1 report from the patent board recognizes Sprint as 1 of the top 10 innovators in the global telecom and communications industry with over 450 U.S. patents granted in the last year. We were 1 of only 2 wireless carriers to be named to the top 10.

Turning to Slide 13. I'm pleased to announce that 4G WiMAX is coming to both Virgin Mobile USA and Boost Mobile later this quarter, and we will announce more details at a later date.

Please turn to my final slide, #14. On last quarter's call I discussed the end of Phase 1 of the Sprint turnaround in 2011, and the first quarter of 2012 began Phase 2. It has been a tough road these past 4 years and there is still much hard work left to do. Everyone at Sprint realizes we have a long way to go to deliver the level of financial performance we aspire to, but I am pleased with our progress and in particular, with our OIBDA performance and our Network Vision progress, which Steve Elfman will now report on. Thank you.

Steven L. Elfman

Thank you, Dan. I'm pleased to be here to discuss our progress to date. The Network Vision project is progressing well, and I'm confident about hitting the targets we've communicated to you.

The next slide is a Network Vision scorecard we developed, which I'll be sharing with you every quarter throughout the implementation, and is similar to my daily internal flash report. We have made good progress during the first quarter, and the project is hitting its stride. We have ramped the resources and currently have over 6,000 people working on the project both internal and through our vendor partners. We expect no issues with resources in any market.

A critical part of this project is building a good pipeline of sites for construction. To date, we have completed zoning on approximately 9,700 sites and leasing on close to 7,700 sites. As we have discussed with you, the zoning and leasing process had the potential for the greatest unknowns, so we are pleased with the pipeline. Over 3,200 sites are now in notice-to-proceed status, meaning we have completed all steps required prior to starting actual construction of the site. And we have started work on approximately 3,000 sites in 17 markets.

We continue to expect to launch LTE coverage in 6 metro areas by mid-year and have 12,000 new Network Vision sites on air by the end of the year. We now have over 600 new Network Vision sites on air, and the early results of site performance are meeting our expectations. On Network Vision sites, we are seeing a doubling of coverage range compared to the legacy network. And when we light up the Network Vision tower, in about 80% of the cases we are repurposing about 2.5 to 3 megahertz of our 800 megahertz spectrum to voice on the Sprint platform. So our customers in those markets are beginning to see improvements in their service.

In the early stages, we are seeing a reduction to in-footprint roaming, which is meeting our expectations of performance. As we build out the network and retune the individual sites to their clusters, we'd expect this performance to further improve.

We are completely done with the field testing and the technology works. For sites on air, we're seeing improved performance of radios, antenna and backhaul, all of which are meeting our performance objectives. Based on the testing of our 5-by-5 megahertz network and the size of our customer base, we expect our network speeds to be competitive.

If we turn to the next slide. The other and equally important project within Network Vision is the thinning of the Nextel network prior to the complete shutdown in 2013. We began the process with a trial in one market in the first quarter and now are underway nationally. The network thinning process is essentially a process of shutting down sites and recalibrating the network to support lower traffic volumes. The Nextel platform was built to support approximately 20 million customers, and as of the end of the first quarter supports approximately 5.4 million customers.

Through the network thinning process, we go into market and turn off certain sites overnight and then retune the network with the expectation that we continue to provide equivalent on-street coverage quality in the majority of cases. To date, we have nearly 1,300 Nextel sites off air. The process is going well, and we now expect that we will have the 9,600 sites planned for this year off air by the end of Q3. The process is not in itself expected to have any meaningful churn or migration impact but should provide immediate savings on utilities and maintenance and on rent going forward, all of which are in the Network Vision forecast.

I'm very pleased with the progress we have made and am confident that over the coming quarters, we will be able to continue to report strong progress and performance on the build while remaining on schedule and on budget.

I'll now turn it over to Joe to go through the financial results.

Joseph J. Euteneuer

Thank you, Steve. Good morning, everyone. Across all areas of the business, the first quarter showed steady execution. I am pleased to say we are progressing well against our plan for the year. As we discussed on our fourth quarter call, 2012 is a year of execution and continued focus on profitability. And our first quarter results reflect this commitment and discipline. We are pleased with our results in the first quarter, which show progress against the 3 most important financial measures of our business: Growth of subscribers and revenues in our core ongoing Sprint platform business, strong conversion of Nextel customers to the Sprint platform and overall profitability in our execution.

