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Executives

Daniel R. Hesse - CEO

Barry J. West - CTO

Kathryn A. Walker - CNO

Robert H. Brust - CFO

Keith O. Cowan - Strategic Planning

Steve Borostick - Director of IR

Analysts

Michael Roland - City Group Investment Research

Jason Armstrong - Goldman Sacks

Craig Moffit - Stanford C. Bernstein

Rick Prentus - Raymond James

David Arden - Bank of America Securities

Simon Flannery - Morgan Stanley

John Hadulik - UBS

Will Power - Robert W. Berd

Tom Watt - Cohen and Company

Sprint Nextel Corp. (S) Q2 2008 Earnings Call August 6, 2008 11:00 AM ET

Operator

Good morning. My name is Mindy and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprint Nextel second quarter 2008

earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to answer a question during this time, simply press * then 1 on your telephone keypad. If you would like to withdraw your question, press the # key. I will now turn the call over to Mr. Steve Borostick, Director of Investor Relations. Steve, you may begin.

Mr. Steve Borostick, Director of Investor Relations

Thanks and good morning. Thank you all for joining us on the Sprint Nextel Q2 earnings call. After making our customary introductory remarks, I'll hand the call to Daniel Hesse, our CEO. Dan will articulate our top three initiatives and how the company is driving measurable improvements in its operations. He will be followed by Bob Brust our CFO, and he'll speak about his objectives, Sprint's Q2 profitability, capital investments and liquidity position. Before finishing the call with a Q&A session, Dan will share a few thoughts about our outlook for Q3. As you may have seen, we issued a press release this morning on a proposed private placement. Under the securities laws we will not be able to discuss the proposed offering with you this morning and we will not be responding to any questions on this subject.

Moving to slide 2, in our presentation; this is our cautionary statement and I just want to point out that our remarks this morning will be forward-looking in some aspects and will involve 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 thoroughly review.

Moving to slide 3, the non-GAAP financial measures we refer to in this presentation and reconciliations of non-GAAP performance measures and liquidity measures for Q2, they can be found on the attachments to our earnings release and also at the end of today's slide presentation which can be accessed on www.sprint.com.

Moving to slide 4, a normalization of EPS. We reported a net loss of $344 million dollars or 12 cents per share which compares with income of $19 million or 1 cent per share, in the year ago period. Special items in Q2 totally $91 million, after tax, or 3 cents per share. Merger related amateurization expenses net of taxes were $416 million, or 15 cents per share. Adjusting for these two items, yields an adjusted net income before amateurization of $163 million, and adjusted earnings per share before amateurization of 6 cents. This compares to 25 cents per share in Q2 of 2007, and 4 cents per share in the Q1 of 2008.

Next on the call is Daniel Hesse, Sprint's CEO.

Daniel Hesse - CEO

Thank you Steve, and good morning everyone. Thank you for joining us at a slightly later time so that we could include our friends on the west coast, so they could participate at a reasonable hour. On our previous earnings calls, I have outlined our approach to improving performance based upon three priorities which remain the same. Number one, improving the customer experience at every touch point to reduce turn; number two, rebuilding the Sprint brand and number three, increasing profitability. We have improved our execution around these priorities and our Q2 results are slightly better than our forecast. We are pleased to report a very significant sequential improvement in post-paid churn to just under 2%.

Our improvement of over 45 basis points is the largest sequential improvement by any US national wireless carrier since 2004, and it equals Sprint's best turn performance since the merger. Our volume of what we call port-out's to other carriers is at its lowest level in two years and the sequential decline in port-out's is the greatest we have seen since the merger. We achieved these results without sweetening our customer retention offers which contributed to our better than expected ARPU and earnings results as well. We also produced stable ARPU at $56, and a 130 basis point improvement in wireless adjusted margins between 25.7%. In addition, our prime-mix in the post-paid base continued to improve providing the company with better credit characteristics.

On the wireline side of the company, solid performance continued. We improved our adjusted ordered margins sequentially by 100 basis points, to 18.6% led by growth in our IP services and reduced operating expenses. Moving to slide 7, it took company-wide focus and attention to improve post-paid churn by over 45 basis points sequentially. Our customer experience initiatives are being tracked rigorously and reviewed each week at our senior team meeting.

We strive to simply the customer experience, and eliminate reasons for customers to call our care centers. At the point of sale, we have recently provided store reps with the authority and with the tools to resolve customer issues. We have updated and standardized our training programs to ensure that Sprint reps are well equipped to transact the most common request, including handset upgrades, service plan changes or billing adjustments. In an effort to minimize the count set up areas in the retail channels we are improving our order entry process so that we review and confirm transactions with the customer, prior to completing the transaction. In July, we realigned retail store employ compensation to be based upon customer satisfaction surveys and on upgrading and retaining customers, rather than being driven primarily by gross-add production. We now treat existing Sprint customers as the most important visitors to our store. In the coming months, we plan to replicate most of these programs with our national retail partners and with our indirect channels.

We are continuing to invest in our networks to support capacity need and advance capabilities without our current systems. Our wireless networks continue to report best-ever performance methods, including year over year declines in national call back rates, drops and improvements in voice quality. We have experienced a significant decline in the number of trouble tickets initiated on a per customer basis on both Iden and CDMA since June of 2007. Sprint's CDMA network is now supporting Nextel DirectConnect, and we are pleased to report Iden-like sub-second latency and overall performance. Our costs estimates to complete rebanding have not changed, and we recently received favorable rulings from the FCC which balance the goals of 800 Megahertz reconfiguration with the communications needs of our customers. Sprint's wireline IP network is supporting strong demand and is receiving high marks from our customers.

