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

Sprint Nextel (NYSE:S)

Q2 2012 Earnings Call

July 26, 2012 8:00 am ET

Executives

Brad Hampton

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

Steven L. Elfman - President of Network Operations & Wholesale

Joseph J. Euteneuer - Chief Financial Officer

Analysts

Philip Cusick - JP Morgan Chase & Co, Research Division

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

Michael Rollins - Citigroup Inc, Research Division

Kevin Smithen - Macquarie Research

Jonathan Chaplin - Crédit Suisse AG, Research Division

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Jason Armstrong - Goldman Sachs Group Inc., Research Division

Operator

Good morning. My name is Katie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprint's Second Quarter Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Brad Hampton, Vice President of Investor Relations. Please go ahead.

Brad Hampton

Thank you, Katie. Good morning, and welcome, everyone, to Sprint Nextel's Second Quarter 2012 Earnings Call. On today's call, Dan Hesse will discuss operational performance in the quarter; Steve Elfman will provide an update on Network Vision; and Joe Euteneuer will cover our 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 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.

Moving to Slide 3. Throughout our call, we will refer to several non-GAAP metrics. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures for the second quarter can be found in the attachments to our earnings release and also at the end of today's presentation which are available on our website at www.sprint.com/investors.

Let's move on to earnings per share on Slide 4. Basic and diluted net loss per common share for the second quarter were $0.46 compared to $0.29 in the first quarter and $0.28 in the year-ago period. There were a few noteworthy items impacting EPS this quarter that I'd like to cover, the first 2 of which are related to our progress towards the eventual shutdown of the Nextel platform. First, the loss per share in the current period included incremental depreciation expense of $782 million or negative $0.26 per share, primarily due to accelerated depreciation expense related to the expected shutdown of the Nextel platform. We have updated our estimate of the expected useful life of the Nextel assets, resulting in an increase in depreciation expense this quarter. Excluding incremental CapEx spend, our assets and servicing, we expect depreciation expense to be around $2.6 billion for the second half of 2012 and around $3.6 billion for 2013, which is expected to be disproportionately weighted towards the first half of 2013 due to Nextel assets being fully depreciated by the middle of 2013.

The current period also included $184 million or approximately negative $0.06 per share for lease exit costs, which are the net present value of remaining lease obligations associated with certain Nextel platform cell sites, which were taken off air during the quarter. In the second quarter, we shut down approximately 8,300 Nextel platform sites. However, locations from which we may continue to gain future economic benefit, including co-located sites, were not included in this charge and represented approximately 30% -- 36% of total Nextel sites shutdown in the second quarter. During the third quarter to date, we have shut down approximately 1,300 Nextel platform sites, a portion of which will also incur a charge in our third quarter results, expected to be approximately $20 million. We expect no additional fitting of the Nextel platform in 2012 at this time. We estimate that approximately $8 million and $77 million of operating expense would have been incurred in the second quarter and the second half of 2012 respectively, for the full year 2012 impact of $85 million if Sprint did not take these actions.

Lastly, we also recorded an impairment of $204 million or negative $0.07 per share related to our Clearwire investment. Net tax expense was $26 million in the second 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. Oops, didn't turn the mic on. Thanks, Brad, and thank you for joining us this morning and for your interest in Sprint. If you turn to Slide 6, please. Let me recap the quarter's highlights before reviewing performance across our 3 key priorities: generating cash, improving the customer experience and building the brand. Adjusted OIBDA of $1.45 billion for the fourth consecutive quarter exceeded both our internal projections and Street consensus. Adjusted OIBDA margin of 17.9% represents a sequential improvement of 277 basis points from the first quarter. Notably, adjusted OIBDA margin is also up 69 basis points from the second quarter of 2011, even with the dilutive impact of both the iPhone and our Network Vision investment in 2012. As I've mentioned before, the 2 most important wireless operating metrics that drive financial performance are churn and ARPU. For our Sprint platform postpaid business, both churn and ARPU were best-ever results for any quarter.

Sprint platform postpaid ARPU of $63.38 is up $4.31 from the second quarter of last year. And for the third consecutive quarter, we posted the highest year-over-year postpaid ARPU increase on record for any major U.S. wireless company. We set the all-time record for Sprint platform postpaid ARPU. In the same quarter, we delivered our best-ever Sprint platform postpaid churn of 1.69%. This represents an improvement of 31 basis points sequentially and 3 basis points over our previous record quarter one year ago. We also achieved our ninth consecutive quarter of positive net adds for the Sprint platform postpaid business. We made progress on our Network Vision deployment. We've launched LTE service in 5 major metro areas and today, we're announcing early completion of 2012's iDEN network fitting forecast with all 9,600 iDEN cell sites already off air. We are now activating new Network Vision sites on air at a rate which, if we maintain our current implementation pace in existing cities and bring in new cities as planned during the year, we'll achieve our 2012 plan. The current week-by-week plans from our vendors show us achieving our goal of approximately 12,000 sites on air by the end of the year.

Finally, based on the ongoing strength of our core Sprint platform business, we are increasing our forecast for full year 2012 adjusted OIBDA performance to a range of $4.5 billion to $4.6 billion.

