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Sprint Nextel Corporation (NYSE:S)

Q1 2008 Earnings Call

May 12, 2008 8:00 am ET

Executives

Kurt Fawkes - Vice President, Investor Relations

Daniel R. Hesse - President, Chief Executive Officer, Director

William G. Arendt - Senior Vice President, Controller

Paget Leonard Alves - President - Sales & Distribution

John Garcia - Senior Vice President - Product Development & Management, Acting Chief Marketing Officer

Kathy Walker - Executive Vice President, Network Services

Analysts

Tom Sykes - Lehman Brothers

Craig Moffett - Sanford C. Bernstein

David Barden - Banc of America

Phil Cusick - Bear Stearns

Richard Prentiss - Raymond James

Christopher Larsen - Credit Suisse

John Hodulik - UBS

Timothy Horan - Oppenheimer

Will Power - Robert W. Baird

Jason Armstrong - Goldman Sachs

Michael Rollins - Citigroup

Jonathan Chaplin - J.P. Morgan

Simon Flannery - Morgan Stanley

Operator

Good morning. My name is Laurie and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprint Nextel first quarter 2008 earnings release conference call. (Operator Instructions) At this time, I will turn the conference over to the Vice President of Investor Relations, Mr. Kurt Fawkes. Please go ahead, sir.

Kurt Fawkes

Thank you, Laurie and good morning, everyone. Thank you for joining us on our call this morning. For the format of the call, Dan Hesse, our President and CEO, will kick off the discussion and then our Corporate Controller, Bill Arendt, who until recently served as our acting CFO, will provide additional commentary. Following Bill’s remarks, we’ll open it up for questions. Paget Alves, John Garcia, Bob Johnson, and Kathy Walker will also join us during the Q&A.

Slide 3 is our cautionary statement. Our remarks this morning will contain forward-looking statements which involves a number of risks and uncertainties that may cause actual results to differ materially from our statements. We provide a detailed discussion of various risk factors in our SEC filings and I of course strongly encourage you to review our filings.

Throughout our call, we will refer to several non-GAAP metrics. Reconciliations of our non-GAAP performance and liquidity measures can be found on the attachments to our earnings release and also at the end of today’s presentation, which is available on our website at www.sprint.com.

On slide 5 we provide the normalization of net income and earnings per share for the first quarter. We reported a net loss of $505 million. That’s $0.18 a share and that compares with a loss of $211 million, or $0.07 per share in the year-ago period. The reported net loss for the first quarter includes special items which reduced reported net income by $196 million. That’s $0.07 a share. In the quarter, after tax merger related amortization cost was $421 million and that’s $0.15 a share. So after netting out these two items, we are reporting an adjusted net income of approximately $112 million, and that’s $0.04 per share.

Now I’m going to turn it over to Dan.

Daniel R. Hesse

Thanks, Kurt and good morning, everyone. Thank you for joining us and for your interest in Sprint. On our last earnings call, I discussed the difficult issues facing us and some initial steps we are taking to fix them, from establishing a new culture centered on accountability to consolidating our headquarters and reinvigorating Nextel Direct Connect. I said our top priorities were improving the customer experience to reduce churn, building a brand position for Sprint in the marketplace, and focusing on areas that would improve our profitability. The issues haven’t changed.

As our first quarter results demonstrate, the business performed largely as we expected, perhaps marginally better. The wireless pressures we projected materialized as we saw higher churn and lower ARPU in our post-paid base. This translates into lower revenues and profits for the wireless business and for Sprint overall.

We had a very solid quarter in wireline, which is an important contributor to our financial and marketing capabilities and wireline will gain in importance over time, as traffic volumes increase, as business customers become a more important element of our customer mix, and as our relationship with the cable companies gets stronger, which I’ll return to later.

Improving the customer experience, establishing a clear differentiated brand identity and focusing on profitability remain our top goals. As I said on the last call, the turnover will take many quarters. However, we are acting quickly and decisively to improve our performance.

If you go to slide eight, I’ll touch on what we are doing to provide a better customer experience. It starts at the point of sale, where we are spending time with customers to set expectations about their initial bill and to ensure customers fully understand their rate plan, their handset, and how to use your key applications.

We’ve also instituted a welcome call program so that for many new customers, their first call goes to Care, where our reps validate the accuracy of the customer account setup and reinforce key points about the service plan, billing, and the device.

We also reach out to customers at various intervals during their life cycle, making certain that they understand their bill and are satisfied with our service quality. Customer response to this program has been very positive.

Nationally, our wireless networks, both CDMA and iDEN, are delivering service quality at their best levels since the merger. This is important to customer satisfaction. As I mentioned on our last call, we begin our leadership team operations reviews each week with a discussion of the customer experience, with particular emphasis on reducing the calls to Care and on improving churn. We are still far from where we need to be but this intense focus is beginning to pay off.

First call resolution improved each month and we finished the first quarter at our best level since the merger. Our service levels are stable and now among the best levels since the merger, as our average speed of answer, our abandon rates are at their lowest or best levels in well over a year. Calls per customer to Care trends also improved in the first quarter.

The conversion to a single billing system is materially complete and we are getting positive feedback from the front lines on how using one system is making it easier to care for our customers.

We want to continue getting better at resolving customer issues but would prefer it if our customers didn’t need to call us in the first place. We have changed the role of Sprint Retail with more emphasis on customer service. We launched a first contact resolution program in our stores. Rather than having our store sales consultants focus purely on sales, we have empowered them to solve customer issues.