Our core business is showing growth in both subscribers and service revenues. Sprint platform postpaid gross adds of 1.8 million grew 10% year-over-year, showing a growing market share in a soft quarter for acquisition throughout the industry. This demonstrates our ongoing commitment to smart growth, producing steadily improving results in our ongoing core business in a disciplined manner. Not only did we increase gross adds year-over-year, we did so while taking actions to support a significant shift in gross add volume to our most cost-effective channels, which helps to improve our variable selling expense. Sprint platform postpaid net adds of 263,000 grew 4% year-over-year.

As we expected, the net adds number during the quarter continued to be affected by the carryover of the churn bubble we discussed on last quarter's call. We believe the impact of the higher churn we have seen in recent quarters is largely behind us. And we have seen involuntary churn begin to improve in Q2. Now that we are largely past this issue, we expect to approach normal seasonality for involuntary churn, which based on our historical trends, is typically worth approximately 10 basis points in the second quarter. And we would expect our sequential improvement in Q2 to be better than this.

I want to make sure everyone understands the expected dynamics of customer growth in 2012. Our momentum in the core business is expected to continue, and we expect to show positive postpaid net adds on the Sprint platform in every quarter in 2012. We will remain disciplined in our pursuit of subscriber growth, and we will not chase unprofitable or marginally profitable gross adds. And we will continue to look for opportunities to improve the cost of customer acquisition as we grow our core business.

Regarding the Nextel platform, we expect the trend of negative postpaid net adds to increase every quarter throughout the year as we continue our migration efforts. The exact timing of the churn for migration of larger accounts is somewhat unpredictable as we go through the process with our business customers. However, consistent with our Network Vision plan, we expect the negative trend on the Nextel platform to increase throughout the year as we prepare to fully decommission the network in 2013.

When looking at the Nextel platform, the most important metric to measure, the health and strength of our ongoing business, is the recapture rate. I am pleased to say we did better than our business plan in the first quarter, recapturing approximately 46% of postpaid customers leaving the Nextel platform compared to 39% in the fourth quarter of 2011. The majority of the retail and smaller business customers that we are currently recapturing to the Sprint postpaid platform are purchasing smartphones and so are incurring the $10 premium data add-on charge as they move. This means that ARPU for the customers should increase. However, their data usage is also expected to increase. So these customers are expected to achieve a similar gross margin to our Sprint postpaid platform base over time.

While we are pleased with the current successes we are seeing in bringing the Nextel platform postpaid customers over to the Sprint platform, I do want to caution that the recapture rate could show large fluctuations over the next several quarters, and therefore, it is a challenge to predict. The reason for this is that of the 3.8 million postpaid customers remaining on the Nextel platform at the end of the first quarter, approximately 3 million of those customers are corporate customers, and the timing of the migration or deactivation of larger accounts may cause large swings in the recapture rate. However, we expect that in total our Nextel recapture rate of our postpaid customers should be slightly better than our approximately 30% that was in our original business case.

As Dan discussed, the most significant growth we are seeing in the business is in postpaid ARPU. Sprint platform postpaid ARPU grew by over $4 or 7% year-over-year and 2% sequentially. 86% of Sprint platform postpaid handset sales were smartphones in the quarter, and approximately 69% of the Sprint postpaid handset base now have smartphones. We expect Sprint postpaid ARPU to show sequential growth each quarter throughout the year.

Turning to Slide 20. We are seeing growth not just in Sprint banded postpaid, but across the entire Sprint platform. Prepaid net adds on the Sprint platform were 870,000 with churn of just 2.92%, our lowest since the launch of prepaid on that platform in 2007. Prepaid has been a significant growth engine for our business, and in the first quarter those trends continued. Because of pricing actions taken last year, particularly in the Boost business with the $5 smartphone data charge implemented in October of 2011, Sprint platform prepaid ARPU grew by almost 2% sequentially in the first quarter, despite the offsetting impacts of the Boost bill shrinkage program and assurance mix. The combination of growing ARPU and improving churn in the Boost and Virgin Mobile brands translated into very strong revenue growth of 9% sequentially and 43% year-over-year in prepaid on the Sprint platform.