If you please turn to Slide 7, I'll organize the balance of my comments around our 3 overarching priorities. Let me begin with cash. In spite of a significant increase in capital investment associated with our Network Vision deployment, this quarter, we again improved our liquidity position by generating $209 million of free cash flow. We ended the second quarter with cash, cash equivalents and short-term investments of $6.8 billion. During the quarter, we completed our first vendor financing arrangement and retired $1 billion of outstanding debt ahead of its scheduled maturity. Our strong quarterly adjusted OIBDA performance in the quarter benefited from continued top line growth. We had solid revenue performance in all 3 areas of our Sprint platform wireless business. The Sprint platform postpaid ARPU rate continues to increase with the ongoing impact of a $10 premium data charge as a result of the continued customer adoption of smartphones. At $63.38, Sprint platform postpaid ARPU reached a new all-time best level and is up, as I mentioned, $4.31 year-over-year. Total Sprint platform wireless service revenue is up over 16% compared to the year-ago period, with postpaid revenue up almost 13%, prepaid revenue up over 30% and wholesale and other revenue up over 125% year-over-year. On a consolidated basis, this quarter represents our eighth consecutive quarter of year-over-year growth in total operating revenues and our fourth consecutive quarter of sequential growth. Total operating revenues are up almost 6.5% year-over-year.

As I said earlier, we reported an improvement both sequentially and year-over-year in our adjusted OIBDA margin performance. While far from where we wanted to be, we delivered a meaningful a 69-basis point improvement in margin from the second quarter of 2011. Although postpaid gross add volume was within 10% of a year ago, we grew adjusted OIBDA margin while absorbing the dilutive impacts this year of our 2 key investment areas, Network Vision deployment and the iPhone. As I transition to a discussion of our customer experience and brand results, I'd like to begin with a brief overview of the iPhone, which benefits both areas.

Turning to Slide 8. In spite of seasonal softness in industry gross adds from Q1 to Q2, we activated nearly 1.5 million iPhones in the second quarter, similar to last year -- or similar to last quarter. As I've said before, the most 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 second quarter, 40% of our iPhone activations were new customers, well in excess of our competitors' historical results and our third consecutive quarter at or above 40%. Longer term, the most important metric of success with the iPhone will be the anticipated lower churn rate of iPhone customers. All of our early life iPhone customer experience metrics continue to be encouraging. We are beginning to see benefits from the iPhone, including lower support costs in service and repair. To date, although still young in its product life cycle, we are observing materially lower early like churn rates for iPhone customers compared to other smartphone customers. The operational performance so far continues to support our decision to carry the iPhone. Considering postpaid devices only, we are ahead of the pace required to meet our contracted commitments to Apple.

Turning to Slide 9 and the customer experience. I'm pleased to report that in the second quarter in a well-known and important third-party independent measure of customer satisfaction, we matched our all-time best rating for overall satisfaction for the Sprint brand. According to the American Customer Satisfaction Index, which made its findings public in May, Sprint is #1 among all national carriers in overall customer satisfaction and the most improved U.S. company across all 47 industries studied over the last 4 years. We also achieved new best-ever levels for customer calls to care across both our postpaid and prepaid customer bases. We're not buying satisfaction. Customer care credits in the second quarter were the lowest or best for any quarter on record. Both postpaid and prepaid customer credits each hit best-ever levels, savings that drop straight to the bottom line.

Our multi-year intense focus on improving our customers' experience with Sprint is continuing to manifest itself in improved churn performance. Sprint platform postpaid churn reached a new all-time best, 1.69% and prepaid churn at 2.53% matches our best-ever reported churn level and is at the lowest level in almost 7 years. Sprint platform prepaid churn has shown year-over-year improvement for 11 consecutive quarters. While the introduction of the Assurance brand, which has a lower churn rate than typical prepaid brands, has helped these results, we have also made progress in improving the churn performance of our Boost and Virgin Mobile customer bases.

Moving to Slide 10. Verizon, AT&T and the Sprint platform each reported record low postpaid churn results this quarter. This is good for the industry as no single metric drives profitability more than churn. But as a result, there are fewer postpaid decisions or new customers to go after, especially if you adjust out ancillary devices like the iPad. The 2G iDEN network has been a source of customers for other platforms, most of all for Verizon for the past few years. We have data going back 4.5 years. But in a typical year prior to this one, based on porting data, we estimate Verizon got almost half of all iDEN DX. Sprint recaptured about 25%. AT&T acquired 20% and T-Mobile about 5%. Verizon benefited from sheer size and by having a push-to-talk CDMA product. From 2008 to 2011, the Nextel platform provided about twice as much benefit to Verizon subscriber numbers and almost as much benefit to AT&T subscriber base as it did to the Sprint platform.

Prior to late 2011, our most effective financial strategy was to do all we could to maintain customers on the Nextel platform, to reduce churn until we had Sprint Direct Connect network technology and devices and until we needed to begin active customer migration, so that we could shut down the iDEN network in 2013. So before this year, the best financial strategy was to retain customers on the fixed cost iDEN platform as long as possible. From 2008 to 2011, we decreased the number of Nextel postpaid DX per year by 66% and improved churn by more than 50 basis points.

Once we declared the end of life for the iDEN platform, a new strategy was warranted. It costs us about $200 less to acquire an iDEN customer than to go out and get a new customer from a competitor. We have described on previous calls how we will give priority to OIBDA over customer growth in 2012. We've spent less in advertising than we spent last year.