If you go to slide 9, we’ve also clarified our brand position. Our research shows that customers want information now. This is why wireless data is growing so rapidly. Customers don’t want to wait until they get to the office or to get home to get information or entertainment. We are positioning the Now Network, the largest broadband data network in America to provide everything customers want now.

We launched the Now Network message with an innovative offer we call Simply Everything. Simply Everything allows our customers to use the Swiss Army Knives that are today’s mobile phones for all these devices can do -- e-mail, text, pictures, surfing, TV, and of course, voice -- without worrying about the meter running. It’s too early to make any definitive statements about the success of Simply Everything but so far, it’s doing better than we had expected not only for new acquisitions but especially for customer retention.

As we mentioned on the last call, our ARPU decline has been driven primarily by the fact that the customers we have been losing have higher ARPUs than the new customers we have been acquiring. Simply Everything gives us a strong retention tool for customers at the high end.

We have also been pleased by the number of our customers who are buying up to a higher monthly recurring charge. We hope that over time, the simplicity and predictability of the bill will mean fewer calls to customer care.

In addition to Simply Everything, another proof point of the Now Network is Nextel Direct Connect instant push-to-talk communication with sub-second call setup times. We are the gold standard for this service. If it’s not sub-second, it’s second-rate.

As planned, we began offering the CDMA version of Nextel Direct Connect in Denver, Kansas City, and in Cincinnati. It’s still very early but the technology is performing well and initial feedback has been positive. We plan to roll the service out to around 40 additional markets in the coming months and will add handsets to the lineup throughout the year.

Sprint plans to bring to market the first ever BlackBerry device with iDEN push-to-talk and WiFi capability in the fourth quarter.

There are also nearly 2 million users who can establish a secure broadband Internet connection from almost anywhere in the country using a wireless data card from Sprint.

Still another Now Network proof point, the Instinct, which we co-developed with Samsung, was recently unveiled at CTIA. To say it was well-received is an understatement. It won the trifecta of top awards at CTIA: the CTIA’s own Best Smartphone and Overall Best in Show Awards; Laptop Magazine’s Best of CTIA Award; and CNET’s Cream of the Crop award. This phone will be made available in June and for a period, we expect demand could exceed supply. The fact that we are making this phone available to existing Sprint customers first rather than to new customers speaks volumes about how we are reorienting our marketing toward improving the Sprint customer experience and reducing churn.

If you go to slide 10, as fast as our EVDO Rev-A network is, nothing in the history of this industry will define Now like the fourth generation. As we announced last week, through our leading position in a newly created public company, Clearwire, Sprint will have at least a two-year headstart over any of its wireless competitors in providing true land line equivalent broadband in this country. We must still, of course, obtain regulatory approvals. But this fourth generation WiMAX network is the ultimate proof point for Sprint's Now claim.

The transaction we announced last week creating the new Clearwire, allows Sprint to simultaneously meet many objectives. Number one, we can maximize the value of our 2.5-gigahertz spectrum position. Putting our spectrum together with Clearwire’s give us the national footprint we would not otherwise have had and in megahertz pops terms creates the largest wireless spectrum portfolio of any company in the country. The assets we are contributing have an implied equity market value of $7.4 billion under terms of the agreement.

Number two, we can continue the momentum of the WiMAX technology and ecosystem and maintain our time to market advantage over competitors and other 4G technologies. WiMAX is deployed in 116 countries with 19 silicon suppliers and 94 vendors. It’s not slideware. It works now.

Number three, we expect to realize the natural synergies between our 4G deployment and our existing 3G infrastructure products and distribution. For example, we have under-utilized tower assets. Sprint can share costs with Clearwire which benefit both companies.

Number four, we have attracted world-class partners that are best-in-class at developing devices and applications and providing distribution to customers.

Number five, we can preserve financial flexibility for Sprint by obtaining attractive financing from investors, over $3.2 billion, that would allow us to grow the WiMAX business without further contributions from Sprint.

And finally, Sprint management can now focus our resources and attention fully on improving the performance of our core CDMA operations.

Our core business should also be further strengthened by the 3G MVNO relationships created as part of this transaction. In particular, the simplification and enhancement of Sprint's near-term commercial relationship with our cable partners, Comcast, Time Warner, and Bright House. We believe we will achieve all of these objectives.

Today, Sprint has the largest wireless broadband data network in America. By offering the inaugural fourth generation service in America, we will further enhance Sprint's brand promise of the Now network. Sprint will be the only mobile wireless provider offering land line equivalent data capabilities to its customers. This weapon will be a significant competitive differentiator in our product line.

Go to slide 11 -- we are investing significant energy in examining our customer base through an economic lens, evaluating characteristics across various customer segments and most importantly the corresponding customer lifetime value. We are finding significant differences in customer lifetime value between segments. As a result, we are being more selective in the customers we acquired. We have also moved acquisition dollars to retention as churn reduction investments generally provide good returns, but we will also be more targeted in our use of retention spending.

In the first quarter, we eliminated 65 company-owned retail locations and about 2200 indirect distribution points. Lifetime value of the customers acquired from these locations rather than gross add volume was the determining factor in our decision criteria. In the short-term, this increased selectivity will probably dampen acquisition volume. However, we are confident the trade-off for long-term value is the right one for Sprint and its shareholders.

Now before I hand the call over to Bill to cover the first quarter performance details, there are a few other items that I would like to cover.

In January, we committed to reduce costs by streamlining staffing and distribution. We have essentially completed the 4,000 person reduction in headcount and have made substantial progress in cutting less profitable distribution points, as I mentioned earlier. In addition, we are reducing our contracted labor. We are well-positioned to achieve our labor cost target of a $700 million to $800 million annualized run-rate reduction by year-end.