Now on to our wholesale and affiliate businesses, which is 100% on the Sprint platform. We are also seeing growth. Wholesale and affiliate net adds were 785,000 in the first quarter, up 102% for the first quarter a year ago. Wholesale, affiliate and other revenues grew 39% sequentially in the first quarter and 49% year-over-year, reflecting both volume and ARPU rate improvements.

The core business has good momentum. Our total customers on the Sprint platform increased by more than 1.9 million during the quarter or by 4% from the end of the fourth quarter of 2011. The growth across all our businesses on the Sprint platform contributed to nearly 5% sequential growth in total Sprint platform service revenues and 16% growth year-over-year. This positive performance continues to exceed our expectations and is contributing to our strong adjusted OIBDA results.

Let's move on to our wireless operating expenses on Slide 21. Total wireless cost of service in the first quarter was $2.3 billion or 32% of service revenues, which was flat on an absolute dollar basis and a 1 percentage point gross margin improvement sequentially. This was primarily due to an improvement in Sprint platform variable network expenses of 9% sequentially from $881 million in the fourth quarter. The sequential improvement in Sprint platform variable network expenses is due to a $40 million reduction in 4G roaming expenses as we shift to the flat rate unlimited use model with Clearwire, as well as a $15 million sequential decline in 3G roaming expenses. Sprint platform variable network expenses increased by just 10% year-over-year while Sprint platform service revenues increased by 16%. It is these trends along with the expected future removal of significant fixed cost associated with the Nextel platform that gives us the confidence in our long-term margin expansion goals.

Total wireless net subsidy expense for the first quarter was approximately $1.6 billion, a sequential improvement of $158 million or 9%. This sequential change was due to seasonally lower postpaid gross adds and upgrades. Our subsidy expense was also helped on a year-over-year basis by changes to our upgrade eligibility program made throughout last year, which helped reduce our total postpaid upgrade rate from almost 9% in the year-ago period to 7% in the first quarter. While growing handset subsidies continue to be an industry-wide issue, we are continually taking steps to improve our cost structure and the profitability of our customers. And in the first quarter, we saw improvements in our variable selling expenses, resulting from efforts to drive customers to our Sprint banded channels, which provides a better customer experience and could reduce our cost per acquisition by as much as $200. This is an example of our commitment to smart growth. On a year-over-year basis, we were able to increase Sprint platform postpaid gross adds by 10%, even as we reduced our total gross add volumes in third-party national retailers by 19%.

Wireless selling, general and administrative cost improved by $19 million sequentially, and increased by $40 million compared to the first quarter of 2011. This year-over-year increase was primarily related to a $59 million incremental expense, which we discussed on the fourth quarter call. There is a full description in the 10-Q, but simply put, when the third-party channels buy handsets direct from an OEM, the expense gets reported as a selling expense rather than in subsidy. This activity is incremental in the first quarter 2012 year-over-year comparative. Excluding this new expense, wireless selling expenses would have improved by 4% year-over-year despite a 10% increase in postpaid gross adds for the Sprint platform compared to the first quarter of 2011.

Network Vision operating expenses were $104 million during the quarter compared to $54 million in the fourth quarter of 2011. We expect that our Network Vision-related cost will show substantial sequential increases through the remainder of 2012.

Turning to Slide 22. Wireless adjusted OIBDA for the first quarter was $1.1 billion, a 57% sequential improvement. Consolidated adjusted OIBDA for the first quarter was $1.2 billion, which was a 44% sequential improvement. Both results include $104 million of Network Vision expenses, which was a sequential increase in expense of $50 million. This performance was due to ARPU and subscriber growth, as well as lower overall volumes, particularly in upgrades, and improvements to certain variable expenses. While we continue to expect to grow revenues and improve our cost structure, our expectation is that second quarter consolidated adjusted OIBDA will be lower than the first quarter due to an approximate doubling of Network Vision expenses in the second quarter.

Now switching to wireline. Adjusted OIBDA in the first quarter was $161 million, a 10% sequential decline and a 29% decline from a year ago. As you know, at the beginning of each year, we adjust the intercompany transfer rate between wireless and wireline to adhere to current market prices. And this resulted in a $53 million year-over-year decline in wireline revenues.

Now let's move to cash and liquidity on Slide 23. We ended the first quarter with a total liquidity position of $8.8 billion, including cash, cash equivalents and short-term investments of $7.6 billion and $1.2 billion of undrawn borrowing capacity under our revolving bank credit facility. During the quarter, we raised approximately $2 billion through private placements. The combined offering was oversubscribed, and the price of the guaranteed notes was roughly 200 basis points, better than comparable notes issued in the fourth quarter. This vote of confidence from debt holders enhanced our liquidity position and strengthens our belief in our ability to raise capital to support our investment in Network Vision and other high-return projects.

We also continue to pursue vendor financing in the range of $1 billion to $3 billion, and our discussions are going well. Our accrued capital expenditures were $800 million in the first quarter, which excluded $115 million in capitalized interest and included $315 million of Network Vision capital compared to $900 million in the fourth quarter and $555 million in the first quarter of 2011.

Rebanding expense, which is not included in capital expenditures, was $58 million in the first quarter of 2012. We estimate that we have approximately $550 million to $650 million in rebanding spend left, which will be split between 2012 and 2013 and will be focused on the U.S. borders.

Free cash flow was $138 million in the first quarter of 2012 compared to $257 million in the fourth quarter and $178 million in the first quarter of 2011. Going forward, we expect that free cash flow will be negative as investments in Network Vision accelerate and inventory increases as a result of new LTE handset launches.

Moving to Slide 24. I'll close with our updated outlook for the year. The positive revenue and subscriber trends in our core business, as well as continued steps towards margin improvement, give us confidence in our outlook for the year, and we expect that adjusted OIBDA will be at the high end of the $3.7 billion to $3.9 billion range that we discussed with you on the fourth quarter call. Second quarter adjusted OIBDA is expected to be lower than the first quarter due to increasing Network Vision spend. We continue to expect capital expenditures for the year to be approximately $6 billion. We believe we have made positive progress against our business plan in the first quarter, executing well on Network Vision and making the kind of steady, ongoing progress toward our goals as we invest in the future of our business.

Our balanced approach to top line growth and profitability was demonstrated by our subscriber and revenue growth on the Sprint platform. We continue to make progress on improving our cost structure in Network Vision. We are very optimistic about the future and, we want to thank the Sprint workforce, both in-house and contracted labor, for their hard work and dedication to meeting our goals.

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

Brad Hampton

Thanks, Joe. In just a minute Susan will instruct our listeners on how to queue up for the Q&A session. I do 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 line for your questions. Susan, please instruct our participants.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Jonathan Chaplin.

Jonathan Chaplin - Crédit Suisse AG, Research Division

Two quick questions, if I may. So involuntary churn, it sounds like, Joe, from your comments, comes down maybe 10 to 15 basis points. Could you just give us some context for what's going on with voluntary churn and what the trend for total churn should be in 2Q? And then the $15 million improvements that you saw in 3G roaming, is that a consequence of savings from Network Vision from the sites that you've launched already? Or are there some other factors playing into that as well?

Joseph J. Euteneuer

So the answer to your last question is, no, it does not. The answer to your first question, you want to take it, Dan?

Daniel R. Hesse

Yes, sure, I'll take it. Well, what we said is -- Jonathan, how are you? This is Dan. That we haven't given specific guidance with respect to churn in the second quarter but just said that you could expect more than, let's say, a 10 basis point improvement in Q2 from Q1. Because number one, if you will, the -- most of the pig is through the python on this involuntary churn issue that we have. There are clearly seasonal benefits in the second quarter. We'll have more benefits also from the iPhone, a higher percentage of our customers being on contract than we've had traditionally, continuing improving overall CSAT and what have you. One of the challenges on churn has been the fact that as you know, in 2011, part of what's driving our profitability performance and our ARPU growth is we've been increasing prices, increasing fees. We did away with loyalty programs, which, of course, drove more upgrades, so you're seeing more favorability on the upgrade side, which has an impact on the bottom line. But of course, you'll see some pressure on the churn side. So what we're trying to do, Jonathan, is find kind of that optimal point, knowing it will give us some pressure on churn to do some things that are, if you will, more accretive to the bottom line and give us more revenue and profitability. But generally, you should see postpaid churn on the Sprint platform begin to improve going forward. Now on the Nextel postpaid platform, it'll go in the other direction. As we accelerate the decommissioning of the iDEN network, you'll see that, if you will, as a -- from a churn point of view as a headwind but continued improvement on the Sprint platform.


Your next question comes from the line of Michael Rollins.