Given the low number of new postpaid phone decisions anticipated in 2012 and the fact that we are now stimulating high churn on the iDEN network so that we can shut it down in 2013, we decided to focus our limited marketing resources on acquiring Nextel platform customers, because of the advantage that the new Sprint Direct Connect provides us as well as because of lower acquisition costs. So in 2012, for the first time, the Sprint platform is out-acquiring Verizon, as we're more than doubling Sprint's historical share of Nextel postpaid DX. We likely will not be able to sustain last quarter's 60% recapture rate, but we feel we are focusing our limited marketing spend in the best way possible.

Turning to Slide 11. As I mentioned before, perhaps, the most important brand metric is the Net Promoter Score, which is a brand's supporters minus its detractors. In a well-known independent survey, the Net Promoter Score for Sprint is at an all-time high, and Sprint is the only 1 of the 4 major carriers to show improvement both sequentially and year-over-year. In another independent third-party survey, the Sprint, Boost and Virgin brands each achieved all-time best scores for Purchase Consideration. One of the most tangible proof points of our brand improvement is the net porting position for the Sprint platform postpaid business. Being net port positive means more of our competitors' customers switched to Sprint than switch from Sprint to a competitor. Before the third quarter of 2010, the Sprint platform had never in its long history been net port positive. I'm pleased to report that we just achieved our eighth consecutive net port positive quarter.

Please turn to Slide 12. Driven by the improvements in the customer experience and the brand, Sprint platform postpaid net adds of 442,000 represent our ninth consecutive quarter of positive net adds. When measured by net adds over an 8-quarter period as a percentage of the customer base, the Sprint platform is the fastest-growing postpaid brand among the national carriers in spite of not having the iPad, a major contributor to the net add performance of our competitors or until recently even the iPhone. And as I mentioned earlier, with relatively little advantage compared to our large competitors from Nextel platform DX until recently. Our total customer base also continues to grow. This quarter, we reached a record 56.4 million wireless customers.

Last quarter, we launched innovative new handsets and products. We are pleased -- I think you should be on Slide 13 -- with the early results of our new LTE handsets, including the latest addition to the EVO product family, the HTC EVO 4G LTE. In spite of an initial launch delay, it quickly became one of our top-selling devices. We're seeing good early results for the Samsung Galaxy S III launched early in the third quarter. We've also seen good market reaction to our new 4G WiMAX prepaid offerings launched late in the quarter. We are seeing prepaid WiMax devices in the high single-digit percentages of our total prepaid sales. And finally, at the end of the quarter, we broke new ground with our Virgin Mobile brand as the first national prepaid carrier to offer the iPhone. It's too early to share results, and we have not yet begun advertising Virgin's iPhone.

Finally, I'm pleased to announce today that Sprint will be launching the Motorola PHOTON Q 4G LTE device in the very near future, our sixth 4G LTE device of 2012 and the first LTE world phone.

The Motorola PHOTON Q is a ULE Platinum Certified premium QWERTY slider with robust business and consumer features. We also continue to innovate in business solutions, evidenced by our announcement of wholesale and retail cloud services and a refresh of capabilities in our Sprint Biz 360 portfolio, which provides mobility solutions for small business customers. In the quarter, we also introduced Sprint Guardian, an industry first suite of mobile safety and security applications.

As I conclude my remarks, please turn to Slide 14. We are early in the second phase of the turnaround, investing for future growth. We're making progress in our core business operations, which funds these investments. We know we have much work ahead of us to achieve the margins we and our investors want. We've achieved all-time bests for the 2 factors that are the most significant determinants of the profitability of our postpaid wireless business, churn and ARPU. As we work to streamline our network infrastructure and wind down the Nextel platform, we have a vibrant and growing portfolio of Sprint platform businesses that will be the foundation for our expected margin expansion in Phase III of the turnaround.

Thank you for your ongoing interest and support of Sprint, and I will now hand over the call to Steve Elfman, who will give you an update on Network Vision.

Steven L. Elfman

Thanks, Dan. I'm pleased to be here to discuss our continued progress on Network Vision during the quarter. We remain confident in our ability and the ability of our vendors to achieve our goals. Please turn to Slide 16.

We are announcing today that we have completed our network thinning effort on the Nextel platform for this year. We've executed our thinning plans rapidly and nearly 3 months ahead of our guidance last quarter. Two weeks ago, we completed our thinning in our last market, which means we have now reached our goal of 9,600 sites for the year and have reduced the number of towers servicing the Nextel platform by 1/3. As a reminder, the network thinning process is not expected to cause any meaningful disruption to on-street coverage nor is it complete decommissioning. It is a process of taking certain cell sites off the air and recalibrating the network to support lower traffic volumes. The network of the Nextel platform was originally built to support approximately 20 million subs. And as of the end of the second quarter, we were approximately 4.4 million subs subscribers remaining. The thinning process allows us to reduce our costs, while maintaining service for those customers who remain on the platform. The completion of network thinning is an important step for Sprint towards achieving our expected margin improvement goals. This quarter, we announced that we expect to complete the shutdown of the remaining Nextel platform cell sites as of June 30 -- as early as June 30, 2013. We have had a lot of questions in costs and the timing of the expected cost savings. Joe will give an update on Network Vision financial outlook shortly, but I want to provide you with some direction on our expectations of the timing of savings, as we implement Nextel platform thinning and move to full decommissioning.

Within the first 6 months after we take a cell site off the air, we eliminate utility, backhaul and maintenance costs. On average, these represent approximately 40% of the annual tower costs and rent represents approximately 60%. By early 2014, we expect that from an adjusted OIBDA perspective, we will achieve the majority and projected savings related to the shutdown of the platform.