Demand for global MPLS ports is 60% higher than last year; supported in part by our efforts to migrate legacy traffic to these more scalable networks. Our customer satisfaction scores are very high, and IP services are leading to higher growth margins. We continue to support our customer's next generation requirements with advanced, IP or internet protocol capabilities, such as our 40 gig per second internet protocol over-dense wavelength division multiplexing capabilities. I am pleased to report that Sprint's network maintained very strong reliability with no transport outages during the recent flooding in mid-western states. Our fast-growing wireless data business is also benefiting from the scalability of our wireline IP

.

Turning to slide H during the second quarter, we reached a milestone as we converted the final post-paid customer, identified UB platform or UBP. This platform is our customer service engine and it enhances our ability to consistently and effectively roll out new products and better serve our customers. UBP enables the company to streamline our training of peer reps, The conversion was a long process which occasionally interrupted certain account service functions for our customers, so we’re glad it's behind us. We are evolving our cost-effective self-service capabilities such as E-Chat, monthly credit card payments, equipment swaps and rate plan changes via Sprint.com. We have also launched a self-service tool called the Sprint-plan optimizer; a service which reviews customer usage patterns and suggests the best rate plan based upon voice and data needs. Sprint's call centers have been a focus in the last year. As a reminder, we staffed up in late 2007 to manage the increasing call volumes. In 2008, the call centers became more proactive with the welcome call program which is designed to fix account setup errors early in the customer life cycle.. One of our biggest success stories in care was merging the collections and care functions to better serve our asl - account spending limit per customers. This resulted in a significant reduction in the calls to care as more customer issues were resolved on the first call. It also improves our collections process, which helped drive down bad debt in the second quarter. The conversion to a unified billing system is having an impact on care productivity as it reduces customer hold times, so our rep won't have to toggle back and forth between multiple billing systems. Earlier this year, we adjusted care rep compensation to align with our focus on first call resolution for both our in source and outsourced care. First call resolution has improved for six months in a row this year. Care is reporting the best service level in three years. We are answering 80% of customer calls in 30 seconds or less. We still have a very long way to go to be world class, but we are making steady progress. Collectively our action plans reduced calls to care centers by 15% in the quarter. This metric reflects all three priorities as it reflects in improved customer experience, restores confidence in the Sprint brand, and improves our profitability by driving costs at a business, we eliminated a few underperforming call centers in the quarter and as call volumes decline, we expect to continue to rationalize call centers and reduce our operating costs.

Now as mentioned, our company-wide focus on the customer experience contributed to a more than 45 basis-point improvement in post-paid churn from 2.45% to just under 2%. We made improvements across the board on both the CDMA and on the item platforms with voluntary and involuntary return in all four regions of the country, and in all classes of our distribution channels. Involuntary return came in at the best level since our merger with Nextel, driven by our recent tightening of credit standards, our improved collections of care practices and seasonal trends. We, like the rest of the industry, expect to see some normal seasonal uptakings, involuntary return in the third quarter. But we believe that our operational improvements position us to retain a respectable portion of the sequential improvement we saw in the second quarter.

Despite our progress on churn, the company ended the quarter with 38.9 million or 776 thousand fewer post-paid subs, which drove revenues lower in the quarter. Stable postpaid ARPU of $56 exceeded our expectations; as did customer acceptance of our revolutionary 'Simply Everything' Plan. Our ARPU decline historically has been driven by the defection of high-value customers. The success of 'Simply Everything' has dramatically reduced churn levels from our most valuable customers.

Moving to slide 10 you will see the three components to the new Sprint brand. We reduced the number of marketing launch windows to intensify the impact of our messages. In the second quarter we became more selective in our marketing spend but we also increased our effectiveness with significant improvements in our most wanted to investigate or MWI scores.

Why Max will further strengthen our claim to having the Now network. We continue to deploy Why Max 4G technology and the results are impressive. We will be launching a commercial service in Baltimore soon, in addition the regulatory proceedings including those at the FCC and the Justice Department for the clear-wire transaction are on schedule and we expect to close by the end of the year. '

Simply Everything' bundle plans are encouraging customers to maximize the utility of their wireless devices. GPS navigation, DB, picture messaging and search capabilities. ARPU continues to benefit from the growth in data services which drove Data ARPU up to $12 for all post-paid customers, and over $15 for CDMA customers.

We are supporting our brand message with innovative products and services. Our 'Instinct' device drew great reviews and broke sales records at SPRINT Retail and at best buy. In addition, we introduced four new Nextel DirectConnect Handsets, increasing opportunities for Nextel DirectConnect subscribers to utilize the capabilities of our industry's leading wireless broadband network. We also expanded this offering broadly throughout the CDMA and EBDO (unclear 3.30.5). Nextel DirectConnect with its sub-second connection times and our CDMA platforms gives us the largest national push-to-talk network, the largest community of push-to-talk users, which is about 17 million, the largest portfolio of devices, 19, and with integrated business solutions we set the goal standard for push-to-talk capabilities.

We continued to launch innovative products in the third quarter including the Palm-Trio 800W, as well as RevA Enhancement - the HDC's mogul and touch PDA's. We are preparing to launch the Airway Fentocel, which enhances in-building wireless coverage for residencies and small offices.

We will kick off the football season with more customizable and proactive and mobile applications which alert fans to their team's specific scores, news and highlights. We introduced Sprint Web, a customizable homepage which organizes content based on a customers previous internet use, and provides direct access to search from Google, in a format which customers are used to experiencing on their computer screens.

Further supporting our brand position are a mix of PDA's and smartphones increasing and account for more than 30% of new and upgraded devices in the second quarter. That trend goes well for retaining high-value customers and increasing the lifetime value of our subscribers. Slide eleven describes some of what we are doing to improve.