As I mentioned on the last call, for us to be more effective at delivering profitability members of the team must be accountable for profitability. If you go to slide 12, as a result we will be creating more profit and loss accountability throughout Sprint by creating business units with P&L measures. We have almost completed naming the entire new senior leadership team at Sprint. Bob Brust, a well-regarded, experienced financial leader and the former CFO at Kodak and Unisys, has joined us as our new Chief Financial Officer. Wireless veteran Steve Elfman is our new President of Network Operations and Wholesale. Some others will have new roles; John Garcia will lead CDMA, Paget Alves will lead sales and distribution, Jim Patterson will lead wholesale, Dan Dooley will lead wireline, Kevin Packingham will lead product development, Matt Carter will lead our boost business, and with Dick LeFave’s retirement, Kathy Walker will lead the combined network and IT organizations.

Now on May 2nd, the court affirmed the FCC’s decision that requires us to vacate part of the 800-megahertz spectrum by June 26th, even though public safety agencies are not ready to vacate our replacement channels. Although we are disappointed by this decision, we remain committed to identifying a resolution of this matter that balances achieving the goals of the 800-megahertz reconfiguration with meeting the communications needs of our customers.

Finally, I know there is a lot of interest in the outlook for the second quarter and beyond. Regarding the second quarter, improving the customer experience and being more selective about the customers we acquire should improve churn but we expect that post-paid subscriber losses will improve only marginally from first quarter levels with a sequential decline in gross adds offsetting some of the improvement in churn.

The pressures we’ve seen in ARPU over the last two quarters are not expected to subside in the second quarter, though positive seasonal roaming and usage factors should provide a partial offset. Subscriber and ARPU deterioration have been the primary downward pressures on profits in recent quarters. As a result, we expect to see declining OIBDA in the second quarter.

Because of the broad set of actions we are taking, we expect that OIBDA performance will begin to stabilize by the end of the year. It is our intention to manage this business to be free cash flow positive.

Now I will hand the call over to Bill.

William G. Arendt

Thank you, Dan and good morning, everyone. In my remarks this morning, I am going to offer some additional details on our results for the first quarter, beginning on slide 13. For the quarter, our total consolidated revenues of $9.3 billion were down 5% sequentially and 8% from one year ago, principally due to declines from our wireless segments.

Wireless service revenue of $7.4 billion was down 6% sequentially and 9% year over year, due to declining post-paid ARPU and fewer post-paid subscribers. Compared to the first quarter of 2007, CDMA post-paid subscribers are up approximately 10% while ARPU from these customers is down by approximately 3%.

The iDEN subscriber base is down 26% from a year ago and ARPU is 10% lower. Boost pre-paid revenues in the quarter were in line with the fourth quarter of 2007 and the year-ago period as higher revenues from Boost Unlimited were offset by a decline in revenues from traditional boost subscribers.

Wireless equipment revenues of nearly $600 million were 13% lower on a sequential basis and 9% lower on a year-over-year basis. The sequential decline was primarily due to a reduced volume of post-paid gross subscriber additions and lower price per handset sale.

Wireline revenues were flat sequentially and approximately 2% higher on a year-over-year basis. The wireline segment continued to report strong revenue growth in IP services, offset by lower voice and legacy data revenues. Wireline IP revenue increased 44% year over year and represented over 30% of our total wireline revenues. IP revenue growth is due to strong demand for MPLS services within the enterprise segment and an expanding base of cable VOIP subscribers.

At the end of the first quarter, Sprint Nextel supported approximately 3.8 million users of cable partner telephony services. Our services are now available to more than 30 million MSO households.

Turning to slide 14, in the first quarter Sprint reported a loss of 1,070,000 post-paid subscribers as gross adds declined by over 250,000 and churn increased by approximately 15 basis points sequentially. Sales through our business channels experienced a moderate rebound from the fourth quarter while sales through our consumer channels, retail stores and indirect channels, decreased in part due to first quarter seasonality and a full quarter impact of tighter credit standards implemented in the fourth quarter. Compared to the year-ago period, gross adds were down mainly due to the tighter credit requirements and more competitive market conditions.

The post-paid churn rate in the first quarter was 2.45%, slightly better than the expectations we set on our last call. The sequential increase was due to higher voluntary churn on the CDMA platform in part due to seasonally higher contract expirations early in the quarter and a sequential dip in [save desk] rates. We currently expect post-paid churn rates will improve in the second quarter of 2008.

During the quarter, we reported a net loss of $540,000 traditional boost prepaid users. Higher churn within our traditional boost segment reflects a scaling back of our retention programs in the quarter as the company increases its focus on near-term profitability and increased competitive activities by other carriers.

In the quarter, we added 340,000 boost unlimited subscribers. We expect to continue to be selective in our boost unlimited sales efforts. Wholesale net adds were approximately 167,000 for the quarter and the Sprint affiliates added 16,000 subscribers.

On slide 15, monthly post-paid ARPU was just under $56 in the first quarter compared to $58 in the fourth quarter and approximately $59 one year ago. The sequential decline in ARPU is the result of lower voice revenues within the CDMA and iDEN subscriber bases, while the year-over-year decline is much more pronounced for iDEN subscribers.

Data revenues grew 19% compared with the year-ago period. Blended post-paid wireless data ARPU was over $11.50 for the quarter and data revenues accounted for over 20% of total ARPU. Leading sources of data revenue growth are air cards, text messaging, and sale of power vision data bundles.