Please turn to Slide 17. As Dan discussed, we've been very successful in our recapture efforts on the Nextel platform, with 60% of postpaid customers staying with Sprint in the second quarter. One of the factors in our success is the strength of our Sprint Direct Connect product, which continues to show industry-leading push-to-talk call setup times. We continue to expand and improve our SDC portfolio and we are confident we have the best push-to-talk product available in the market.

During the quarter, we launched the Kyocera DuraXT, our fifth rugged SDC handset. At the same time, we enabled Sprint Direct Connect to work on both our voice network and roam outside of our footprint, which means our customers now have greater coverage than they did on the Nextel platform.

Please turn to Slide 18. The next slide of -- is the Network Vision's score card, which I showed you last quarter, with an update on the solid progress we have made. As I discussed last quarter, a critical part of this project is building a good pipeline of sites for construction. To date, we have completed leasing on over 12,700 sites and zoning on over 13,900 sites. We are either ready for construction or underway on over 6,300 or 52% of the sites we're planning to bring on air this year.

On July 15, we launched 4G LTE in 5 major markets in 15 cities, including Houston, Dallas, San Antonio, Atlanta and Kansas City. We also announced the accelerated LTE launch in Waco, Texas and expect to launch 4 additional cities, including Baltimore, by the end of August. The network is performing well and the average speeds are highly competitive. We now have over 2,000 Network Vision sites on air. As Dan has said, we are now activating Network Vision sites on air at a rate which, if we maintain our current pace in the existing cities and bring in new cities as planned during the year, we will achieve our 2012 plan. The current week-by-week plans from our vendors continue to show us achieving approximately 12,000 sites by the end of the year.

You should remember that Network Vision is not just about LTE. It's about modernization of our entire network, which includes voice and 3G. The coverage improvements that we are seeing on these towers are substantial. As we bring the sites up, early results show a 10% to 20% jump in voice minutes per site overnight, a very important indicator of expected future roaming savings. We expect these results to continue to improve as we light up 800 megahertz CDMA voice and handsets with this capability continue to penetrate the base.

Another important milestone in the quarter was the approval by the SEC for the deployment of LTE in the 800 megahertz band. I want to reiterate our confidence in both the Network Vision build and the Nextel platform decommissioning. The technology is working well and our 3 vendors continue to pick up the pace to hit our goals. With that, I will now turn it over to Joe to go through the financials.

Joseph J. Euteneuer

Thank you, Steve. Good morning, everyone. Last quarter, I discussed the key financial measures of our business, growth of subscribers and revenues in our core ongoing Sprint platform business, strong recapture of Nextel customers to the Sprint platform and overall profitability in our execution. These priorities remain unchanged in the second quarter. We executed well against each of them. I'm particularly pleased with our adjusted OIBDA results. Adjusted OIBDA of $1.45 billion in Q2 was up 20% sequentially, with flat sequential iPhone sales volumes and an increase of Network Vision impacts from approximately $100 million in the first quarter to approximately $175 million in Q2.

Even more gratifying, adjusted OIBDA grew 10% year-over-year, while fully absorbing the incremental impact of our iPhone and Network Vision operating expenses and with only a slight decline in gross adds. This growth in adjusted OIBDA is a direct result of our revenue growth, lower upgrades due to policy changes implemented last year and cost containment due to our ongoing commitment to disciplined growth.

Moving to Slide 21. Our core Sprint platform business continues to show strong growth in both subscribers and revenues. Total customers on the Sprint platform increased by nearly 1.3 million in the quarter and contributed 3% sequentially and 16% year-over-year growth in Sprint platform service revenues. Our Sprint platform postpaid business performed especially well this quarter. While Sprint platform postpaid gross adds of 1.5 million were down slightly year-over-year, the comparative quarter in 2011 was one in which we acquired some lower quality customers, which resulted in elevated churn for the past few quarters. I'm pleased to say that this elevated churn is now behind us, and our customer acquisition in the second quarter displays our ongoing commitment to disciplined growth. Sprint platform postpaid net adds of 442,000 grew by 96% year-over-year and 68% sequentially, aided by our best-ever Sprint platform postpaid churn of 1.69%.

As we indicated for the past 3 quarters, we expected involuntary churn to improve significantly this quarter as we move past the temporary churn bubble. This improvement in involuntary churn, as well as sequential improvement in voluntary churn, allowed us to post our best-ever postpaid churn on the Sprint platform. Going forward, we expect Sprint platform postpaid churn to return to normal seasonal patterns, typically, a sequential increase in Q3 followed by a sequential decline in Q4. The strength of our Sprint platform net adds was greatly supported by our focus on the recapture of Nextel customers to our ongoing Sprint platform business. Q2 was our most successful quarter yet in this effort, recapturing 60% or approximately 431,000 of Nextel platform postpaid customers. This result is well above our original business case expectation and better than both the 46% recapture rate in the first quarter of this year and the 39% rate in the fourth quarter of 2011.