Daniel R. Hesse

profitability. I’ve already discussed our efforts to improve the customer experience lower churn. We’re also working to improve the quality of our customer base for establishing higher credit standards so that we can lower exposure subprime. We continue to steamline unproductive distribution channels. We closed another first retail stores in the quarter, and we reduced the number of indirect dealers by over 25%, targeting dealers with low productivity and high churn. In the prepaid markets, rent raised service prices for boost unlimited. Collectively, these actions would reduce our gross add production but they should improve our profitability over time.

In the wireline segment, we’re focused on selling higher-margin IP services and transitioning legacy services to these platforms. Wireline margins improved in the quarter in part due to the higher margins in the IP business. Cable VOIP revenues were up 60% in over a year and subscribers surpassed 4 million in July.

We’re simplifying the business to improve the customer experience and reduce costs. We reduced the number of wireless price plans, and year combinations, by 80%. We’ve reduced labor costs and we’re on track to realize $700 to $800 million of annualized savings as we exit 2008.

In conclusion, we made progress in the quarter but we’re far from satisfied. By stabilizing our ARPU, decreased churn and lowering costs, we delivered an $87 million sequential increase, but we’re still not in a position to deliver sustained revenue and earnings growth. We’ve not turned the quarter yet, but I’ve been clear that this will take some time. We believe that we have a good plan in place that we have traction, fair goals and measurements, and accountability for performance throughout the organization. We expect to continue to make progress and improving our performance over the long run.

And now I’ll introduce our new Chief Financial Officer, Bob Ross.

Bob Ross

Thanks, Dan, and good morning everyone. Since this is my first quarterly earnings call with the company, I’ll start by saying that I’m excited to be in this part of the industry and part of Sprint in particular. The company has an impressive set of assets to work with and that works the spectrum and product and service capabilities for example, and we see opportunity to drive better returns from these assets over the next few years.

From the financial standplay, my focus areas are pretty straightforward improving Sprint’s cash position and aggressively reducing our large debt load is at the top of the list. We recently took a step in this direction, and with the agreement to sell Sprint’s remaining towers for approximately $670 million and we’ll continue to evaluate other transactional or one-time event types of actions to strengthen our balance sheet and increase financial flexibility. There’s a limited universe to these alternatives, and most of the real opportunity lies in improving the way we run the business on a day-to-day basis.

The factors that have depressed recent results are predominantly execution-centric and not structural, and as second-quarter results demonstrate, we are already beginning to see positive movement in a number of key areas. Opportunities for growth in the wireless industry overall appear healthy, particularly where Sprint is differentiated from competition. Together, these dynamics give us confidence so we can progress towards a more normalized level of profitability and cash production as the company continues its improvement efforts. This cost management is critical to maximizing cash generation, so this is another area of focus where we will direct a lot of attention.

We’ve already taken some actions to better manage spending, including the establishment of a process to review all expenditures of the company pre the purchase order issuance. They still are early but this is proving to be a very effective means of raising the collective consciousness about spending. Spending is beginning to come down as evidenced by a 24% sequential decline in accounts payable at the end of June.

We’re also reducing labor expenses by delayering our internal resources as we transition to a business unit structure and reducing our reliance on external consultants. These are only a few or early examples to demonstrate our focus on cash and cost management. These is one final area I want to mention before moving into the results for the second quarter which is delivering on our commitments and internally, which means accountability for executing operating plans and achieving financial results those plans support. This in turn is directly tied to delivering on commitments we made externally to our shareholders, customers, and other shareholders in the company. This is something that I take very seriously and I know Dan and the Board feel the same way. So you can expect substantial diligence and efforts to accompany these expectations we set with the actions we need to take to achieve them.

For that we'll move on to talk about results. Adjusted ROI for the second quarter was $2.1 billion which compares to $2 billion in the first quarter and $2.9 billion in the year ago period. We were very please with the sequential improvement as cost reduction had outpaced revenue declines for the first time since early 2007. And margins expanded for the first time since the third quarter of last year. The chart on slide 14 outlines the change. On the revenue side its declines are due mostly to the net lost of post-paid subscribers and lower handset sale volumes which Dan hit on earlier.

ARPU was relatively flat and so a natural contributor to sequential performance. On the plus side, we saw benefits from Bundle, DataPlans and seasonably higher usage patterns and these were mostly offset by declines in voice and pressure within IDEN. On the cost side; cost of service was up from the first quarter levels by $43 million or 1.5% primarily due to seasonably higher roaming expanse, as well as higher service and repair costs.

Cost of products improved $89 million sequentially as fewer gross additions drove lower handset volumes, but all of these savings were negated by lower equipment revenues in the quarter. Put another way, net subsidy expanse was essentially flat. The most notable expense reductions in the quarter came from SG&A. Overall SG&A expansions were down $352 million from the first to the second quarter, a decrease of more than 11%. While the decline was across most areas of SG&A, I was pleased with the significant reduction in bad debt expense. In the second quarter bad debt was 1.9% of service revenues down from 2.9% in the first quarter. This decrease is directly related and proportionate to the sequential reduction in the voluntary subscriber deactivations.

We are clearly doing a better job in managing our risks with respect to sub-prime customers. We are taking on fewer sub-prime customers and we are managing the customer experience better by changing the way the care and collection organizations partner we do business with customers. Improved collections performance which Dan mentioned was also a contributor to bad debt improvement in the quarter. More specifically we saw a higher resolution rate for customers who entered the collection treatment process which resulted in a lower involuntary deactivation. IT expense also came down for first quarter levels with the decline primarily due to lower labor costs from a rationalization of supported applications and projects across the company.

A report in SG&A expenses for the second quarter also benefited from a sequential decline in merger and integration expenses of approximately $40 million, though this was not a contributor to adjusted improvement.