Michael Rollins - Citigroup Inc, Research Division

Just a couple of things. First, as you're looking at the change in guidance, how much of that reflects changes in assumptions for either the benefits you expect to get for Vision this year versus the cost relative to sort of the core performance? And then secondly, can you give us just some sense of what you're seeing in terms of the uptick in ARPU and usage from smartphone users to try to think about what the longer-term potential is for the Sprint CDMA postpaid ARPU?

Daniel R. Hesse

I'll give you -- this is Dan, Michael, how are you doing? In terms of any guidance, right now we are not adjusting guidance for the year based upon Network Vision because there are a lot of moving parts in Network Vision. A lot of things are going well, but there's a lot still to go. We're very early. So we're not adjusting anything yet positively or negatively. We're right on plan as far as we're concerned on Network Vision, so we're not adjusting any of our guidance yet, even though things are going well. With respect to the -- I think it's kind of the -- the question has to do with potential ARPU uptick or what have you given smartphone penetration. Roughly 69% of our customer base currently has a smartphone. So there's an opportunity, obviously, to take that north of 69%. And some of those customers actually have smartphones but don't yet pay the $10 additional data charge because they bought those smartphones before we implemented the increase. And of course, the increase only went to new customers and customers that upgraded. So there is potential there, but also keep in mind that in the year-over-year comps, it'll get harder later in the year in terms of looking at things like revenue growth or ARPU growth because you'll be -- because the increases went into effect in the first quarter of 2011. So we began to see the ARPU increases all through '11. So anyway, as you get later in the year, the comps get more difficult. But net-net, we have about 30% of our subscriber base on phones that still don't have smartphones, and there's obviously a potential to have them upgrade to smart devices, as well as, obviously, the lion's share of our gross adds, new customers coming in, are on the iPhone and other smartphones.


Your next question comes from the line of Kevin Smithen.

Kevin Smithen - Macquarie Research

It looks like you pulled forward your target for 9,600 iDEN site decommissions to Q3 from Q4. How much would that increase your Network Vision benefits target for the year? And what is the new expected run rate exiting 2012?

Joseph J. Euteneuer

Well, Kevin, in regards to the 9,600, I think you heard from Dan that we aren't changing any of the estimates in regards to Network Vision right now, although Steve continues to do his 9,600 ahead of schedule. As far as the exiting run rate, we've not changed anything. Are you talking about the pacing of decommissioning or -- I wasn't sure what your last...

Kevin Smithen - Macquarie Research

Yes, I had thought the 9,600 was a year-end target, and in the press release, it said it's now expect to be completed by Q3. So that would indicate higher savings in Q4 potentially, a slight acceleration in at least the decommissioning part of it.

Steven L. Elfman

Yes, this is Steve, and a good question. We had -- we were not completely clear at the beginning of the year how fast we can move on this, and so we gave ourself till the end of the year. We're saying that we can actually move much faster. And so that's why we're really saying now that we believe that we'll get it done through the end of the third quarter. And so in the fourth quarter, we've not put out any numbers of what that additional benefit would be, but we're -- we certainly will have it done sooner, and those benefits in terms of utilities and maintenance and so forth will hit earlier than initially advised.

Joseph J. Euteneuer

And I think that's why you see us saying that we can be up on the upper end of the range that we've -- gave you.

Kevin Smithen - Macquarie Research

That's great. Any -- just as a follow-up quickly, any savings to backhaul or tower lease cost from the decommissions initially? Or is that more of a longer-term project?

Steven L. Elfman

That's the next steps. That's why we actually don't call it full decommissioning and rather thinning where we're really turning off the site. And really, with that, you save utilities, you save maintenance. Next steps will be to fully decommission where you pull -- basically, you pull out the T1s. You don't have to pay that anymore. And then finally, you provide it back to the landlord when the lease is up and don't pay any rent. And so we haven't, at this point in time, changed schedule on that. We expect that to follow the 2013. But as we know, with some of the Nextel sites, the lease is not up until post 2013. And so we're not changed any plans on that.


Your next question comes from the line of Brett Feldman.

Brett Feldman - Deutsche Bank AG, Research Division

And thanks for all the color on how to think about the EBITDA impact into the second quarter because of Network Vision. I'm hoping I could take it just a little further and maybe get some commentary around how we think about the points in time where we will see the peak level of Network Vision spending or, I guess, the EBITDA dilution from that. I understand that maybe calling out a month or a quarter is not that easy, but can you maybe comment on some of the key milestones that we should be monitoring to know when you may be getting to or through the peak spending, whether it's bringing a certain number of sites on air or maybe having migrated a certain portion of the Nextel base?