As these customers move to the Sprint platform, we are typically seeing an increase in company postpaid ARPU as they transition to a higher mix of smartphones and take the premium data add-on charge. So our focus on the recapture effort is both cost-effective and is revenue accretive to the company as a whole, although slightly dilutive to Sprint platform postpaid ARPU. The success of the program to date gives us the confidence that we should achieve a recapture rate above 40% for the next 2 quarters. However, as we enter 2013 and approach the complete shutdown of the network, we expect the recapture rate to decline. Our current progress with the recapture effort has exceeded our expectations and our overall progress in reacquiring the Nextel customer base gives us confidence that we will meet or exceed our original guidance of a 30% recapture rate as we move toward the goal of complete shutdown of the Nextel platform by midyear 2013. To the extent that customers begin to leave the Nextel platform faster than expected, this may move some Nextel postpaid net losses that were anticipated in 2013 into the current year. As Dan mentioned, the Sprint platform postpaid ARPU of $63.38 reached its highest level ever this quarter, growing by 7% year-over-year and 1% sequentially. The sequential increase to ARPU was due to continued penetration of our premium data add-on charge to the base, as well as changes to certain group discount policies, which tightened eligibility requirements and reduced customer credits in the second quarter. We do not anticipate these changes to group discount policies will provide sequential benefit going forward. 81% of the Sprint platform postpaid handset sales in the second quarter were smartphones, and approximately 72% of the Sprint platform postpaid handset base now has smartphones.

We continue to enjoy strong sequential ARPU benefits on the Sprint platform from penetration of the premium data add-on charge, which we expect to continue through the second half of the year. While accretive to the company as a whole, the success of our Nextel recapture rate does manifest itself in some ARPU dilution on the Sprint platform, through both migration credits and the assimilation of lower ARPU subscribers into a higher ARPU base. Because of the strong recapture rate in Q2, along with the impact of the group discount policy changes I just mentioned, could cause a temporary dilutive effect on the sequential change in Sprint platform ARPU from Q2 to Q3, while providing a continued sequential ongoing benefit to the company as a whole. We expect Sprint platform postpaid ARPU would revert back to its sequential quarterly growth in Q4.

Moving to Slide 22. Our Sprint platform prepaid business also continues to grow as we added 451,000 customers in the quarter. While the prepaid business continues to enjoy good growth, the second quarter showed lower subscriber growth due to typical seasonal slowness for Boost and Virgin Mobile, as well as impacts to net ads associated with the changes in the regulatory environment of the lifeline industry. Aggressive competitive behavior in the lifeline segment ahead of regulatory deadlines, as well as the complexity associated with implementing these new requirements, has had an impact on subscriber numbers across the industry in Q2. The regulatory changes that occurred in the second quarter are still being implemented and the ultimate impacts are difficult to predict. However, given these changes, we believe there will be a significant reassessment of overall volumes and thus, competitive behavior in the lifeline industry. Because of this, we expect our Assurance Wireless and lifeline industry wholesale net add volumes to be adversely affected for the rest of the year. We are engaged in ongoing assessment of the new environment and plan to continue to offer high-value service options to current potential new lifeline customers. Despite this impact, the fundamentals of our prepaid business are strong. Prepaid service revenue on the Sprint platform grew almost 5% sequentially and 32% year-over-year. Our Boost brand on the Sprint platform continues to produce very strong customer growth and the total Boost brand is growing despite Nextel platform declines. Within a very competitive environment, the substantial improvement in churn we have made in the Boost and Virgin brands of approximately 100 basis points year-over-year has contributed to our strong revenue growth.

Our wholesale and affiliate business also continues to show very good growth. While net adds of 388,000 were also negatively impacted by seasonality and the lifeline regulatory changes, wholesale affiliate and other revenues grew a robust 20% sequentially and more than 100% year-over-year. We continue to expect strong year-over-year revenue growth in wholesale and affiliate business throughout the remainder of the year.

Let's move on to our wireless operating expenses on Slide 23. Total wireless cost of service in the second quarter was $2.3 billion or 31% of service revenues. This is a 2-percentage point gross margin improvement year-over-year and a 1-percentage point sequentially, even with incremental Network Vision spend in a seasonal uptick in 3G roaming of $30 million sequentially. Service and repair cost were down year-over-year and sequentially, driven by lower transaction volumes and higher refurbished replacement rates. The positive impacts of the iPhone and the success of the Sprint buyback program, which was recently named the best in the industry by Compass Intelligent Research, are contributing to the improvements in our cost structure.

Total wireless net subsidy expense for the second quarter was approximately $1.5 billion, a sequential decline of $93 million and an increase of $322 million year-over-year. The year-over-year increase in subsidy expense is largely driven by our iPhone investment, while high end per unit subsidy is already beginning to show operational expense benefits in other areas of the business, including lower returns, service and repair, and calls to care. We believe our results this quarter reflect the soundness of this investment.

As we look at the second half of the year, our quarterly adjusted OIBDA results could be impacted by the timing of a possible launch of a new iPhone. While we do not know if or when a new iPhone may be launched this year, our adjusted OIBDA estimates for the second half of the year assume incremental iPhone sales associated with the new iPhone launch. We are also expecting an increase in upgrade activity in the back half of the year, as a larger percentage of our base becomes upgrade eligible and we experience normal seasonal upgrade patterns. To the extent these iPhone sales are higher or lower, this will affect our adjusted OIBDA projections.

Total wireless selling, general and administrative costs of $2.3 billion were flat year-over-year and down 2% sequentially. This means our wireless SG&A expense, as a percentage of wireless service revenue, improved by 3 percentage points year-over-year, even inclusive of an incremental $70 million of selling expense associated with direct sourced iPhones. Excluding this expense, selling expense would have been reduced by nearly 4% year-over-year. This strong improvement in our expenses is due to our ongoing, company-wide focus on cost management, which is evident across our business in the second quarter.