Beginning in the third quarter of 2008, Sprint will no longer normalize or merger and integration expenses. Moving on the next item we will look at capital. In the second quarter capital spending totaled $646 million which is down from the $1.36 billion in the first quarter, and $1.67 billion in the year ago period. For the first half of 2008 capital spending was just over $2 billion which is almost 40% below the spending levels for the first half of 2007. This lower yield over year investment reflects reduced spending in Core Wireless and there are a number of underlying factors. In 2007 there was a significant amount of initiative driven investment that was largely completed last year and therefore not carried over into 2008. For example, investments were made during 2007 to expand EVDO RevA by roughly $150 million [covered bops} to enable next town Direct Connect on CDMA's and to bring acquired affiliate networks to parity with our core networks.

In this, if traditionally we invested to expand the CDMA footprint during 2007 to better align with IDEN coverage area. Largely as a result of refocusing our capital decline as on retention instead of growth, our network team added 80% fewer sites in the first half of 2008 when compared to 2007. In 2008 investments have been targeted enhancing coverage and capability capacity while within the existing wireless footprint. In light of subscriber trends, our capacity needs have been limited to a few specific geographic locations where platform specific subscriber and usage trends support the investment.

Network performance is obviously a hallmark element of the overall customer experience which is a top priority for the entire management team. It gets us back to where we're confident that our wireless capital plan, which holds second half spending in Wireline and Wireless segments relatively flat; the first half levels positions us to sustain current service quality within our existing footprint. On the Wireline side capital investment continues to be focused on supporting growth in IP services including MPLS and Cable VOIP Wireline capital spending for the first half of 2008 is up 5% year over year but we continue to expect that spending for the whole year will be below 2007 levels.

Slide 16. The last topic that I want to address before we go into our Q&A is our financial position which ties back to our initial comments about cash, cost management and debt reduction. We exited the second quarter with access to approximately $4.7 billion in liquidity comprised of $3.5 billion in cash and equivalent and $1.2 billion available under our credit line. We've made progress on a number of options discussed during the first quarter called to strengthen our financial position. First, we began implementing initiatives to reduce costs. We've also taken steps to begin deleveraging the balance sheet using cash to retire the $1.25 billion of November maturities early. We continue to generate positive free cash flow, and we're raising cash by monetizing our tower assets.

There's another positive movement I'd like to point out which may not be so evident. Earlier we described the initial actions that have been undertaken to better manage costs, how these are impacting spending levels, and how our adjusted performance was driven by cost reduction. The effects of this spending deceleration also show up outside the income statement. As actual cash expenses which are reflective backward looking activity, help pace accruals which are more reflective of forward spending levels. This has obvious implications for working capital and free cash flow and along with some unfavorability in a time in a certain payments and receipt, impacted Sprint's second quarter results in both areas. When free cash flow in particular, cash capital spending in the second quarter exceeded our reported capital expenditures by more than $250 million dollars. We expect that free cash flow performance in the second half will improve substantially from first half levels. We also continue to remain in compliance with our debt covenence for the foreseeable future and plan to reduce gross debt obligations by at least another billion dollars during the third quarter. I am comfortable speaking for both Dan and myself that there is heightened confidence in the quality of our financial condition. Now I hand it back to Dan for more discussion on the outlook.

Daniel R. Hesse - CEO

Well thanks Bob. We've clearly made improvements in the second quarter and I'll eco the confidence in our financial position that Bob mentioned. While I'm pleased with the pace of progress so far, as we have consistently said, it will take some time to fully resolve our challenges. Looking at the third quarter, we expect the sequential reduction largely driven by a seasonal uptake insurance and modest seasonal decline in ARPU for post-paid subscribers. Most of the sequential performance improvement in CHURN and ARPU during the second quarter was related to factors other than seasonality including the progress we made improving the customer experience and the effectiveness of simply everything as retention tool for high-end customers. On the customer acquisition front, we expect sequential gross acquisitions to moderate in the third quarter. While we’re giving up some volume, we’ve improved customer quality. This is demonstrated by the fact that our prime mix for acquisitions, as well as in the postpaid base has reached the highest levels since the merger. We believe this tradeoff is in the company’s best economic interest.

I’ll now open it up for questions and hand it over to Steve.

Steve Borostick

Before the operator is going to instruct our listeners as to how to queue up to ask a question, I want to point out to everyone on the call that you can access an audio replay and a webcast of our presentation at www.sprint.com\investor.

We’ll now open the line for your questions. Operator, please instruct our participants.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Watt from Cohen and Company. You may begin.

Tom Watt - Cohen and Company

Dan, you talked about the priority on existing customers, but we’ve clearly seen some slip in gross adds. Could you talk a little bit about your view on expanding the gross adds front? Are we going to see additional campaigns? Particularly with the 3G iphone and some of the new smart phones, are there ways to limit share loss?

Daniel Hesse - CEO

Thanks, Tom, for the question. We think the best return on our investment is on retention, more so than on acquisition. We have, and we’ve talked about this in the past, made a decision to allocate more of our marketing investment toward retention versus acquisition.

We have also, as we have mentioned, done things so that there will be an effect on the gross adds side in terms of tightening credit standards, reducing less profitable distribution channels, and what have you. So we really are focusing very much on both retention and on the acquisition side, much more on quality rather than quantity.

In terms of sub numbers, as I mentioned earlier, you can expect that there will be some moderate decline in the rate, but there will be some impact on gross adds.

The second question had to do with the iphone. As I mentioned earlier, not only is our PDA and smart phone mix increasing fairly substantially, but simply everything as a rate plan marries extremely well with smarter devices. We believe that when customers look at the total value proposition of, for example, instinct versus iphone, they’ll see a difference in price for the device and some capabilities we have that they don’t. When they start looking at the 3G - that’s our 3G footprint with the largest broadband network in the country - and the cost of using all the services (data services, surfing, email) they’ll see that we provide a very good value.