Joseph J. Euteneuer

Yes, sure. Look, I think we talk about -- Steve talked about hitting his stride. And I think what you'll see is -- you see him hit stride in regards to permitting and leasing. I mean, he's like well ahead of where he needs to be. So he has plenty of backlog. And now as he moves into the construction side, as we get through the second quarter and we talk to you about second quarter results, we'll have a lot better picture about just how fast we're going and sort of where we can predict that sort of peak trough to be. But right now, it's just a little bit early to sort of predict that, but we're trying to give you as much color as we can. Yes, go ahead, Steve.

Steven L. Elfman

Yes, this is Steve, again. One of the things to think about is, as we put the deals together with our 3 vendors, we actually don't pay anything out until the site is on air, that we've accepted it and that is working. And so really the peak spend primarily in capital is going to be really for a while as we launch sites and launch more than per quarter, that will be the peak spend, and accept them. And then as they're live and we start to put in the backhaul, the fiber backhaul, that's when really the OpEx will start to hit. So I think, as I show you on the quarterly scorecards for you, the numbers, you'll be able to model that out.


Your next question comes from the line of David Dixon.

David Michael Dixon - FBR Capital Markets & Co., Research Division

I wanted just to shift gears, if I could, to a question on your strategic positioning. And, Steve, I was hoping you could provide me with an update on how you're leveraging both your low-, your mid- and your high-frequency spectrum bands, which should help to differentiate you in the market. I mean, you've had a great win recently in the standards body in China, particularly at 800 meg. And we've seen that now approved and equipment is being built and chipsets are being built, and that's for LTE. And so I was just hoping that you could give us an update on how you're thinking about that, and then I have a follow-up.

Steven L. Elfman

Fair to say. Good question, David. So what we -- we look at our portfolio of spectrum from our 1.9 PCS spectrum where we'll be primarily putting LTE and then working with our Clearwire partners at 2.5 will be using their LTE network for really offloading and where we have constraints. And that provides a lot more bandwidth and coverage, pardon me, capacity. And then our hope is to use the 800 in future years beyond using it for CDMA voice, but for LTE. We have got Band 26, which is the 800 LTE band, approved through the 3GPP, but a very important next step is to be able to get the FCC to approve that. And once we have that, then we can be more definitive on when we would use LTE in 800. But that's really our overall plan, to get better coverage and to get better capacity using all 3 of those.

David Michael Dixon - FBR Capital Markets & Co., Research Division

And then just a follow-up, Qualcomm is telling me that they should be ready with chipsets in late 2013, and it's not that difficult for them to do it now that it's locked down. Does that concur with what you're seeing from your end? I'm sure you're looking at it a little deeper than we are.

Steven L. Elfman

Yes, I think so. When you're talking about getting Band 41, which is the 2.5 band, I think working on that and the standards bodies and with Qualcomm on the chipsets. So I think that those are -- that's good timing, but there's a lot of things that have to take place before you can be definitive on that. So if Qualcomm says they can do it, I feel pretty good.

David Michael Dixon - FBR Capital Markets & Co., Research Division

Great. And just one follow-up very quickly on how effective you've been in capping non-smartphones in terms of the traffic impact on that. Has that driven a mix shift in incremental growth towards devices that are generating less traffic for using the smartphones versus dongles, I'm thinking about? And has that given you maybe some flexibility to add 4G WiMAX now inside the prepaid segment?

Steven L. Elfman

So what we've been able to do and what we continue to do is look for offloading of both our smartphone and our broadband -- mobile broadband traffic to -- whether it's Wi-Fi, and to WiMAX, which is hugely important to us, since we do have that unlimited pricing. So we've started to put in a client into our smartphones that basically looks for WiMax and/or Wi-Fi and does an offload to help relieve our current 3G network. And also, because we've got the opportunity to use WiMax, this is why we're going over there with prepaid in the next quarter.


Your next question comes from the line of David Barden.

David W. Barden - BofA Merrill Lynch, Research Division

I guess 1 or 2, first to Steve, for you. Just looking at that Slide 16 and that Vision scorecard, as we look at these construction underways, getting the sites on air and then notice to proceeds, how do you look at this chart and then try to anticipate how it's going to change? And then, if you could kind of talk a little bit about some of the headwinds and tailwinds that you've been seeing. For instance, are you seeing zoning as a lot less of an issue? We've heard there's some maybe some problems with some mounting brackets that have been engineered for some of these things. If you could talk about kind of the nuts and bolts of how we're getting from zoning to sites on air timing, that would be great. And then just a quick housekeeping item, Joe. I think last quarter you were saying that the variable expenses related to iDEN were $350 million, and that was going to be the thing that we were going to mine out as we shut down the iDEN sites. Could you kind of update us on that number? That would be great.

Steven L. Elfman

Good question. In terms of -- our zonings are ahead, but one of the things you find, in some jurisdictions you don't need to do specific zoning. Leasing, a couple of things on that. We did do the deals with the major tower companies last year, and that makes up approximately 50% of our tower portfolio. And what we have to do there to get a leasing complete is we have to submit basically drawings that is more paperwork with them. We don't have to negotiate rates and rent, so -- or timing. And so those generally go quite a bit smoother and faster in terms of the leasing. So we see that going well. It's the other 50% that are out and, let's say, on the top of a fast-food restaurant or in a farmer's field, that's where we have to go out and negotiate both rate and then go back with drawings. So those take a little bit longer, and you can have a headwind if there's difficulty in negotiating a lease, right? That's one. The other question you had about some headwinds. On a daily basis, there's things that go very, very well. And on a daily basis, there's things that make you put your head in your hands. But there's not been any significant issue that causes a setback. There are some daily ones. And so just to react to the one that I know is out there that we've -- that towers have been falling down, we had early on some of our towers that we determined we needed to have stronger brackets, and we ended up going back to those and putting in some tighter criteria for certification before we would go and do a mount. And so, yes, that caused a brief delay, but nothing that would affect the overall outcome of the project. So you have these that pop up, generally. This one got an awful lot of press, I think, and it doesn't affect the overall program, but sure enough, we did have to put tighter certification in.

Joseph J. Euteneuer

And Dave, yes, that number that we gave last quarter is still good.


Your next question comes from the line of Chris Larsen.

Christopher M. Larsen - Piper Jaffray Companies, Research Division

I had 2 roaming expense questions. One of the things that you highlighted is that your 3G roaming costs were down this quarter sequentially even with the higher iPhone sales. And maybe that's a little bit counterintuitive assuming that you're getting more customers on 3G than you would have on WiMAX. Maybe you could just highlight what has been driving that. Has it been deploying the 800 or what? And then secondly, as we look out to LTE, do you have any agreements for -- or plans to have agreements to have any LTE roaming? Or is it going to be all on your own network?

Steve Elfman

This is Steve. Let me answer the last one. There is no agreements at this point in time to do LTE roaming onto other major carrier networks the way we had it in our 3G environment. The most important roaming agreement is to do the roaming with Clearwire and go to the 2.5 LTE that they will be building in 2013. So that's the one that we have in place. And beyond that, there's nothing to report. And in terms of the roaming sort of quarter-over-quarter effect, I would say generally this is seasonality and frankly, the -- some of the tuning work that we've done and some of the offloading, but primarily, I would say this is seasonality.

Christopher M. Larsen - Piper Jaffray Companies, Research Division

Great. And then just a quick follow-on. Dan, you mentioned something about you had converted customers to the $10 add-on, and I missed the percentage that you had given. How many of your customers have not already been upgraded to that $10 incremental fee?

Daniel R. Hesse

We don't give that specific number, Chris. What I was doing -- so we have not provided what percentage of our customers pay the $10. But what I did say was that -- that we have -- we do disclose that 69% of our base are on smartphones, but not all of them pay the $10 add-on to the extent that they bought the smartphone before we put the $10 charge in effect. So there is still some opportunity even from the smartphone base, as well as obviously, as those that don't have smartphones over time migrate to smartphones. And, of course, a much higher percentage of our gross adds each quarter are smartphones. So we still have, if you will, some tailwinds in terms of ARPU increase there. But the other point I wanted o make sure everybody understood was but on a year-over-year comparison purpose, given that these charges went into effect, the increased $10 early in 2011, that the year-over-year comps will be more difficult in terms of ARPU growth.


Your next question comes from the line of Jason Armstrong.

Jason Armstrong - Goldman Sachs Group Inc., Research Division

Dan, speculation in the quarter, obviously, around MetroPCS. And I know you won't want to talk about that specifically, but I guess my question is, can you put some parameters around when you would feel comfortable using the equity as a currency to accomplish something strategic? And then, Joe, I guess I'm struggling a little bit with the EBITDA guidance for the year. And you pointed to the higher end of the range, but I guess last call you said first half lower than second half relative to what you just printed in 1Q. It seems tough to get there. So is the expectation now that EBITDA actually declines sort of sequentially over the course of the year?

Daniel R. Hesse

Jason, Dan here. Well, it's not as simple as just looking at the equity price. There are obviously a lot of factors that one considers. But dilution in equity price is clearly one of the many factors that we consider. It's distraction, it's the long-term value strategically or the value of synergies or what have you that go into an equation that is -- that's complex. But obviously, M&A activity or acquisitions look more favorable as the equity value goes up because dilution is one of the factors that we consider. But there's no magic number. It's just one of the items we consider.

Joseph J. Euteneuer

And in regards to your question on the first half, second half, when we gave that guidance, the numbers were fairly close. We haven't really changed it. Yes, there is a potential it could be sequentially down, but you're talking about within dollars of each way. So we really haven't updated that.

Jason Armstrong - Goldman Sachs Group Inc., Research Division

But -- so, Joe, your expectation is still second half higher than first half?

Joseph J. Euteneuer

Right now. There is a potential if you -- it all is going to depend on the timing and what goes on with Network Vision. And as we said, we're the first quarter into it. Once we get more here into the second quarter, we'll have a lot better idea.

Jason Armstrong - Goldman Sachs Group Inc., Research Division

And so that is why...

Joseph J. Euteneuer

There's a lot of acceleration going on.

Jason Armstrong - Goldman Sachs Group Inc., Research Division

I guess that implies -- so the second quarter really takes a dip and then improvement after that is really what that implies?

Joseph J. Euteneuer

Yes. We're looking at doubling Network Vision expenses here in the second quarter, if not more. I mean, you heard Steve accelerate his iDEN performance from year end to third quarter. You see how many -- what his pipeline is in regards to permits and leasing. So we're trying to get this project done.


Your last question comes from the line of John Hodulik.

Batya Levi - UBS Investment Bank, Research Division

This is actually Batya Levi for John. Wanted to ask you about your LTE plans for the year end. You mentioned 6 markets by mid-year. How many POPs do you think that you'll have by year end? And just to tie that up with the expected -- maybe an expected iPhone launch in the fourth quarter, which could be an LTE phone, what is your strategy to maintain the gross add share that you've been getting in the iPhone sales versus the other peers?

Steven L. Elfman

This is Steve. It was actually very difficult to hear you, but I think the first question was regarding the 6 markets that we said we were going to launch mid-year and then how many POPs by the end of the year. And we're still looking in the 100 million to 120 million POPs at this point in time. We're not identifying at this point the next set of cities and markets. And then your other question regarding iPhone, I could not...

Daniel R. Hesse

Would you ask that again? I think it...

Batya Levi - UBS Investment Bank, Research Division

Yes, sure. So looking at your, I guess, gross add share among the iPhone activations, you're doing a bit better than your overall gross add share among the other nationals. So when -- if we assume that there will be an iPhone -- LTE iPhone launch in the fourth quarter, what's your strategy to maintain that kind of share, if you're not going to have a full LTE buildout by then?

Daniel R. Hesse

This is Dan. Well, first of all, we don't know when the next iPhone is coming out and what it will have in it. Like you, we've made some assumptions, but we don't know. I think an important fact to keep in mind is when we launched our 4G devices, the EVO, we sold the majority of the EVOs in non-4G markets. So customers clearly when they're looking at a device, look at more than whether it's 4G or not. And actually if you look today, you're exactly right, a huge percentage of our gross adds are iPhones, even though it's a 3G device and it is competing head to head against 4G devices. So we'll be launching LTE markets as quickly as we can, but we expect that we'll be successful in selling the next version of the iPhone.

Brad Hampton

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


This does conclude today's First Quarter 2012 Sprint Earnings Release Conference Call. You may now disconnect.

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