As Dan mentioned, we have recently rolled out our new lineup of LTE devices and launched LTE service in 15 cities. As we look at the second half of 2012, we expect that we will begin to make select additional marketing investments to support the continued growth of our business.

Please turn to Slide 24. The strong core business performance I have outlined has resulted in wireless adjusted OIBDA growth of 23% sequentially and 18% year-over-year. The total Network Vision impact to adjusted OIBDA was approximately $175 million during the quarter compared to approximately $100 million in the first quarter of 2012 and minimal amounts in the second quarter of 2011. We expect that our Network Vision-related dilution will continue to show sequential increases through the remainder of 2012. The strong underlying growth of our core Sprint platform business gives us confidence in our ability to continue to invest in our long-term margin expansion goals.

Now switching to wireline. Adjusted OIBDA for the second quarter was $149 million, a sequential decline of 7% and a year-over-year decline of 29%. While declines in this business continue, favorability in switched access, as well as operational improvements in billing accuracy and collections, are improving our outlook for the year. Because of these favorable trends, we are now expecting 2012 wireline adjusted OIBDA to be approximately $600 million.

Moving to Slide 25. I now want to update our 2012 Network Vision outlook. We estimate approximately $300 million of improvement in our 2012 Network Vision adjusted OIBDA impact versus our original business plan. We are now estimating 2012 dilution from Network Vision of approximately $800 million compared to our previous estimate of $1.1 billion. Just over 50% of the $800 million dilution in 2012 will impact cost of service and just over 35% will impact the net subsidy expense. Of the $300 million change from our previous estimate, an estimated $220 million of the benefit from the original guidance is subscriber-related, due to lower-than-expected customer losses on the Nextel platform. An estimated $115 million of the benefit is due to lower-than-expected duplicative site cost as we deploy Network Vision, better-than-expected Ethernet rates versus our original business case and lower backhaul and other expenses related to the accelerated thinning of the Nextel platform.

The third and smallest area of our estimated adjusted OIBDA savings is due to the treatment of tower lease expense for thinned Nextel platform sites, which Brad detailed at the beginning of the call, and which is cash neutral. The current estimated benefits we are seeing to our original business case reflect the success of the project to date. At this point, our previous estimate of approximately $100 million dilution to adjusted OIBDA in 2013 and the broader economics of Network Vision remain largely unchanged and at year end, we will refine these numbers as needed. In addition, we will be posting supplemental slides on our website that provide additional detail on the 2012 Network Vision update after the call.

Moving to cash and liquidity on Slide 26. We continued to make improvements to our liquidity and capital structure this quarter. During the quarter, we entered into a new $1 billion secured equipment credit facility with a syndicate of international banks to finance equipment purchases from Ericsson for Network Vision. We ended the second quarter with a total liquidity position of $8 billion, including cash and cash equivalents and short-term investments of $6.8 billion and $1.2 billion of undrawn borrowing capacity under our revolving bank credit facility. We also have an additional $1 billion of liquidity from the secured credit facility, of which $500 million is available currently through May 2013 and another $500 million is available beginning April 2013 through May 2014. We continue to work with our Network Vision vendors to pursue additional export credit financing. We also retired $1 billion of 2013 debt maturities and now have less than $800 million of maturities due in 2013.

We are confident about our ability to finance the investments we are making in the core business. Capital expenditures for the quarter were $1.2 billion which excluded $102 million of capitalized interest and included $704 million of Network Vision capital. Re-banding expense, which is not included in capital expenditures, was approximately $50 million for the second quarter. Our CapEx outlook for 2012 remains unchanged at approximately $6 billion, excluding capitalized interest and re-banding. Free cash flow for the second quarter was $209 million compared to $138 million in the first quarter and $267 million a year ago.

Moving on to our expectations on Slide 27. Because of the strong trends we are seeing, we are very pleased to announce today an increase in our adjusted OIBDA outlook for 2012 to a range of $4.5 billion to $4.6 billion. We are encouraged by the trends we are seeing in our core Sprint platform business and by the early favorable trends in Network Vision expenses. At the same time, we remain ever vigilant in our focus on execution and on maintaining balanced growth in a highly competitive environment. The first half of 2012 has shown good underlying fundamentals in our business. And as we look to the second half of the year, we expect these strong underlying trends to continue and to support the ramp-up in our Network Vision investments and a potential iPhone refresh. At the same time, we will maintain the flexibility to perform competitively in the market. As always, we will continue our commitment to cost discipline and our focus on executing against our key financial priorities: growth of subscribers and revenues in our core ongoing Sprint platform business, strong recapture of Nextel customers to the Sprint platform and overall profitability in our execution. We are pleased with our performance to date. We are thankful for the great execution by our employees and vendors, and we are excited about the quarters to come. I'll turn the call back over to Brad.

Brad Hampton

Thanks, Joe. Katie, could you please instruct our participants on how to queue up for the Q&A?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Phil Cusick from JPMorgan.

Philip Cusick - JP Morgan Chase & Co, Research Division

There's a lot to talk about, but let's start with ARPU. Joe, you talked about customer credits and it sounds like 3Q could be, I don't know, flat, down versus 2Q. Can you go into that a little bit more?