Tom Watt - Cohen and Company

Secondly, you talked about a target of reducing debt load. Do you have a target leverage ratio and, within that, are there opportunities even with the net to reduce the cost?

Robert Brust, CFO

This is Bob. We’ve been working on that as we look at the size of the debt. As you know, it’s around $24 or $25 billion now, and the leverage is measured by the covenant we have. We’d like to get that down more in the middle like 25, 26 range over time. So that’s what we’d be targeting.

Tom Watt - Cohen and Company

Thanks very much.

Operator

The next question comes from Chris Larsen from Credit Suisse. Your line is open.

Chris Larsen

Thanks. I have a couple of questions. First, going back to the lower gross adds. Is the sequential decline in the lower gross adds a function of you pushing less on trying to grow the customer base or is it a more competitive environment that you’re experiencing, whether it’s the iphone or anything else that your competitors are doing?

Dan, I have to think at some point the idea is to grow the customer base, and when that equilibrium occurs - at least when you go to zero when churn and gross adds are same number - do you get there eventually by increasing your gross adds or just bringing your churn down so far? Can you give us an idea on that?

Bob, as far as the Tower sale, can you give us an idea of the impact that will be on the P&L? When I looked at the revenue or the dollars for Tower, it looked like a small figure, but I’m wondering if there is something on the lease backside that might be different?

Robert Brust, CFO

Thanks Chris. First of all, I think the primary impact on the outsider decisions that we’ve made, that I’ve articulated earlier, which are increasing our credit requirements, credit score requirements, reducing distribution, being more selective with the customers that we bring in. As I mentioned earlier even on the boost unlimited side, as we increased prices to improve customer lifetime value and so we are really focus on higher value subscribers. Simply, everything has been extremely successful but it’s about a $100 a month price plan so it’s very successful but it’s targeted at a very high value customer.

I will say though, in terms of kind of overall economic impacts, I think what we’re seeing in the market generally is we’re going to have some slight benefits, I think, in turn because there’ll be fewer customers moving between carriers in this environment because there’s some investment required so which I think will over time a little bit reduce the number of customers out there that think to go after on the gross outside so we’re really focusing on making sure that our uniform profitability perspective, focusing on customers staying with us.

You raised the final question with perspective to how do we get back to growth, I think no question; we have to be effective both in inquiring new high-value customers -not just customers in general- and reducing churn even though we’ve made tremendous progress in reducing churn to under 2 percent, which is a big milestone for us this quarter. We’ve still roughly two times the churn level of the major carrier, so we still have a lot of room to improve over time in reducing churn and that’s goal number one.

Daniel Hesse - CEO

Chris, on the second part of your question, the tower shell. That was just negotiated, there’s a lot of due diligence as still going on by the inquirer and all the accounting issues are straight out on that, so we’ll give more information on that as we get into the final sign-off in the deal and that may not be till September but we’ll talk about that later.

Chris Larsen

Ok, thank you.

Operator

Your next question comes from Will Power from Robert W. Berd and Company.

Will Power

Great. Thanks for taking a question. I got a couple of questions. First, on post-pay ARPU, you had a pretty solid stable number in Q2, I guess you had aluded to the expectation for greater prices on the second half of the year. I guess I’m just trying to better understand the sources of those pressures. Secondly, nice SG&A improvement in the second quarter how should we think about and where are the largest opportunities for future sequential cost improvements? Thanks

John Garcia

This is John Garcia. Let me talk about the ARPU stabilization, and within that number there’s a lot of movement going on in terms of greater stability because of simply everything. Simply, we’ve seen some customers move down to it, but we’ve seen a surprising number of customers move up to it and new customers sign up for it at a higher than expected rate. At the same time, we are seeing some overage go down because there are some mitigating factors and some seasonality that normally happens in the third quarter with less overage. It happens that we’ll drive it down a bit, but are very encouraged by the stabilization that’s happening there. We’re also encouraged by the number of high-value customers that were leaving us but are no longer leaving us but we still experienced some seasonal pressures, some kind of pressure that’ll have some downward pressure in the third and fourth quarters that we normally see, lessened by, again, the stabilization of simply everything.

Will Power

Okay.

Robert H. Brust

This is Bob, when the discussion on SG&A, we’re doing a lot of work looking at what the SG&A structure that the company should be is we move to the organization that Dan’s pushing the company to. I can see that we’ll continue to pursue heavily the delayering and the reduction in staff that has been announced here earlier. To get that all done, we’re looking at all facts, factors of spending. We’ve taken some actions on professional fees and consultancy and stuff like that; we’ll continue to push that, but it will be a little while to get into the 2009 budget process before we have some really good ideas on that.

Operator

Your next question comes from John Hadulik from UBS. Your line is open

John Hadulik - UBS

Thank you. Good morning. I want a quick clarification on the previous question on the iphone. You mentioned that you expected something prescient in involuntary churn because the seasonality’s down in the third quarter. That suggests that you’re not going to see an increase in voluntary churn in the second quarter given what you’ve seen thus far from the iphone.

Secondly, it looks like the equipment costs were a little bit higher than we expected, despite the fact that gross adds were a little high. It seems that the cost per gross add is ticking up. Is that because of the instinct or a higher upgrade rate? If you could add some color to that it would be great.

John Garcia

This is John Garcia again. Let me talk on the subsidy piece. We are seeing increases in upgrades among our customer base which drives up some subsidy cost. We are seeing a higher mix of PDAs. That’s offset by lower gross adds than we’ve had in the past because of our higher level of selectivity, so that’s ticking it up a bit. We believe, however, that these are great investments as we look at the total value of the customer -- higher ARPU, less churn - so we believe those are good individual investments.

John Hadulik - UBS

You think that this level of equipment spend per gross add is a good pace going forward?

John Garcia

Yes, I think that’s a pretty good pace.

Going to the question on the iphone - last year we didn’t have the instinct. This year we do, and we’re very proud of the phone. Although we’re seeing some poor add activity increase, we think it’s greatly muted by what the instinct is doing for us. The instinct, by the way, is in the same class as a PDA in terms of subsidy, and we are seeing a good percentage of our customers go to that.

Just as importantly, we are seeing a high level of upgrades go to the instinct. Again, when somebody upgrades a phone they sign a new contract. We’re seeing also higher ARPU take rate of existing customers when they switch to the instinct, and so that stabilizes ARPU, increases ARPU with the base, and increases the loyalty of the customer because of the extended contract. It’s on a brand new 3G network about a fifth the size of ours.

The value that Dan talked about earlier in terms of what customers have to pay AT&T versus Sprint for a complete package is a dramatic difference, so we think that the impact of the iphone has been muted. Certainly, it’s there and it will have an effect on voluntary churn just like all carriers see seasonally in the third quarter.

John Hadulik - UBS

Great, thanks John.

Operator

Your next question comes from Simon Flannery from Morgan Stanley. Your line is open.

Simon Flannery - Morgan Stanley

Good morning. I would like an update on the next direct connect. You’ve launched the new handsets. You’ve had it going for several weeks now. Can you give us a sense? I don’t know if you’re able to share any numbers at this point or any user experiences. As we go forward into the next couple of quarters, how are you going to approach the Nextel or the Legacy add-in base with this product? Are you going to aggressively try to migrate people across or focus on if people are happy on that network just keeping them there?

Tim Donahue

In regards to performance, this device is pretty much in line with our expectations. Dan hit the fact that the performance is basically a part of what we’re seeing on the items themselves. As far as the portfolio going forward, he’s looking at what the needs of the customers are overall. There’s some differential in regards to the network performance, but overall the items pretty much work in parity, so we’re not positioning them necessarily as one over the other one. They choose based on their needs for those devices, whether they’re rugged or non-rugged.

Simon Flannery - Morgan Stanley

Are we likely to see item losses or the migration across to CDMA? Is that going to accelerate? I think you said the pace actually slowed down this quarter, but is that pace going to be fairly stable over the next few quarters?

Tim Donahue

In terms of the migration of subs, about 40% of the subs coming off the Iden network went to the CDMA network. That’s very much in line with recent quarters, Simon.

Simon Flannery - Morgan Stanley

So Qchat’s not really going to change that.

Tim Donahue

Qchat was launched late in the quarter, in June, and was introduced gradually in the markets where the coverage of CDMA and EVDO matched the Iden coverage, again with the customer experience of very front and center on the mind of our sales reps, on our customer service agents. That's how we're pursuing the approach to NEXTEL Direct Connect on CDMA or on IDEN.

OPERATOR

Our next question comes from David Arden from Bank of America Securities. Your line is open.

David Arden - Bank of America Securities

Hi. Thanks a lot for taking the question. Just two if I could really quickly. First, obviously you have the industry leading data ARPU penetration and the CDMA base. I imagine a lot of that is coming from simply everything and migrations to those types of plans. I guess on the one hand can you talk about how you allocate voice versus date ARPU when you are talking about these bundled plans and I think it's at 27 - 28% penetration of date revenues, how much upside is there? The second piece of that question was simply on everything. Obviously you seem to be pretty satisfied with how that has developed. I guess my question would be on elasticity of demand. Do you see that if you maybe raised prices five dollars or lowered prices five dollars on these plans that you might be able to move the needle in an advantageous way, or are you in the "sweet spot" right now with how you structure your prices. Appreciate it.

Steve Borostick

Okay. Thanks Dave. Steve Borostick here. On the allocation on data and voice, when we sell our bundled voice and data plan, were allocating roughly 30% of the monthly charges towards data. And for part two of the question regarding elasticity demand, Dan has the answer.

Daniel R. Hesse - CEO

Hi David. Well, the old adage; if it's not broken don’t fix it. And right now I think we have hit a sweet spot. We're at a really good place we think in the pricing of our plans. We have considered it, but right now we're not planning to make any changes in our offers so I can't give you specific information with respect to the elasticity, but we believe that again, there's a lot of value with respect to our customers but it's also profitable for Sprint, so we're in a really good spot.

John Garcia

Dan if I may, this is John Garcia. Now one of the changes we are considering making is the elimination of the $89 plan that doesn't have data in it. The take rate on that is less than 1% of all of the customers taking it and so we believe that the elasticity at $99 where you'd normally have a kink in the curve around below 100 is truly a nice place to be and when you take the data out even with the ten dollar discount, customers aren't attracted to it so I think this really gives a lot of resonance to the fact that we are about being the best wireless data network. Customers see the value in that and willing to pay the extra money for it, and so we're very happy with where we are on the price plan.

David Arden - Bank of America Securities

Thanks. That's helpful.

Operator

Our next question comes from Rick Prentus from Raymond James. Your line is open.

Rick Prentus - Raymond James

Good morning. A couple of questions for you. Dan, first on the Churn, you mentioned obviously a significant focus on retention but a lot of room to go as far as getting churn levels down to kind of the national peers. What do you think it takes? Is it just time, is it more initiatives? Typically in the industry network quality's been the number one reason for churn but you talk about having the great statistics. What do you think it takes to keep driving churn down and over what kind of time frame should we look for that?