The lower voice ARPU in the first quarter is due to an ongoing decline in the average monthly recurring charge for voice services. The main drivers of this trend are: one, differential between monthly billings for new subscribers when compared with billings of deactivating customers; two, the migration of existing customers to lower price plans; and three, certain subscriber fee reductions which are intended to increase customer satisfaction.

These dynamics also reflect the largest share of family plans and the lower contribution from some prime customers, which tend to generate higher ARPUs. Lower usage based voice revenues in the quarter are due to seasonal factors and moderating inter-connect minutes of use, especially on the iDEN network. We are also providing more credit to our subscribers, which is recorded as contra revenue. Again, this action is consistent with the company’s focus on retaining customers and improving the customer experience.

Slide 16 -- our consolidated adjusted OIBDA of $2.01 billion in the quarter was down from $2.46 billion in the fourth quarter as the result of the lower contribution from wireless subscribers and incremental handset subsidies. These items were partially offset by lower cost of services due to lower network cost, reduced sales and marketing spending, and a slight improvement to bad debt. Sprint's consolidated adjusted OIBDA margin in the first quarter was 23%. Wireless margins declined to 24.4% while wireline margins were 17.6%.

Slide 17 -- capital expenditures were $1.36 billion for the quarter, approximately 15% of total revenues. Wireless capital of $875 million during the first quarter reflects reduced requirements for EVDO expansion as well as moderating needs for the iDEN network. Capital spending for zone was $236 million in the first quarter. Wireline capital was $191 million for the quarter.

For all of 2008, we expect to see significant year-over-year reduction in core wireless capital spending. We also expect full-year wireline capital spend to be below 2007 levels. Zone capital is expected to be moderately ahead of last year. Under our agreement with Clearwire and the strategic partners, Sprint expects to be reimbursed for zone capital and operating expenses incurred from now until the close. However, these expenditures will continue to be reflected in our reported results for the close, which is expected to occur in the second half of this year.

Slide 18 -- the company is maintaining its financial flexibility. We ended March with approximately $4.8 billion of cash and marketable securities. This includes $2.5 billion drawn on our line of credit plus $170 million in free cash flow during the quarter. As we indicated previously, Sprint drew on the credit line in late February in order to mitigate potential refinancing risks associated with the bonds maturing in November, 2008 and May of 2009. Our current credit availability stands at about $1.2 billion, updated for the recent SEC decision to reduce the rebanding letter of credit requirement by $337 million.

We are optimizing our capital spend and closely managing other uses of cash, which include working capital. We are also seeking ways to improve cash flow generation from the business, including headcount reductions, rationalization of distribution channels, and other cost saving measures. As a result of our efforts, we expect to generate positive free cash flow for the balance of 2008.

And now I will hand the call back to Kurt for the Q&A setup.

Kurt Fawkes

I would like to remind everybody that we will have a replay available of our call this morning at our website probably about a half hour after or so, after the call. So Laurie, if you could go ahead and instruct them on how to submit questions, I’d appreciate it.

Question-and-Answer Session

Operator

(Operator Instructions) For our first question today, we’ll go to Tom Sykes with Lehman Brothers.

Tom Sykes - Lehman Brothers

Thanks for taking the question. The release indicates that you expect continued pressure on gross adds and I would imagine some of it is due to tighter credit standards. And I’m wondering what your thoughts are on expanding the unlimited offering to capture those customers that walk into the store but the get turned away because of credit.

And then second, could you just provide maybe a little insight into what you are seeing with respect to customer service expense on the unlimited customers? I realize you don’t have much time to have all the results in, but any tidbits you’d have on data points with respect to calls into customer service versus traditional post-paid would be great. Thanks.

Daniel R. Hesse

Let me start with I guess the second part of your questions. With respect to unlimited offers generally, and I’ll take simply everything as an example, it’s too early to tell what the trends will be in terms of calls to care, but generally with respect to unlimited plans, we would expect to see fewer calls to care because a main reason that customers do call care are questions about their bills, overage charges, concerns with them and what have you. So part of the rationale for unlimited plans is to reduce the calls to care and it’s a trend we would hope to see over time with any of these unlimited plans.

Secondly, as I mentioned earlier, there will be a pressure on gross adds going forward and it is a mind-change for us in that we are going to be focused first and foremost on profitability and that means focusing more on retention. And as a result, we will see potentially fewer gross adds going forward in the business and we are not looking for -- necessarily for ways of taking customers who are unprofitable and putting them on either of our networks, CDMA or iDEN.

Tom Sykes - Lehman Brothers

Okay, great. Thank you very much.

Operator

We’ll take our next question from Craig Moffett with Sanford Bernstein.

Craig Moffett - Sanford C. Bernstein

Good morning. Last week there was a report that you were reconsidering the idea of spinning off the Nextel network. Even if you can’t comment specifically on those plans, I wonder if maybe you or perhaps Kathy could just talk about the feasibility of separating the Nextel network, the iDEN network at this point from the CDMA network and what that would entail and whether that is indeed even possible at this point.

Daniel R. Hesse

You’re correct. It would be complex. But that being said, as you can see in our marketing efforts, we are really working aggressively to reinvigorate Nextel direct connect. Hopefully you’ve seen some of our new advertising, the firemen, maybe the roadies. We’ve introduced new handsets and as I mentioned in my remarks, we plan to have a very important new device for our iDEN customers later this year in terms of an iDEN BlackBerry that will also have WiFi capabilities. So we are committed to our iDEN customer base and to Nextel Direct Connect, and that’s also partly why we have launched it and plan to launch it much more widely, Nextel Direct Connect capabilities on our CDMA network going forward.

Craig Moffett - Sanford C. Bernstein

But should we assume then that a separation and spin-off of the Nextel network is out of the question or is it at least off the table for you guys for the time being?

Daniel R. Hesse

Well, we don’t comment on speculation. We always, as part of the ongoing way we look at our business, nothing is off the table completely. We will always periodically reevaluate all of our options but as I mentioned, we are really committed to reinvigorating Nextel Direct Connect and as you also indicated, there would be significant complexities.

Craig Moffett - Sanford C. Bernstein

All right. Thank you, Dan.

Operator

Our next question today comes from David Barden of Banc of America.

David Barden - Banc of America

A couple of things, if I could, just one -- Dan, I think you mentioned you’d be reimbursed for the WiMAX spend on capital expenditure. I was wondering if that was going to be the same for the EBITDA or development costs that go along with that. And if I could ask a second question, just related to something you said about the pricing adjustments that you are making for customers, could you elaborate a little bit on the magnitude and the time commitment that you are discounting the service for these customers that would be complaining, I guess, about the price that they are being charged. Thanks.

Daniel R. Hesse

With respect to your first question, we will be reimbursed basically for our cash outlays, both CapEx and OpEx, between now and the end of the year. So it’s really both in terms of our WiMAX expenditures between now and year-end.

Quite frankly, I don’t understand -- I apologize, David. Could you rearticulate your second question?

David Barden - Banc of America

Sorry, Dan. You had mentioned that one of the pressures on ARPU this quarter was some effort to I think re-price some of the services for the customers that were calling in, and I was wondering if you could elaborate a little bit. Maybe they’re just monthly credits. If that’s it, that would be good to know but it sounded like it was more of a price adjustment that you were making for some of the customers that were calling in and looking to leave the network.

Daniel R. Hesse

What we’ve done is we’ve eliminated some of the additional fees that we used to charge customers, so fees at the bottom of the bill and what have you as part of improving customer satisfaction and simplifying our offers to customers.

David Barden - Banc of America

So just fees, no kind of core monthly recurring charge, price cuts for customers that complain the loudest?

Daniel R. Hesse

That’s correct.

David Barden - Banc of America

Okay, great. Thanks much, guys.

Operator

We’ll take our next question from Phil Cusick with Bear Stearns.

Phil Cusick - Bear Stearns

Thanks for taking the call. Speaking of 2Q, you mentioned gross adds down, and they are typically down seasonally. I wonder if you can help us think about what the industry overall is doing as far as you can see. Is it really just a seasonal reduction in gross adds quarter over quarter or is there anything else out there that you are seeing in the industry overall as consumers are a little tighter? Thanks.

Daniel R. Hesse

I’ll let Paget Alves answer this.

Paget Leonard Alves

Phil, let me comment in a couple of respects. First of all, Dan mentioned earlier that we are targeting our acquisition efforts more closely associated with the value of customers, so that’s a factor. Part of that is changing the offers, as you’ve heard, and also focusing a bit on we raised some handset prices, which we thought was the right thing to do to complement the offers we have, track customers who are more interested in data and high value services. So what you are seeing is a bit of a repositioning along with the credit factors that have been -- that are factored into our results in both the prior quarter and this quarter.

Phil Cusick - Bear Stearns

Okay, can you help me out just a little bit? So the credit standards went up in October or November, sometime in the fourth quarter. Can you help us think about what the timing of this repositioning and handset pricing increase? Because we’ve seen a few things happen over the quarter. I’m not sure what the net effect has been and the timing of that.

Paget Leonard Alves

Phil, I had a little trouble hearing you. You broke up a bit. Could you just repeat that?

Phil Cusick - Bear Stearns

Sorry -- so what was the timing of that repositioning? The credit standards went up in the fourth quarter, so what has changed during the first quarter to second quarter time period, other than seasonality? Thanks.

Paget Leonard Alves

I would describe it as a continuation of the actions we took in fourth quarter, so this it two quarters of the same actions we can -- the only additive change may have been focusing a little bit more on the targeting that Dan described. We are putting a tighter lens around profitability of the customers we are acquiring. That’s reflected in some of the store closings and changes in say in closing some indirect distribution doors. So you are seeing a continuing effect.

Phil Cusick - Bear Stearns

Okay, good. Thanks, guys.

Operator

Our next question comes from Rick Prentiss with Raymond James.

Richard Prentiss - Raymond James

Thanks. Good morning, guys. A couple of questions for you; in the press release, when you are talking about the covenants and the balance sheet that you are possibly considering selling some non-core assets, I was wondering what you would consider non-core, how much money might be involved there.

William G. Arendt

At this point, I am not in a position to provide anymore guidance beyond than we have in the press release. It’s still too early, still looking at it, and so at this point, I would like to hold off until we get probably closer to our second quarter earnings release. We’ll have a better story for you there, more complete.

Richard Prentiss - Raymond James

Okay, and then on the Direct Connect on CDMA, how many pops do you have turned on right now with the cities that you mentioned? How many pops do you expect you’ll have in the coming months and is there a target for year-end as far as how many Direct Connect CDMA pops will be ready?

John Garcia

We’ve launched three cities so that we can test all of the different network manufacturers we have out there. It’s going very well. We hope to launch about 46 markets by June. That will represent about 70% of our network and then perhaps another 5% to 10% beyond that before the end of the year. So roughly in the 80% part of our network will have QChat launched.

Richard Prentiss - Raymond James

Great, and then the final question for Dan, I think; you mentioned the team you are starting to put together. Are you expecting to announce a COO or a CMO? And how many direct reports are you trying to target to? Is it basketball team, football team? What kind of size are we looking at?

Daniel R. Hesse

Well, I am trying to have a flatter organization which will mean more people reporting directly to me than you normally would see because I want to reduce the number of levels, if you will, between me and the customer. So you will see across the organization, if you will, probably more football teams and less basketball teams reporting to the coach.

But that is part of making the organization more efficient. I do not intend to have a COO or a CMO. What I’ve kind of described as the new organization is largely complete in terms of the senior leadership team.

Richard Prentiss - Raymond James

Great. Good luck, guys.

Operator

Thank you. We’ll take our next question from Chris Larsen with Credit Suisse.

Christopher Larsen - Credit Suisse

Thanks. I wondered if Dan, you could talk a little bit about the trends throughout the quarter and into April. It looks like the net adds were maybe not as severely as bad as you had thought and the EBITDA a little bit better. And maybe you could talk a little bit about the churn trends on a monthly basis and gross trends, as well as the bad debt, which seems to have improved sequentially. Thanks.

Daniel R. Hesse

Thanks, Chris. For competitive reasons -- and I’ll say good morning to our friends from AT&T and Verizon on the call, I know you’re listening -- we won’t give you a lot of specificity but what I will tell you is that we did see after a difficult, and I mentioned this on the last call, we moved into 2008 with some very stiff headwinds. After a very difficult January and February, we began to see improving trends in churn in March and we’ve continued to see those improving trends in the second quarter, which is why I indicated that we will see churn improvement in Q2.

Christopher Larsen - Credit Suisse

And if I could just ask a follow-up, and thank you for the answer, on the Rev-A, you said that you are suspending expansion of that. Can you just give us an idea of where the Rev-A coverage is and is there any concern that it won’t cover enough for the QChat rollout?

Kathy Walker

The reason that the spending is moderating is because we were materially complete with overlaying the CDMA network so the driver behind it is completion of the project and the coverage is substantially there for the launch of 70% and more of our pops, so we feel like we are well ahead of where we need to be to roll out that service and continue to support the expansion of Direct Connect on iDEN and CDMA.

Christopher Larsen - Credit Suisse

Thanks, Kathy.

Operator

We’ll take our next question from John Hodulik with UBS.

John Hodulik - UBS

Thanks. Two quick questions, first a follow-up to Chris’ on the churn issue; can you just give us a little bit more color on the improvements in March and April? What was driving it? Was it the voluntary or involuntary? And any sense for how you expect that to trend further on out? I mean, have we seen what you think is the top in churn this quarter?

And then dilution from WiMAX, it seems to have trended down a little bit versus the fourth quarter. How do you expect that to trend throughout the year and is that what is driving your expectations for lower EBITDA or is it lower EBITDA in the core business as well? Thanks.

Daniel R. Hesse

With respect, John, nice try asking the same question again, but yeah, in terms of the churn improvement kind of toward the end of Q1 and going into Q2, it’s an improvement in both involuntary and voluntary churn, so it is in both areas.

And the second question had to do with WiMAX?

John Hodulik - UBS

WiMAX dilution, yeah, I mean, is that what is driving the lower EBITDA or is it coming from higher spending on WiMAX and lower EBITDA in the core business?

William G. Arendt

I would not go -- it’s not WiMAX. It’s the continuing challenge we are having in the core business. There’s almost a small dilutive effect there.

John Hodulik - UBS

Okay, so EBITDA should be relatively flat from a WiMAX standpoint, than an EBITDA loss?

William G. Arendt

I would say so, yes, sir.

John Hodulik - UBS

Okay, great. Thanks.

Operator

We’ll take our next question from Tim Horan from Oppenheimer.

Timothy Horan - Oppenheimer

Thanks. Two questions; just a clarification on the Nextel side -- if QChat is really working, do you have a way to phase out iDEN over the longer term, maybe over a five-year period? And then secondly, it looks like the tax rebate checks will be a little bit larger this year with some of the government incentives. I know in the past that kind of helped out churn quite a bit in the second quarter, particularly. Do you see any effect or better effect this year and maybe temporarily helping out the trends? Thanks.

Daniel R. Hesse

With respect to what you -- the question you asked on iDEN, that’s clearly an alternative that the company would have but based upon our economic analysis so far, it looks like our shareholder return would be better by continuing to market the differential and unique advantages of both networks, and that’s why we’re reinvigorating push to talk on Nextel Direct Connect and also introducing it on CDMA. So that is the plan but as you indicated, having QChat on CDMA gives us alternatives if we decide to change that strategy going forward.

With respect to the checks, obviously everything helps and that is I think a piece of the improvement in churn, particularly involuntary churn.

Timothy Horan - Oppenheimer

And could I just ask a follow-up on the CapEx side? The 12% seems quite low. Do you think this is, as a percentage of revenue, do you think this is sustainable over the longer term? Thanks.

Daniel R. Hesse

We’re not providing long-term guidance with respect to CapEx.

Timothy Horan - Oppenheimer

Thank you.

Operator

We’ll take our next question from Will Power with Robert Baird.

Will Power - Robert W. Baird

Great. Thanks for taking the question. You all have, from a marketing perspective, I guess, focused on unlimited and simplicity and I guess really seem to have somewhat of a barbell approach on that front. You’ve got simply everything at the high end, you’ve got Boost Unlimited more at the low end. So I guess I’m wondering, what’s the real strategy for trying to gain more traction at the mid-level price point, kind of the bread and butter, say $50, $60 price point? Thanks.

Daniel R. Hesse

Well, without getting into specifics, you will see further simplification in our rate cards and plans. We think simplifying the business is important not only to reducing our costs but to having a better, clearer marketplace proposition for our customers. So you can expect to see future rate plans and simpler rate plans being introduced going forward.

Will Power - Robert W. Baird

Okay, is there any way to get a general sense for timing? Is that something that could be weeks off or months off or later in the year?

Daniel R. Hesse

All of the above. But for competitive reasons, we won’t talk about that specifically but stay tuned.

Will Power - Robert W. Baird

Okay. Thank you.

Operator

We’ll take our next question from Jason Armstrong with Goldman Sachs.

Jason Armstrong - Goldman Sachs

Thank you. Good morning. A couple of questions, first on the 800-megahertz; is there an appeals process maybe at a different level you can go through here? Can you just help us think through what happens as you go past June 26th? What is sort of the enforcement mechanism from the FCC here?

And then second question, just back to the EBITDA performance, you mentioned obviously more pressure in 2Q but if we step back and think about moving parts, ARPU you get a seasonal lift, you’ve talked about fewere gross adds, which means subsidy levels potentially go down 1Q to 2Q. And then obviously at the beginning of 1Q, you announced an employee and distribution point rationalization, which should help you on the cost structure. So stepping back, it almost seems like EBITDA should be moving up in 2Q, given what you’ve told us, so maybe just help us step through why it’s down. Thanks.

Daniel R. Hesse

With respect to your first question, we are going to continue to work with public safety and with the FCC. Everybody I think shares the same interests here, which are making sure that our service to public safety on iDEN, because we have 3 million customers, public safety customers on iDEN that we continue to provide great service to those customers but we also all share the same goal of making sure this rebanding process is completed quickly.

So we have a number of ways that we can file for extensions and what have you. I don’t think our iDEN customers should be concerned at this point. We believe that we will be able to work through this process with public safety and with the FCC moving forward.

Bill, I’ll let you answer the second question.

William G. Arendt

You hit on a number of the drivers here but the other one is the volume. As we look at this from a rate volume standpoint, you mentioned on the rate we would expect traditional seasonal overage probably less than we historically have seen in the past. That seems to be a less component of our rate plan but also the volume of the subscribers that we are looking at in terms of further declines, that is really why we continue to think we are going to have OIBDA pressure. And your point of gross adds, yes, and your other point of the employee termination and those costs that are coming out, but I think you have to also factor in the subscriber losses that we are still looking at here and that is really what we are pressuring on OIBDA.

Jason Armstrong - Goldman Sachs

Okay, thanks, Bill.

Operator

We’ll take our next question from Michael Rollins with Citigroup.

Michael Rollins - Citigroup

Good morning. Just two questions; first on the post-paid CDMA side, at what point will that segment be in a position to grow as you look at the guidance around losses and you balance that against what is happening in the iDEN business? And maybe a little bit more color maybe on what happened in the first quarter would be great there.

The other thing I just wanted to ask about, back to the churn question, I don’t mean to follow-on a few questions that have already been asked, but one of the things that we’ve noticed historically in the Sprint business is that churn is seasonally lower from involuntary in 2Q by about 30 to 50 bps and that reverses in the third quarter. And so is that something in terms of a seasonal pattern that should be consistent again in 2008? Thanks.

Daniel R. Hesse

Yes, we would expect to see similar seasonal patterns in ’08 versus ’07, so that part of the churn reduction that we talked about that we would see in Q2 is seasonal and you would expect that there will be at least seasonal factors that we’ll have to deal with in Q3 versus Q2.

With respect to your specific question about post-paid CDMA, we are not going to provide specific guidance between the platforms going forward, so -- was there a more specific question? Go ahead, Kurt.

Kurt Fawkes

A couple of things, Mike, on your involuntary churn of 30 to 50 basis points, I would say you are on the high side there as far as our historical track record. The other thing you have to think about, while the economic stimulus tax rebates are going to be a plus this year, we also have $60 gallon of gas this year that we didn’t have in prior years, so there is some offset there as well.

Your second question was regarding CDMA revenue growth and when can we expect it to grow -- keep in mind that on CDMA we have in the plus column the data revenue is much stronger there, obviously, than it is on the iDEN side. On the negative side, you’ve been losing sub-prime customers as we’ve tightened credit and that’s been -- those are higher-than-average ARPU customers, so you are seeing more pressure associated on -- with churn of higher ARPU customers probably on CDMA from the consumer segment than you would on iDEN. So we’ve tightened our credits last fall so you should start to see the benefits of that play out over the balance of 2008, but it’s really tough to call as to when does CDMA in fact grow again. We have taken other actions, as we commented this morning about things that we are trying to do to improve customer satisfaction and we are making some trade-offs on the ARPU line for customer satisfaction and improved retention going forward on CDMA.

Michael Rollins - Citigroup

Thanks for taking my questions.

Operator

Our next question comes from Jonathan Chaplin with J.P. Morgan.

Jonathan Chaplin - J.P. Morgan

Thanks. So not to beat a dead horse on the churn question, but just following up from Mike’s question, it seems that it’s been more like 20 to 30 basis points as far as we can tell in terms of seasonal impact, so you should have that playing in your favor in the second quarter. But it seems like you’ve done a tremendous amount to improve the gross add mix on the one hand and then improve customer care on the other hand, so there should be a component over and above seasonal benefits that should be playing into the churn improvement from 1Q to 2Q. I’m wondering if we should expect that same 20 to 30 bps plus something for the initiatives that you’ve put in place in terms of the magnitude of churn improvement from 1Q into 2Q.

And then I’m wondering if you can give us some color on where you think voice ARPU starts to flatten out. Does it have to get all the way down to where AT&T and Verizon, where the industry is for voice ARPU? Or do you think there is a prospect of maintaining, because of your sub mix, some premium to AT&T and Verizon longer term?

And then finally I’m wondering if -- there was one plan that we thought looked interesting we were hearing just from channel checks was beginning to have a decent up-tick and that’s the 400 minute plan with unlimited data. I’m wondering if you can give us some color on how that’s doing. Thanks.

Daniel R. Hesse

Let me take a couple of your questions. First of all, with respect to churn, we are not going to give a magnitude number, if you will. Just that it will improve. As Kurt indicated, I think the numbers that you have for the seasonal impact are higher than what we would expect the seasonal impact to be in terms of improvement in Q2. But on top of that, there will also be improvements based upon the actions that we are taking that you described, some of them improving the customer experience, focusing more on high value customers and what have you.

Secondly with respect to the unlimited plan with 400 minutes, right now the loading on the plan has been heavily the Simply Everything, including unlimited voice, and that’s largely because that’s what we’ve been marketing right now. So our real focus has been initially on that $99 plan, so that is dominating the loading right now on Simply Everything and it is really a function of what we are focusing on at the beginning of the launch of those new programs.

I’ll let John Garcia answer your middle question.

John Garcia

That was the question on ARPU?

Jonathan Chaplin - J.P. Morgan

Voice ARPU, yeah.

John Garcia

Well, the other thing, as Dan talked about us focusing on high value customers, this includes a continued strong focus on business customers. These tend to be heavier voice ARPU type customers and so as we really focus our mix shift to high value customers, we hope that that will have an eventual effect on ARPU improvement, as well as continued push on data. Along with the Simply Everything plan that we launched at $99, we also launched a couple of other plans with 450 minutes and 900 minutes. They are like $69 plans and $89 plans. We are starting to see some lift there and as we continue to push our Now Network messaging, which is really about all the things a very fast usable data network can do for you, we hope that that will shift some mix to those rate plans as well and get us a broader catch at the market there.

So focus on business that brings us higher ARPU that’s offset somewhat by families, where you get less expensive add-a-phone to it, but the key message for us really is focusing on high value customers, which we think eventually has a positive effect there.

Jonathan Chaplin - J.P. Morgan

Does that mean that voice ARPU can start to stabilize somewhere around these levels, above where the market is?

John Garcia

Well, we are not getting specific guidance there but I would take it that our focus really is on those higher value customers which should have an improvement impact on ARPU.

Jonathan Chaplin - J.P. Morgan

Thanks very much.

Operator

Due to time constraints, we will take today’s final question from Simon Flannery with Morgan Stanley.

Simon Flannery - Morgan Stanley

Thanks very much. Good morning. Dan, can you talk about the make-up of the iDEN post-paid base? We continue to see fairly sustained erosion. Is there a sort of a core set of users that might be willing to stay on versus some of the more consumer centric that are finding more offers on CDMA or elsewhere? So might we expect that to moderate over time?

And in terms of some of the improvements in customer service, are you going to be taking up your ad spending say in Q2 to try to focus your messaging a little bit more on how the customer service and sort of the care experience is improving as well, to try to close the perception gap? Thanks.

Daniel R. Hesse

Thanks, Simon. You’re correct with respect to the iDEN base, if you think about it we do have two groups of customers. We do have a core set of what we call the heavy users of the button and they have a very low churn. Customers that don’t use the button or don’t use the button very frequently, which largely is more on the consumer market, the churn there is higher and that is the challenge that we are facing on the iDEN network, is the customers that don’t use the unique nature of that network with respect to its great push-to-talk and push-to-X capabilities.

With respect to the second message, what is -- if you take a look at the advertising around the Now Network, what we are doing is we are focusing our message on the fact that telling our customers in the market that we have a very, very strong network and that’s why that word is important in the advertising. So we are clearly, in terms of -- and as I mentioned earlier with respect to things like Simply Everything, migrations of our customers to those rate plans, not just acquisitions, have been very, very positive so clearly we have messaging to our existing customer base. As I mentioned earlier as well, the instinct phone, the fact that we will be offering it first to our existing customer base when we launch the phone in June is just another example of a variety of efforts that we have underway to really market more to our customer base, our existing customer base, than to new customers.

With respect to ad spending though, I’m not going to disclose what will happen to our advertising spending versus Q1 in future quarters, but thanks, Simon.

Simon Flannery - Morgan Stanley

And would you say the heavy users, are they 50% of the iDEN base? Is it in that sort of 50-50 split?

John Garcia

It’s a little bit higher than that and in addition to the heavy push-to-talk users, we have a pretty good test segment of customers in there who use data services, vertical applications, and their churn is very, very low. But it is higher than 50%. It’s a pretty healthy percent.

I would also add from a messaging standpoint, you’ll see us focused on fewer things this year -- broadband, continued support of Nextel Direct Connect, and our Now Network messages. And I’ll mention this because Dan won’t; the ad that we ran with Dan in it, our reluctant -- very reluctant -- star of our Simply Everything ad was one of our highest-rated ads we’ve run in a long time. And that ad in particular signaled to our existing base that there’s a change going on at Sprint and that it’s all for the good and we are getting very good resonance on that advertising.

Simon Flannery - Morgan Stanley

Great. Thanks.

Kurt Fawkes

Okay, thanks, everybody. That concludes our call this morning. Please feel free to give us a call at investor relations if you have any follow-ons today. Thanks again.

Operator

Ladies and gentlemen, this concludes your Sprint Nextel conference call. Thank you very much for joining. You may now disconnect.

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