Joseph J. Euteneuer

Yes, it's really a success-based thing because we've had so much success with the recapture of Nextel subscribers and then with the one-time change in policy on second line discounts, you had a one-time benefit in the second quarter that then becomes flat for the third and fourth quarter. So you have this mathematical calculation that potentially could cause OIBDA -- I mean, the ARPU to be flat to slightly down just on the Sprint platform, but not for the overall business. So the overall business ARPU will continue to have sequential growth, but we could potentially have flat to slightly down ARPU just for the one quarter in 3Q.

Philip Cusick - JP Morgan Chase & Co, Research Division

And then that's a one-time thing in Sprint platform ARPU? It should grown again in the fourth quarter?

Joseph J. Euteneuer

One-time thing and then back in the fourth quarter, you see -- yes, you'll see the sequential growth back in the fourth quarter. So it's a very minor thing. We've been trying so hard to make sure we gave you guys all the visibility and we reestablish credibility in our numbers and stuff. We just wanted to give everyone the heads up.

Philip Cusick - JP Morgan Chase & Co, Research Division

That's helpful, and if I can get one more in. You mentioned the tower lease treatment as the smallest help to the Network Vision cost reduction and can you just remind us what that number is?

Brad Hampton

Phil, it's Brad. The change in the tower lease treatment is $85 million of impact to adjusted OIBDA for the full year, $8 million in the second quarter and $77 million for the second half of the year, so $85 million in total for the year.

Operator

Your next question comes from the line of David Dixon from FBR.

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

Steve, I had a question on the network upgrade progress. I'm feeling good about device availability in FY '13, supporting both your 800 and your 2.6 spectrum band after good discussions with both Qualcomm and the handset manufacturers. But on the network front, well, I'm hearing good news from Alcatel and particularly from Ericsson on the technology front and Samsung in terms of the cluster approach that caused a bit of a lag optically. Based on the sites on year-to-date, what's giving you the confidence that you're going to hit that 12,000 site target by the end of the year?

Steven L. Elfman

Thanks, Dave, and a few good things I'd like to talk about on that. Number one, there's about 700 to 800 sites that are really not on air simply because we -- I'm sorry, can I just put the mic on?

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

Yes, we can hear that Steve.

Steven L. Elfman

Oh, you could, okay, good. So we got several hundred sites that are done and ready to turn on and we're waiting for backhaul fiber basically to the site. We've got several hundred others that basically we have birds nesting on them. And once the birds leave, we'll be able to turn those sites on. Also that early in the quarter with one of our vendors, they had back orders on antenna in for a couple of our markets. That's cleared now. And most importantly, each one of the vendors has really refined their logistics processes, basically getting the product out of country to warehouse to the site and up the pole, so -- and have ramped up their crews appropriately. So that's what gives us a lot of confidence. And at the same time, the key as we've said before is getting the pipeline and getting the leasing, getting the zoning. So that and finally the fact that we've started on our key cities early in the year and we're really ramping up in a new round of cities, which gives a pool of call it candidate sites increases rather dramatically. So that's what gives me the confidence, Dave.

Operator

Your next question comes from the line of Michael Rollins from Citigroup Investment Research.

Michael Rollins - Citigroup Inc, Research Division

A couple of questions for you. If -- first, on the vision expenses during the quarter, could you just give us a segmentation of where they broke out in different line items? And then taking a step back, Dan, what's your reaction to the rate plan changes from your competitors moving to these shared data plans and the implications on the pricing front and how they compare to where your plans are?

Brad Hampton

Mike, it's Brad. Let me take the first one on Network Vision. We're going to post the supplemental slide on our website immediately following the call that gives a little more detail on how the Network Vision expenses flow across the P&L for the year. So look for that on the website following the call.

Daniel R. Hesse

And Michael, Dan here. Number one, what we want our rate plans to stand for is simplicity and value and unlimited is still a significant differentiator. And we think it's important to maintain, if you will, very simple rate plans. And I think our rate plans are significantly simpler for customers to understand. It will take us a while to assess what the impact will be. We have not seen a significant change, if you will, in customer behavior based upon some of the new pricing moves. So we will look at it over time. We don't currently have any plans to make any changes with respect to our rate card and rate structure or prices. But we will evaluate that, if you will, month-by-month, quarter-by-quarter, going forward, but right now, we see no reason to make any changes. It's still early.

Michael Rollins - Citigroup Inc, Research Division

And should we expect an evolution in your tablet strategy, whether it's with the iPad or just new pricing plans to promote more add-on device adoption?

Daniel R. Hesse

Well, stay tuned. We -- I can't comment on that yet.

Operator

[Operator Instructions] Your next question comes from the line of Kevin Smithen from Macquarie.

Kevin Smithen - Macquarie Research

It appears that your iPhone investment is starting to pay off. Can you just walk through the impact that the iPhone had on your CDMA churn reduction this quarter and also the sequential acceleration in ARPU growth?

Daniel R. Hesse

This is Dan. Without getting into specifics that we don't disclose, I will say that the early life churn and again it's early, but the early life churn is significantly better than we've seen on other smartphones. So the expectation is that we will see better churn performance and if you will, accretion to our churn numbers over time. Calls to care are significantly lower than on other devices. Service and repair and returns are significantly lower than on other devices. So all of the early life metrics tell us that we made the right decision. Churn and other care costs, as well as obviously the 40% of the customers being new customers, high gross add percentage, all of those early indications are positive.