Daniel R. Hesse - CEO

Good question. I think it's going to require us just to continue to execute better in the areas that I covered on the call. We have a company wide effort to reduce churn, so we're seeing improvement as I mentioned in CARE and the CARE experience. What's most important, though is that we drive the reasons call CARE down because that's a dissatisfier, so in terms of CARE experience or experience once a customer is with us, we're giving them fewer reasons to call, and most importantly when they call CARE and that's why we have so much focus and compensation associated with first call resolution. They just want their issue resolved. So our customer sat. levels if you will, are up across the company. They are up in CARE, they're up in retail, they're up in telesales.

Secondly in retail, what's important is that, you know as I mentioned earlier, we reduced call set-up errors and we've also incentivized the people in our stores, as I mentioned we'll be rolling out to our indirect and our national partners. We're incentivizing them more to focus on providing a great customer service to our existing customers and less focus on gross ads. I also mention that our IDEN and our CDMA networks are performing at best levels ever, you're exactly right it's a very important driver of churn, an important churn issue.

So, as we mentioned we have a 30 basis point improvement on the Iden side and even a larger improvement on the CDMA side so we continue to need to focus on that performance and then lastly, offers like the Instinct, Simply Everything plan, is extremely important as well. So really what we have is a broad corporate effort across all parts of the company to make this job one; improving the customer experience and reducing churn, and it is going to take continued hard work across the company to do that and that is the plan. It will take us time to get to the levels we would like, which is to be comparable with the big 'two'.

Rick Prentus - Raymond James

Bob, on the balance sheet side; which is obviously a big focus for you. Can you talk a little big about the growth debt reduction of one billion dollars in Q3. I guess the Tower Deal will close in Q4 so that won't help it, but what will allow you to get the gross debt down by the billion dollars? I know you can't talk much about the proposed private placement of the convert; but what was the rationale for the timing of the announcement for doing that proposed deal?

Robert H. Brust - CFO

Well we ended up in Q2 with 3.5 billion dollars in cash and comparable line of credit, and as I said in my talk, it looks like the second half of the year will be pretty good on free cash flow. So, the decision is we will try to take out of those proceeds at least one billion dollars to reduce that during Q3 to take some of the pressure off that load. But it will come out of current operations, that billion dollars.

Rick Prentus - Raymond James

In terms of the timing for the three billion dollars proposed convert?

Robert H. Brust - CFO

I can't talk about that, sorry.

Operator

Your next question comes from Mike McCormack from JP Morgan. Your line is open.

Mike McCormack - JP Morgan

Thank you. Maybe Dan, you could make a comment on when you get turn levels -which obviously will be a long-term process - down to the levels where you want them to be, how do you then revamp the gross ads without using the credit quality as a tool there? Secondly, last quarter you mentioned the use of customer credits, to try and have some retention policy on that. Could you give us an update on whether or not that had an impact this quarter?

Daniel Hesse - CEO

Mike, thanks for your questions. Let me take them one at a time. I think that we clearly do need to focus on high quality customers going forward and ramp gross ads up. That's why we're focusing on differentiating ourselves and having a very clear brand message around the Now network, and we have to execute very well around that. So we provide, if you will, handsets like the Instinct that are unique and different and better; innovative pricing plans like Simply Everything, a lot of proof points; we are reinvigorating Iden, so we think in essence, the same messages, a lot of them that are so appealing to existing customers - we have to do a better job at having those same messages appeal to non-Sprint customers and what we are finding is that, so for example I mentioned things like MWI, there is a lag, if you will, in terms of brand performance.

We have more opportunities to communicate clearly with our customers; we have more opportunities to do that than with non-customers, so there is a lag there. But we believe that this is why the brand is so important. I talk about the three priorities which are number one the customer experience and that helps us reduce turn, number two, the Now network and improving the brand; that appeals to both our existing customers but very importantly to the new customers and then profitability. So it's really that second area around brand that is going to be important because we believe that - again - the focus on these high-value plans and the focus on data and the growth in data and the uniqueness of a lot of our offers will very much appeal to new prime customers. But we need to make the brand healthier.

In terms of your second question on customer credits; we have not made any changes to our customer offers, versus historical offers.

Mike McCormack - JP Morgan

So just to go over your first response, are you thinking this is a word of mouth improvement of gross, or is there something to do from an external marketing standpoint?

Daniel Hesse - CEO

Very much both.

Mike McCormack - JP Morgan

Ok. Thanks for the answers.

Daniel Hesse - CEO

Thank you Mike.

OPERATOR

Our next question comes from Craig Moffit from Stanford C. Bernstein. Your line is open.

Craig Moffit - Stanford C. Bernstein

Good morning. Dan, during the quarter you sent a quarter to your customers reaffirming your commitment to the Nextel Iden network. Should we assume that any consideration of spinning off the Iden network is now off the table and that you're fully committed to keeping it and fixing it in-house?

Daniel R. Hesse - CEO

What I've said before, we're still consistent, and that is we are committed to improving our service levels on the IDEn network. That's why the IDEN network is performing at its best levels ever. We're continuing to bring out new handsets. Of course Iden churn is coming down as a result of that, so we're very committed to our customers on iden and making that a great experience. But what I've also said is, since I've taken this job, that every option is on the table, and every option will continue to be considered.

Craig Moffit - Stanford C. Bernstein

O.k. Then one follow-up if I could. You've spoken quite a bit about how successful the instinct in particular has been. Has that success with the instinct been affected at all directly by the IPHONE or could you comment at all about how the instinct is doing relative to, in the period since the IPHONE showed up in the AT&T stores?

John Garcia

Excuse me, this is John Garcia. You know, we believe there's a new class of handsets that go just beyond the PDA and they're really made distinctive by usability, and the IPHONE is clearly in that class and we believe the INSITNCT is clearly in that class. So what we think the INSTINCT and the IPHONE have done is they've opened up the possibility of what data can do for you in a mobile environment and that really is a great thing for Sprint in that we are best at that.

You know we have the highest data ARPU, we’ve got the best network optimized for data and so the more customers think about data, and its really driven by usability, worry free pricing and great content, that's all an advantage for Sprint. And so the choice of the now network and really being data focused is about where we believe, not only where we perform extremely well because of our network assets, but what we believe the market is going to become and it's going to become more than just voice. Clearly you have to have great voice to compete at all, but data is where this market is going, we're well positioned for it, and we believe as we begin to bring more points around the NOW network beyond just speed, usability, worry free pricing and great content, that handsets will play a great roll in accelerating that. The IPHONE had done it, the INSTINCT has done it, and later this year we'll introduce some Microsoft phones that we take usability up to a new level of usability so that more and more customers will be less afraid to try it. They'll realize the benefits of it. I'm sure everybody on this call uses their phone more for data than they do for voice and we think that's a trend that's only in one direction and that's more of it, and we're well positioned to take advantage.

Craig Moffit - Stanford C. Bernstein

But John, does that mean that the IPHONE is helping the INSTINCT if I parse your answer?

John Garcia

I think it's part of a momentum to more data usage and it's rising the level for all of the phones that can compete in that category.

Craig Moffit - Stanford C. Bernstein

O.k. Thanks John, thanks Dan.

OPERATOR

Your next question comes from Jason Armstrong from Goldman Sacks. Your line is open.

Jason Armstrong - Goldman Sacks

Good morning. Thanks for taking the question. You know, Dan, without getting into any of the deal specifics, I'm just wondering from a high level if you can talk about how this financing impact the company strategy. I think the perception in the past was that Sprint may not have had the same flexibility around price plan, their subsidy levels because there was covenant over hanging. You know today's announcement at least initiates a path around that type of overhang. So should we be thinking of this as really an invent in your mind that lists an overhang on your ability to compete more aggressively either on service plan pricing or hands on subsidies. Any comments there?

Steve Borostick

Hey Jason, this is Steven pre-empting here. I guess you tuned in late and missed my introductory comments but we will not be answering any questions on today's proposed private placement. Do you have a follow-up question?

Jason Armstrong - Goldman Sacks

O.k. Thanks Steve. Let me try one other one. Cut back scuts in terms of where we're trending for the year. Sort of trending sub 10% of revenues in wireless. It's a good range to think about going forward and then when you think about what drove the levels we're getting to now, can you review for us what mission critical capital spending versus what's more discretionary and allows you to move the needle here.

Steve Borostick

Jason, we have been monitoring our networks, and we’ve been reporting to you on best ever metrics on call blocks, drops, voice quality, and trouble tickets per subscriber. Every metric we see on the CDMA and Iden network is moving in the right direction. We have adjusted our capital spend this year, as we said, to reflect the cessation or largely wind-down of several key projects in 2007, which were geographic expansion, EVDO initial build out, UVP, etc.

We are investing the dollars that are required to achieve the objectives that we’ve laid out for the organization. Again, the primary focus of those dollars is retention.

So I think that’s all we have to say on the capital front.

Jason Armstrong - Goldman Sacks

This is sort of a good run rate to think about going forward. It’s not like this is a trough year in capital spending from your perspective?

Unidentified Company Representative

I think the capital plans are under continual review based on subscriber and usage trends. It obviously depends on where the demand comes from - the geography, the voice, the data category, the platform. We continually review those plans.

Our guidance was for the segment level that wireless capital spend would be comparable in that the first half would be a good comparable number for the second half, and the same thing on the wire line platform.

Operator

Your next question comes from Michael Roland from City Group Investment Research. Your line is open.

Michael Roland - City Group Investment Research

Thanks for taking my question. If you look at churn based on customer tenure, can you describe where the churn improvement’s coming from with respect to how much of the improvement is from the early life churn cycle, versus how much is coming from the tails of churn? For example, for customers who have been with you for at least one year or customers who have been with you for at least two years?

Daniel Hesse - CEO

Thanks, Michael. Dan here. We’re seeing improvements across the board. We’re not going to provide too much detail, but I will say that a very substantial element of the improvement is an early life churn. That’s why we’ve focused so much on the front end, as I was describing, making sure that we have the order correct at the point of sale. This is why we’re being proactive early to make sure the customer is satisfied and to eliminate any issues that the customer may have. We’re seeing a disproportionate improvement, if you will, in early life churn. But we’re seeing improvement across the board.

Michael Roland - City Group Investment Research

I want to follow up with some of your comments on the marketing front. Can you also give us a sense of your productivity and marketing by describing what you’re seeing on subscriber acquisition costs as you look at that on a per gross add basis?

John Garcia

This is John Garcia again. A lot of things go into our per gross add basis, including our advertising spend and our subsidy expense. As we look at the available sales that are out there, as everybody else’s churn goes down, although it’s tempting to want to spend more on advertising, you have to mitigate that against what you believe is prudent to spend in that particular quarter.

We are trying to avoid taking the “drunken sailor” approach of just spending until we run out of budget. You time your spending seasonally, based on when the gross adds are available and what products you have to sell. Those expenses fluctuate a bit over the year. Sometimes it’s not healthy to look at a quarter-by-quarter spend. It’s also mitigated by the rising cost of handsets as more and more people go to PDAs.

Operator, is that our final question?

Operator

Yes, it is.

John Garcia

Thank you. Thank you everyone for participating in Sprint Nextel’s Second Quarter Earnings call today. If you have additional questions, please call our Investor Relations number at 1-800-259-3755.

Operator

This concludes today’s Sprint Second Quarter 2008 Earnings Release Conference Call. You may now disconnect your lines.

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