Kevin Smithen - Macquarie Research

And Dan, as a quick follow-up, it looks like you took pretty significant market share of iPhone activations in the quarter. Your competitors had significantly down iPhone activations and yours were flat. What's -- how would you attribute that? Is that your unlimited plan? Or is there still pent-up demand from your installed base of smartphone customers that were demanding an iPhone? What would you attribute the share gains to?

Daniel R. Hesse

I attribute it to the simplicity of our rate structure in unlimited. I think that iPhone customers largely -- a lot of them began use on the iPhone on unlimited plans. They tend to be customers who they've moved to Apple products because they are very simple to use. Customers like simplicity and our plans are the simplest, particularly, with the unlimited features. So I think that is the major reason.

Operator

The next question comes from the line of Jonathan Chaplin from Credit Suisse.

Jonathan Chaplin - Crédit Suisse AG, Research Division

So one quick question. When you -- Joe, when you laid out the -- your expectations for Network Vision at the end of Q3, you said you expected sort of 400 to 600 basis points of margin expansion from Network Vision and then another 400 to 600 basis points from organic improvements in the business. It seems like the business overall for you and the industry in general is doing better than anybody thought it would be at that point last year and it seems like you are in line with or ahead of expectations on Network Vision. Can you tell us where that 800 to 1,200 basis points of margin expansion is now, based on the trends you're seeing in the business? And can you remind us what base we should be adding that to?

Joseph J. Euteneuer

Yes, remember, the -- you added to the base that was from the fourth quarter of 2010. And look, we are very fortunate that our execution to date with lower churn, better recapture rate on the Nextel customers, the consistent growth in the sequential change in ARPU, the fact that we're moving marketing cost to our own stores versus third-party stores, all of these things that are going on to either create efficiency, reduce costs or improve growth on the top of the line, all contribute to the growth in margin, and we are optimistic about the original goal we set. We're not prepared to change that until we achieve it, but we'll continue to provide you updates in the future.

Operator

And your next question comes from the line of Rick Prentiss from Raymond James.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Two questions if I could. First, nice job on getting the iDEN thinning down early and the benefits for that. I had a question about that. I think I heard 8,300 sites that were decommissioned through 2Q and 1,300 in third quarter. And the leasing amount, the $85 million that was just clarified for the 2012 impact, what percent of those 9,600 towers leases have you reflected into that $85 million benefit?

Brad Hampton

Rick, this is Brad. About 64% of the cell sites triggered the one-time recognition of the remaining lease obligation. The sites that are either co-located or for which we could expect some future use or value were not reflected in that reclassification, so 64% of the sites in the second quarter.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Great, okay. And the second question then, I think I heard that the roaming kind of early indications 10% to 20% voice increase overnight. Can you talk to us a little bit about when you think you could see the roaming benefits flow into the numbers? Sounds like that's probably not included in your updated EBITDA guidance now. And then how long would it take to get the 800 at the site and the handsets into the base?

Brad Hampton

In terms of the guidance, the roaming sense is relatively in line with what we expected. There is some in-year timing delta of sites on air versus what we originally assumed in the business case. But overall, we're seeing early indicators in line, and not expecting any significant change there to the case.

Richard H. Prentiss - Raymond James & Associates, Inc., Research Division

Okay. And then one quick one since those were quick answers. I think, Joe, you mentioned the upgrade percent, about 9%, includes the iDEN recapture. Do you guys look at it without the iDEN recapture, what's it's kind of running that maybe is more apples-to-apples with your competitors?

Joseph J. Euteneuer

You know what, I don't have that number for you right now. We try to look at it in total just because in our mind, recapturing a Nextel customer is like reselling them and so we have not split that out for you.

Operator

Your next question comes from the line of Jason Armstrong from Goldman Sachs.

Jason Armstrong - Goldman Sachs Group Inc., Research Division

Maybe just a couple. First, on the handset cost into the second half of the year, you mentioned that there's an assumption underlying that iPhone sales go up. I'm just maybe trying to get a reference or frame a reference of what underlies the EBITDA guidance at this point. I think people are very focused on fourth quarter as a big refresh quarter in the industry. Maybe we can just -- if you can compare it to last year's fourth quarter, the upgrade rate then with 9%, is that roughly what you're assuming for this year just to help us think through that? And then second question, Dan, on consolidation, obviously, we've talked about this before and the need for M&A in the industry. I think there's been an admission historically that there were certain concerns that held Sprint back that included, obviously, a host of network initiatives on your plate. It included issues with currency over time. As you take stock of this today, the currency substantially improved. You highlighted obviously a lot of strong progress on the network initiatives. So to what extent does this change willingness to consider consolidation opportunities at this point?

Joseph J. Euteneuer

In regards to your question on the upgrades, it's 9% or north. So it's a hard one to peg. We don't know what it is yet and how dynamic it's going to be, so we have assumed higher upgrades just because we believe there might be a pent-up demand for something really new and unique.

Daniel R. Hesse

Dan here. I can't comment on any potential M&A activity. Obviously, Sprint does support continued consolidation in the industry. I'd say in terms of constraints, the only thing we would want to avoid would be anything between now and the middle of 2013 that would, if you will, stretch the resources of our network organization. We want to complete Network Vision, which will be largely complete by the middle of 2013. So we wouldn't want to undertake anything that would complicate that process, the implementation process between now and '13.

Brad Hampton

That concludes our call today. Thank you for joining us. We're happy to take additional follow-up questions through our Investor Relations line. Thank you.

Operator

And this concludes today's conference call. You may now disconnect.

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

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

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

Source: Sprint Nextel Management Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts