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Executives

Brad Hampton

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

Steven L. Elfman - President of Network Operations & Wholesale

Joseph J. Euteneuer - Chief Financial Officer

Analysts

Philip Cusick - JP Morgan Chase & Co, Research Division

David W. Barden - BofA Merrill Lynch, Research Division

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

Jonathan Chaplin - New Street Research LLP

Brett Feldman - Deutsche Bank AG, Research Division

Kevin Smithen - Macquarie Research

Sprint Nextel (S) Q3 2012 Earnings Call October 25, 2012 8:00 AM ET

Operator

Good morning. My name is Christie, and I will be your conference operator. At this time, I would like to welcome everyone to the Sprint 2012 Third Quarter Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to turn the call over to Brad Hampton, Vice President of Investor Relations. Mr. Hampton, please proceed.

Brad Hampton

Thank you, Christie. Good morning, and welcome to Sprint's Third Quarter 2012 Earnings Call. On today's call, Dan Hesse will discuss operational performance in the quarter; Steve Elfman will provide an update on Network Vision; and Joe Euteneuer will cover financial results. After that, we will open up the call to your questions.

However, due to securities law issues relating to the pending transaction, we will only address questions related to the ongoing business and not with respect to the pending SOFTBANK transaction or M&A-related questions. Under the merger agreement, a preliminary proxy statement with respect to the transaction is expected to be filed by the end of November and it will contain a complete description of the merger and related matters. We appreciate your understanding of and cooperation regarding this issue.

Before we get underway, let me remind you that our release and the presentation slides that accompany this call are both available on the Investor Relations page of the Sprint website.

Slide 2 is our cautionary statement. I do want to point out that in our remarks this morning, we will be discussing forward-looking information, which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review, including our annual report on Form 10-K, and when filed, our quarterly report on Form 10-Q for the third quarter of 2012.

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

Let's move on to earnings per share on Slide 4. Basic and diluted net loss per common share for the third quarter were $0.26 compared to $0.46 in the second quarter and $0.10 in the year ago period. There were a couple of noteworthy items impacting EPS this quarter that I'd like to cover. First, the loss per share in the current period included incremental depreciation expense of $397 million or negative $0.13 per share, primarily due to accelerated depreciation expense related to the expected shutdown of the Nextel platform. Our expectation for accelerated depreciation in Q4 is similar to that of this quarter, and we expect total depreciation for the fourth quarter of approximately $1.5 billion. Accelerated depreciation for 2013 is expected to be disproportionately weighted toward the first half of 2013 due to Nextel assets being fully depreciated by the middle of 2013.

The current period also includes $22 million or approximately negative $0.01 per share for lease exit costs, which are the net present value of remaining lease obligations associated with certain Nextel platform cell sites, which were taken off air during the quarter.

In the third quarter, we shut down approximately 1,300 Nextel platform sites, bringing the total number of sites shut down to approximately 9,600 in 2012. However, locations from which we may continue to gain future economic benefit, including co-located sites, were not included in this charge and represented approximately 39% of total Nextel sites shut down during 2012. We estimate that absent the actions taken to terminate leases in the second and third quarters of 2012, rent expense would have been higher by approximately $38 million for the third quarter and approximately $85 million for the full year 2012.

Net tax expense was $47 million in the third quarter, primarily related to state taxes. For the full year 2012, we continue to expect our net tax expense to be approximately $150 million to $200 million.

I will now turn the call over to Sprint's CEO, Dan Hesse.

Daniel R. Hesse

Thank you, Brad, and thank you for joining us this morning and for your continued interest in Sprint. As Brad mentioned, today's call is about our performance in the third quarter. Our 3 priorities continue to be the customer experience, our brand and cash. But as I have mentioned in previous quarters this year, because of our heavy investments in our investment phase, our #1 priority in 2012 is cash.

Turning to Slide 6. Adjusted OIBDA of approximately $1.28 billion exceeded both our internal projections and Street consensus for the fifth consecutive quarter. Although our adjusted OIBDA margin at 16% is not yet where we want it to be over time, we are pleased with this quarter's results given the dilutive impacts of our 2 major investment areas, Network Vision and the iPhone, including the launch of the iPhone 5.

We continue to be pleased with the performance of our Sprint platform business. Postpaid ARPU for the Sprint platform is up 5% year-over-year, and we achieved our best ever third quarter results for Sprint platform postpaid churn at 1.88%. Total prepaid churn of 3.37% is our best performance for any quarter ever and represents our 15th consecutive quarter of year-over-year improvement.

In the first half of 2012, we recaptured 55% of the postpaid customers leaving the Nextel platform, double our historic performance level and a level we did not believe we could sustain in the second half. I'm pleased to report we recaptured 59% of departing Nextel postpaid customers in the third quarter.

We had a successful launch of the iPhone 5 and again achieved an industry-leading 40% gross add mix across all of our iPhone activations in the quarter.

We also made solid progress on Network Vision deployment. We now have over 20,000 cell sites with zoning and leasing complete and over 13,500 now under construction or ready for construction.

Finally, based on the performance of our business, we are again increasing our adjusted OIBDA forecast for the year, and we now expect to slightly exceed the top end of the range of our 2012 adjusted OIBDA forecast, which we raised significantly a quarter ago.

If you'd please turn to Slide 7, I'll organize the balance of my comments around our 3 overarching priorities. Let me begin with cash. As you recall, we are in the second phase of our turnaround where we are investing in Network Vision and the iPhone, investments we expect will provide us with margin growth in Phase 3. We have now entered the cash burn quarters of the investment phase with CapEx ramping up to $1.49 billion this quarter. We ended the third quarter with cash, cash equivalents and short-term investments of $6.3 billion. As you have read, earlier this week, Sprint received $3.1 billion of additional cash as a result of a convertible bond offering to SOFTBANK.

Please turn to Slide 8. Delivering solid operational profitability, as measured by adjusted OIBDA, is our #1 priority as we work through these heavy investment quarters. We delivered better-than-expected adjusted OIBDA as we benefited from continued year-over-year ARPU strength in both our postpaid and prepaid Sprint platform wireless businesses. Sprint platform postpaid ARPU is up $3 or 5%, and prepaid ARPU is up $0.84 or over 3% year-over-year. Total postpaid ARPU is at its highest level in over 6 years. On a consolidated basis, total net operating revenue is up over 5% compared to the year ago period. This quarter represents our ninth consecutive quarter of year-over-year growth in net operating revenues.

Please turn to Slide 9. We continued our disciplined approach to subscriber acquisition in the quarter. As I described last quarter, we are continuing to prioritize the recapture of our Nextel subscribers over traditional customer acquisition spend because of the efficiency of a lower cost for recapture of over $200 per customer versus the cost for acquiring a new customer in the marketplace. As I mentioned, our 59% recapture rate topped expectations in our strong performance for the first half of the year. As we work toward a complete shutdown of the Nextel platform anticipated for the middle of next year, we are making good progress in moving customers off the platform. As of the end of the third quarter, we are down to 3.1 million subscribers on the platform, down from 7 million a year ago. Even though we added nearly 900,000 customers to the Sprint platform this quarter, we reduced the iDEN base by over 1.3 million customers this quarter, so total company subscribers declined by 423,000 in the quarter. This 30% stimulated decline in the size of the Nextel subscriber base in 1 quarter is, by far, the largest ever. The previous 2 quarters' declines were 18% and 13%, respectively, and before that, the decline had rarely been above 10%. In absolute terms, the loss is the largest since the first quarter of 2008.

Loss of iDEN platform customers pressures our top line results. But clearing the Nextel platform so we can shut down the network and harvest the spectrum are key elements of our plan to reduce expenses and grow margin in future periods.

The iPhone benefits both the customer experience and the brand. In spite of a slowdown in iPhone sales early in the quarter as customers anticipated the launch of the iPhone 5, as you can see on Slide 10, we activated approximately 1.5 million iPhones in the third quarter. As I've said, the most important near-term financial indicator of success with the iPhone is the percentage of activations that are new customers to Sprint because they represent a new source of revenue. In the third quarter, 40% of our iPhone activations were new customers, in excess of our competitor's historical results, and our fourth consecutive quarter at or above 40%.

Early-life iPhone customer experience metrics are encouraging. To date, we are continuing to observe materially lower early-life voluntary churn rates for iPhone customers compared to other smartphone customers and lower support costs as measured by calls to care and device service and repair costs. The operational performance, so far, continues to validate our decision to invest in the iPhone. And we are also ahead of the pace required to meet our contractual commitments to Apple.

Turning to Slide 11 and the customer experience. I am pleased to report that Sprint customers continue to enjoy an industry-leading experience as reflected by our #1 ranking in the American Customer Satisfaction Index. This quarter, we received 2 J.D. Power awards that attest to the improvements we've made in the customer experience over the last 4 years. The Sprint brand is now ranked highest in satisfaction with the purchase experience among full-service wireless providers for the third consecutive time and the Virgin brand is ranked highest in satisfaction for customer care with noncontract wireless service for the second consecutive time.

The improved customer experience at Sprint continues to manifest itself in our churn performance. Sprint platform postpaid churn was our best ever for a third quarter, and Sprint platform prepaid has delivered year-over-year improvement in churn for each of the last 12 quarters. While the Assurance brand churn benefited from some regulatory changes to the subscriber base eligibility validation process in the third quarter, both the Virgin and Boost, Sprint platform churn rates are down materially year-over-year. Our total prepaid churn set an all-time best record this quarter.

Turning to Slide 12. One aspect of our brand I am particularly proud of is the progress we're making in sustainability. Corporate social responsibility is a hallmark of the Sprint brand. Newsweek's ranking of the greenest companies in America was released this week, and again, Sprint was named the third greenest company in the United States. Again, we're the only telecom carrier to make the top 25. This quarter, we were also named to the Dow Jones Sustainability Index North America as the Mobile Telecommunications Sector Leader for the second year in a row.

Please turn to Slide 13. Driven by the improvements in the customer experience and the brand, the Sprint platform continues to grow. In the quarter, we reached 52.9 million customers served on the Sprint platform, our all-time highest level. This is our 11th consecutive quarter of posting net subscriber additions on the Sprint platform. When measured by net adds over an 8-quarter period as a percentage of the customer base, the Sprint platform is the fastest-growing postpaid brand among the national carriers in spite of not having the iPad, a major contributor to the net add performance of our competitors. On Tuesday, we announced that Sprint will carry the iPad Mini and the fourth generation iPad, which, we believe, will aid our subscriber performance going forward.

Finally, on Slide 14. In addition to the highly successful iPhone 5, we continue to grow our portfolio of LTE devices, including 3 additional new LTE smartphones in the quarter. Additionally, we are continuing to innovate in service offerings, including the Uconnect vehicle connection offering with Chrysler, our new bring-your-own-device offering for business and the cloud-enabled Microsoft 365 offering for small and midsized businesses.

So in conclusion, the third quarter represented a quarter of solid execution with particular focus on 3 areas: number one, cash as we increased our adjusted OIBDA forecast yet again; number two, recapturing as many Nextel customers as possible with a recapture rate that exceeded the year's first half; and number three, implementing Network Vision, which Steve Elfman will now give you an update on.

Steven L. Elfman

Thank you, Dan. I'm pleased to discuss our continued progress on Network Vision during the quarter. Please turn to Slide 16. In the third quarter, we continued to make strong progress with the Network Vision pipeline. The pace of Network Vision has accelerated and we continue to be confident in the technology and the benefits. We now have zoning complete on over 21,500 sites and leasing complete on over 20,000 sites, more than 55% increase over Q2 for each. Over 13,500 sites are ready or have already begun construction, an increase of more than 115% over the second quarter. Our weekly construction starts are now up more than 250% from Q2, and sites completed per week is now up over 200% from last quarter. We've expanded the number of cities under construction to over 200, and we have now launched LTE in 32 cities with more than 115 expected to launch in the months to come. We now have nearly 4,300 sites on air, more than double where we were 3 months ago.

Throughout this process, we've talked to you about the fact that we've been working with our vendors and pushing them very hard to achieve the goal they committed to at the beginning of the year. While we're encouraged by the momentum of the project, we have been seeing some delays from our vendors, largely related to logistics execution and material shortages as well as some delays related to the hurricanes in the third quarter. And now, we believe, we're approximately 1 quarter behind in hitting the 12,000 target.

The delay during the front end of the project has not meaningfully changed our expectations of timing or cost of the project. We have all hands on deck and are laser-focused on deploying as quickly as possible in order to bring the benefits of LTE and enhanced 3G to our customers.

As we discussed with you in the past quarters, we are strategically launching LTE markets early, so we can let consumers know that Sprint's LTE is available in their neighborhood or coming soon as they make decisions and can provide them an enhanced and continually improving performance as we build new sites.

Turning to Slide 17. During the quarter, I was very pleased with our strong execution and progress on the elimination of the Nextel platform. We are well on pace to have the platform shut down in mid-2013 and expect margin benefits in the second half of the year. Following our completion of the thinning of 9,600 sites in July, we have completed access disconnects and powering down of all equipment for virtually all of those sites during the third quarter. We are already starting to see the financial benefits from these actions, which Joe will review in a few minutes.

As Dan said, we recaptured 59% of the Nextel platform postpaid customers during the quarter, which continues to beat our expectations. At the end of Q3, we had nearly 1.2 million Sprint Direct Connect customers, and we are pleased with the performance of the product. We are encouraged with the progress we are seeing in our negotiations with our large business customers and I'm pleased to say that we have already confirmed migration agreements with several large accounts. Our continued success in the Nextel platform conversion reinforces our expectations of margin benefits in the latter part of next year.

The third quarter has been a quarter of steady execution of Network Vision. We continue to exceed expectations on the Nextel platform and the progress we are making there is yielding benefits. Our pacing on Network Vision build continues to gain momentum, and we are bringing LTE to new customers daily. I will continue to push our vendors and my team everyday to improve execution and accelerate our pace.

I look forward to updating you next quarter. I'll turn over to Joe to update you on the financial results.

Joseph J. Euteneuer

Thank you, Steve, and thanks, everyone, for being here today. As I laid out for you at the beginning of the year, my ongoing priorities for the business are in 3 areas: the growth of subscribers and revenues in our core Sprint platform business, strong recapture of Nextel customers to the Sprint platform and overall profitability in our execution. These are the most important areas of execution for future financial strength, and I am pleased to report we continue to yield solid results in each area.

First, our focus on the growth of subscribers and revenues in each -- our core Sprint platform business has resulted in an increase in the total customers on the Sprint platform of nearly 900,000 in the quarter and 14% year-over-year growth in wireless service revenues.

Second, our 59% recapture rate of postpaid Nextel customers to the Sprint platform in the third quarter continues to exceed our expectations.

And finally, we continue to achieve adjusted OIBDA results above expectations because of our focus on disciplined growth and profitability.

Moving to Slide 19. Our Sprint platform postpaid business continues to show strong growth in both subscribers and revenues. Sprint platform postpaid net adds grew by 55% year-over-year as a result of our strong recapture rate of Nextel subscribers. While Sprint platform postpaid gross adds were down year-over-year in an environment of lower industry decisions, they were up nearly 6% sequentially. This is despite our ongoing focus on Nextel recapture rate rather than external, more costly acquisition. As we entered the third quarter, we realized that industry decisions would be delayed in advance of the iPhone launch at the end of the quarter, so we chose to conserve our marketing dollars and continue to focus on recapture. With our current powerful device lineup, including our upcoming launch of the iPad in November, you'll see us seasonally increase some of our external marketing efforts in the fourth quarter.

It is the focus on the Nextel platform that allowed us to recapture nearly 60% of postpaid Nextel customers to our ongoing Sprint platform business in both of the last 2 quarters. This success gives us the confidence to raise our expected recapture rate for Q4 to over 45%. However, as we have previously stated, we fully expect the recapture rate to decline in 2013.

As we have discussed with you in the past few quarters, the majority of the recaptures we've achieved have come from consumer and small business accounts, which are less complex. We continue to work with our larger business accounts, and as Steve said, conversations are progressing well. At the end of the third quarter, approximately 1.8 million of the 2.3 million remaining postpaid customers on the Nextel platform were business accounts. While our work with our business customers is going well, we continue to expect that the recapture rate will be choppy as our customers make decisions and we approach the complete shutdown of the Nextel network.

One of the most important things we can do to create long-term margin improvement is to clear customers off the Nextel platform. We're also starting to see expense benefits of the thinning project in our results. Power-related expenses for the Nextel network declined by over $40 million sequentially, largely due to reduced rent, which benefits OIBDA only, and utility expenses, which benefit both OIBDA and cash. These benefits will increase once we are able to shut down the remainder of the network mid-next year, so we are very focused on achieving that goal.

We also achieved our best-ever third quarter Sprint platform postpaid churn of 1.88%, which shows steady progress on this key metric despite some impacts we have seen related to our network, which should be expected with any major network build. While we do expect some hiccups with churn along the way as we work to execute rapidly on the Network Vision project, churn will be an ongoing focus for our business and we expect to see churn benefits from enhanced network quality when the build is complete.

As I indicated on last quarter's call, Sprint platform postpaid ARPU of $63.21 was down slightly on a sequential basis, but remained historic highs and grew 5% year-over-year due to the continued penetration of our premium data add-on charge. 81% of Sprint platform postpaid handset sales in the third quarter were smartphones, and approximately 73% of the Sprint platform postpaid handset base now have smartphones. As I discussed with you last quarter, the success of our Nextel recapture efforts manifests itself in some ARPU dilution on the Sprint platform through the assimilation of lower ARPU subscribers into a higher ARPU base. While our high rate of recapture causes some dilution to the Sprint platform ARPU in the near term, as I said, many of these customers are increasing their ARPU as they purchase smartphones so the recaptured customers are actually accretive to the total postpaid ARPU, which, at $61.18, was the highest postpaid ARPU we have had in over 6 years. We expect that ARPU on the Sprint platform will resume sequential growth in Q4 as we believe some of the smartphone purchasing decisions in Q3 were pushed to Q4 due to the late launch of the iPhone in the quarter.

Moving to Slide 20. Our Sprint platform prepaid business also continues to grow. We added 459,000 customers in the quarter and posted our best ever third quarter Sprint platform prepaid churn, up 2.93%, as we saw year-over-year improvements across all of our prepaid brands. These strong results supported the growth of Sprint platform prepaid revenue, which grew 6% sequentially and 28% year-over-year.

Regulatory changes continue to affect the Lifeline industry, which have impacted our Assurance net adds year-over-year as they are implemented. We also expect a onetime impact to our Assurance subscribers next year as we implement a recertification process of our Assurance base as of June 1, 2012. Customers who do not recertify by the end of this year are expected to churn off in the second quarter of 2013 in accordance with our normal prepaid churn rules. This process is expected to have a significant impact on customer accounts throughout the Lifeline industry. We continue to believe our Assurance brand is best in class.

Our wholesale and affiliate business continues to post solid results. We have now had positive net adds for 11 consecutive quarters and nearly doubled revenues from the year ago period. However, wholesale and affiliate net adds declined substantially from last quarter due to our prepaid resellers eliminating inactive accounts in the base, largely associated with Lifeline regulatory changes. We plan to continue working with our wholesale partners to eliminate inactive prepaid accounts in the fourth quarter.

Let's move on to our wireless operating expenses on Slide 21. Total wireless cost of service in the third quarter was $2.3 billion or nearly 31% of service revenues, which is a 3 percentage point gross margin improvement year-over-year even with incremental Network Vision dilution. We continue to see benefits in service and repair expenses, which are down year-over-year due to lower transaction volumes and higher refurbished replacement rates, mostly attributable to our industry-leading retail buyback program. As I mentioned earlier, we are also starting to see lower rent and utilities expenses on the Nextel network from the accelerated thinning project this year.

Our 3G roaming expenses in the third quarter also declined by 4% year-over-year. While it is still early in the build and we still have a lot of work to do, this is the first year-over-year decline we have seen in 3G roaming costs since the fourth quarter of 2009. Total wireless cost of service was slightly down sequentially as lower Nextel network expenses more than offset a seasonally high service and repair and 3G roaming costs.

Total wireless net subsidy expense for the third quarter was approximately $1.6 billion, an increase of $171 million sequentially and $481 million year-over-year. Higher subsidy rates on smartphones such as the iPhone, which was not in our device lineup in the year ago period, continue to be a challenge for the industry and ourselves. However, we continue to see the benefits from our decision to carry the iPhone show up in other areas of the business such as lower returns and exchanges, lower calls to care and lower early life churn. The sequential increase to net subsidy expense was primarily related to over 375,000 additional Sprint platform upgrades as we introduced 2 iconic Android devices at the end of the second quarter, as well as launching the iPhone 5 at the end of the third quarter.

Total wireless selling, general and administrative costs of $2.3 billion were flat sequentially and up slightly year-over-year. However, this increase was almost entirely related to an incremental $72 million of selling expense associated with direct-sourced iPhones that was not included in the prior year period. Prior to carrying the iPhone, Sprint sourced all phones to our channels and this expense was recognized as a subsidy. Excluding this expense, selling expenses had declined by 5% year-over-year, largely related to our continued efforts to increase volumes in our most cost-effective channels, which resulted in a 15% year-over-year increase in postpaid company-owned store gross adds and a 54% year-over-year increase in gross adds on our website.

Our disciplined growth strategy is also benefiting us with reducing bad debt expense as we maintain tight credit standards and are smart about our channel mix.

Bad debt expense as a percentage of total wireless service revenue were down from 2.4% to 1.8%, a 55-basis point reduction from the year ago period.

Please turn to slide 22. As I stated earlier, I am particularly pleased that our disciplined approach to growth is leading to strong adjusted OIBDA results. Consolidated adjusted OIBDA of approximately $1.28 billion was almost $200 million above consensus estimates. Wireless adjusted OIBDA of $1.1 billion was down approximately $100 million from the year ago period. However, the total estimated Network Vision impact to adjusted OIBDA was approximately $185 million during the quarter compared to approximately $30 million in the third quarter of 2011. This means that excluding the increased dilution from Network Vision, we have kept wireless adjusted OIBDA margins essentially flat despite the dilution of the iPhone. This result shows our continued focus on cost discipline. As Dan mentioned, the strength of our adjusted OIBDA results means that we now expect to slightly exceed the top end of our previously raised guidance of $4.5 billion to $4.6 billion for the year.

Now switching to wireline. Adjusted OIBDA for the third quarter was $158 million, a sequential increase of 6% and a year-over-year decline of 14%. The sequential growth was mostly related to smaller penalties in the third quarter for lower company-wide T1 volumes largely related to Network Vision. We remain confident in our wireline adjusted OIBDA guidance of approximately $600 million for the year.

Moving to cash and liquidity on Slide 23. We continue to make improvements to our liquidity and capital structure this quarter. We raised $1.5 billion in the debt markets and used the proceeds to retire $473 million of 2013 debt maturities and $1 billion of 2015 maturities. This leaves us with only $317 million of debt maturities due in 2013, less than $1.4 billion due in 2014 and approximately $1.6 billion due in 2015.

We ended the third quarter with a total liquidity position of $7.5 billion, including cash, cash equivalents and short-term investments of $6.3 billion and $1.2 billion of undrawn borrowing capacity under our revolving bank credit facility, which expires in October of 2013. We also have approximately $923 million of expected future liquidity from the secured equipment credit facility that we signed last quarter as we borrowed $77 million during the third quarter. We continue to expect to fully utilize the secured equipment credit facility as we progress through the Network Vision project.

In addition, this week, we received $3.1 billion from SOFTBANK related to issuance of a 7-year 1% convertible bond announced on October 15. We have substantially improved our capital position, and we believe we are well positioned to continue to execute on Network Vision and operational plans.

Capital expenditures were $1.5 billion excluding $52 million of capitalized interest and including approximately $1.1 billion of Network Vision capital. Network Vision capital was up 54% sequentially as the build continues to gain momentum. With the shift in timing of some of the towers on air into early 2013, we expect that we will also see a shift of some capital expenses and Network Vision adjusted OIBDA dilution from 2012 to 2013. We now expect capital expenditures for 2012 to be less than $6 billion excluding capitalized interest and rebanding. Rebanding expense, which is not included in capital expenditures, was approximately $43 million for the third quarter and we now expect approximately $200 million for the full year.

Free cash flow for the third quarter was negative $487 million, compared to $209 million in the second quarter and negative $273 million a year ago. Free cash flow in the third quarter was partially impacted by the increase in capital expenditures associated with Network Vision. We have now entered the cash burn period of our investment phase that we have anticipated for some time, and we expect to be free cash flow-negative for the next several quarters.

In closing, I am very pleased with the strong steady results that we continue to produce as we execute on Network Vision and we move through our investment phase. With many exciting developments for Sprint in the coming months, I want to emphasize that our discipline and focus on profitability will not change. Throughout the year, as we have embarked on the investment phase of our turnaround, we have kept a razor-sharp focus on disciplined, profitable growth and that focus continues to show results. These benefits are allowing us to, once again, raise our adjusted OIBDA guidance to slightly exceed our previously raised guidance. I am proud of the team, and we will continue our focus and discipline as we move forward and execute on our plan.

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

Brad Hampton

Thank you, Joe. In just a minute, Christie will instruct our listeners on how to queue up for the Q&A session. I do want to point out that you may access an audio replay or a webcast of our presentation on sprint.com/investors. We will now open the line for your questions. Christie, can you please instruct our participants?

Question-and-Answer Session

Operator

[Operator Instructions] Your first audio question comes from the line of Philip Cusick with JPMorgan Securities.

Philip Cusick - JP Morgan Chase & Co, Research Division

I guess, for Joe and Dan. Can you help us get to the EBITDA guidance for the year? So your 4Q EBITDA implies sort of a $500 million drop sequentially, and I appreciate that you saved some marketing dollars and pushed that harder in the fourth quarter. Hopefully, that helps the gross adds share. Network Vision expenses probably ramp up. But this still seems like a very large amount. What am I missing, or are you just being conservative at this point?

Daniel R. Hesse

Phil, Dan here. Well, you're right. First of all, there's seasonality that always happens in Q4. You have a lot more gross adds. You have a lot more upgrades than you do in other traditional quarters. It's also you think of the timing of the new iPhone 5, it came out right at the end of the third quarter, so we're going to have a full quarter of iPhone 5 dilution. And you're right, Network Vision expenses will increase in Q4. So we do have a number of things that will be different in Q4 than Q3. And beyond that, we're not going to give any more specific guidance with respect to the fourth quarter.

Philip Cusick - JP Morgan Chase & Co, Research Division

If I can, just one more quick one. You've talked in the past about maybe another secured credit facility that could come through from a vendor. Do you not need that anymore or is that still a possibility?

Joseph J. Euteneuer

I mean, vendor financing, obviously, is always a good thing to have so we continue to work on it. Just like the Ericsson facility that we put in place, it does take a while to do. We continue to talk to Samsung and Alcatel-Lucent, but it's probably not going to get done, if we do get it done, until sometime into the first quarter. And we would have to look at what our borrowing rate is because as a result of the announcement of the transaction, our borrowing rate has tightened up by over 200 basis points.

Operator

Your next audio question comes from the line of David Barden with Bank of America Securities Merrill Lynch.

David W. Barden - BofA Merrill Lynch, Research Division

Two, if I could. Just Joe, kind of following up a little bit on that. Can you tie out kind of the pacing of the Network Vision expenses to the adjusted $800 million expense guidance from last quarter? Sounds like you said that some of it will slip into next year, which might impact the negative $100 million guidance for Network Vision net expense next year. So if you could kind of tie out how the new pacing is relevant to the prior Network Vision expense realization guidance, that'd be great. And then just second, obviously, for not that much money, you guys have kind of effected some substantive governance changes at Clearwire. I was wondering if you could kind of update us on your thinking with respect to Clearwire's ability right now, as an independent company still to fund itself, to pursue objectives that are in Sprint's best interest in terms of LTE network build, et cetera.

Daniel R. Hesse

David, this is Dan. I'll do the first one with respect to Clearwire. Clearwire-specific questions you'll have to address to Clearwire. But we have a very good relationship going forward. As you know, we've signed an agreement where they will deploy 4G LTE on their 2.5 TD spectrum. And we still are planning to work together to implement that plan.

Joseph J. Euteneuer

And Dave, yes, basically, I think the way to look at Network Vision is potentially up to $100 million could slip into 2013. But it's up to, we'll see how much acceleration happens here in the fourth quarter because Steve has a pretty good pace going right now.

David W. Barden - BofA Merrill Lynch, Research Division

So $100 million less expense in 2012 and then maybe $100 million more in 2013?

Joseph J. Euteneuer

Potentially, that's sort of the max. I think with the pace he's got going on in the fourth quarter, that number might be mitigated.

David W. Barden - BofA Merrill Lynch, Research Division

And I apologize, Dan, if I could just follow up on your answer to the Clearwire situation. Obviously, Clearwire has a situation where it has a finite amount of funds. It has a important strategic role to serve as a partner for Sprint. How do you square the circle right now? How do you get comfortable that they have the financial wherewithal to be the partner that you need them to be through 2013 and beyond?

Daniel R. Hesse

Well, we'll continue to talk to Clearwire and work with Clearwire in that regard.

Operator

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

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

Dan, just a big-picture question, first off, on spectrum. It looks like you're okay on our modeling for spectrum for the next few years with 1.9 and then 800 and then hotspot 2.5 supported. But how do you think about the impact, if any, of a spectrum deal that you might do with any other companies? Just on your ability to get a deal approved down the track between Sprint and T-Mo at whatever time in the future that could be. And then a question, just on CapEx, I'm looking at your device roadmap for 2013. It looks good in terms of 800 and 2.5 capability. How much of that, from an infrastructure perspective, is being front-end loaded in the build? Perhaps that'd be a question for Steve. And then just lastly, on roaming expense trends, encouraged to see the trends turning down. We see more of a kind of a 4G versus 3G focus in the latest build-out plans. And so do you think that's going to impact your ability to capture roaming expense savings in 2013 versus the plan?

Daniel R. Hesse

Why don't I take the first part, and I'll let Steve take the last 2 parts of your 3-part question. Anyway, I can't comment specifically on the likelihood or attractiveness of any specific potential transaction in the future like you referenced T-Mobile. But again, we're not talking specifically about the SOFTBANK investment in Sprint today. But clearly, we will have much more flexibility to make sure that our spectrum assets are what we need them to be. So we will look at what spectrum is available, either sold on the market or it's obviously it's also a part of whenever you do think of a combinations or mergers going down in the future, you look at what it does for the total spectrum position of the company. But you also pointed out that Sprint is in a pretty good position today with respect to spectrum in that as we aggressively and on purpose move Nextel customers off the Nextel platform, that very high-value 800 megahertz spectrum is available for reuse for 3G and for 4G LTE-TD. For the Sprint platform customers, that's important. We, of course, have the 1.9 PCS. And through our partnership with Clearwire, that high-capacity, high-frequency 2.5 gigahertz spectrum. But it's always good if you want to be the highest-quality network provider out there to have a good position in low, medium and high frequency and we'll continue to be opportunistic when opportunities arise for access to additional spectrum, including opportunities like spectrum hosting on our Network Vision platform. So I'll turn it over to Steve.

Steven L. Elfman

I'm going to try and remember the questions. But first one on the devices. Dave, clearly for us, the 1.9, 800 and 2.5 in our devices next year is what we're working on. That was part of the commitment to be able to utilize the TD-LTE network of Clearwire. So all of our devices, once we've got Band 41 in the chip, we'll be launching. So that's question number one. Question two was in terms of roaming benefits with 3G as well as our 4G launches. We're seeing really good benefit in our roaming, as I think Joe pointed out in the results, even in this quarter. And for us, we're not just ramping the 4G, but also the 3G. They're generally making one visit to the site, in some cases, with 3G with one of our vendors. We have to make a second visit, but also with also one of our vendors because we're replacing a current incumbent in some markets, we can more easily turn 4G on and not affect our customers the way when we have a partial build in a city, we choose not to put the 3G -- turn the 3G on, if you will, until we have enough sites and clusters up to minimize the effect of what's called sort of border crossings in those cities. So you'll see the benefits from roaming. They're there now and you'll see more and more as we put up 3G. This is getting the critical mass of sites in a city to get that.

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

And Steve, you are putting the 800 radios in now?

Steven L. Elfman

Yes. Oh, yes, indeed. The 800 radios for voice have been in the devices since early last year and any new device that's been coming out has the 800 for voice, not at this point in time for LTE Band 26, which just got FCC approval last quarter. So that will start in the next -- in 2013.

Operator

Your next audio question comes from the line of Jonathan Chaplin with New Street Research.

Jonathan Chaplin - New Street Research LLP

I'm wondering if you could give us a little bit more color on gross add trends. I understand that some of the decline in growth adds share or the decline in porting ratios was due to a focus on iDEN recapture. Also, during the quarter, we got Verizon launching the shared data plan and you are a little bit behind Verizon and AT&T in terms of LTE deployment. I'm wondering if you can give us some context on how those 2 factors might have impacted share in the quarter. And to the extent that Verizon's plans are having an impact, I'm wondering if could give us some context on how you think about unlimited, whether you have to adjust your plans at all to respond to the shared data plan?

Daniel R. Hesse

Jonathan, Dan here. Verizon did have a good quarter, but we do a lot of research with all of our channels, with care and what have you, and it is not due to their shared data plans. We are seeing absolutely no evidence of it. They do have a substantial, but we say -- we think temporary advantage in terms of LTE footprint. And also, as Steve kind of alluded to on the answer to his past call, we do have some, what we call, pardon-our-dust issues as we implement Network Vision market-by-market. So that -- so there are some temporary advantages that Verizon has due to its network, but we do not see making any changes to our rate plans in spite of low advertising spend and really a focus on iDEN recapture. We're pretty pleased with what -- the effectiveness of our marketing plans. I think when you look at subscribers overall, I think you alluded to this as well in your question, it is just much more economically beneficial for us to focus our resources on recapturing the iDEN customers at substantially lower cost per gross add. Also to reduce cost, we have been shifting much more of the acquisition to our own channels. So we're seeing, if you will, a double-digit increase percentage in our retail stores year-over-year. We're seeing Web growth, dramatic increase in our lowest-cost acquisition channel, which is the Web. So we're really focusing on profitability. And also, if you take a look at it overall, Jonathan, we added 900,000 customers to the Sprint platform. And as we're implementing Network Vision, the question is how many customers do you want to add to the Sprint platform in a particular quarter to minimize the investment in just pure capacity, what we might call legacy, but at least capital that would have shorter life than, let's say, Network Vision, so -- Network Vision capital would have. So all of these are -- we look at together, which is we, on the one hand, we are accelerating the decline on purpose. I mentioned a 30% decline in the size of the iDEN base this quarter. We're focusing our guns, knowing so many of those customers are going to be coming out, on recapturing as many of them as possible. That's our focus. That's the most profitable way of using our dollars, knowing we're adding a lot of customers because of that to the Sprint platform and looking at our capacity and our other resources that way. But back to your question about Verizon, we're seeing absolutely nothing in any of our channels that indicates that the new rate plans that Verizon has is either helping or hurting -- to their credit, I don't think it's hurting them. Because of their LTE footprint advantage right now, they're being able -- they're, if you will, blasting right through, what we believe, are complex rate plans. But again, our network position, we believe, is temporary and we plan to catch up.

Operator

Your next question comes from the line of Brett Feldman with Deutsche Bank.

Brett Feldman - Deutsche Bank AG, Research Division

And kind of a follow-up here. Dan, you were talking about some of the temporary advantages that Verizon has in the market right now. But when you take a step back, and I think it's fair to say that Verizon and AT&T have some permanent advantages that have worked for them for a considerable amount of time. As someone who competes with them day-to-day and you look at someone like Verizon getting the highest share despite having the highest prices, why do you as a competitor think they have been able to sort of achieve that? And in light of your vastly improving financial condition, what are the types -- just qualitatively speaking, what are the types of structural improvements you'd like to make in Sprint's business to kind of permanently close some of that gap?

Daniel R. Hesse

Well, thanks for the question. And again, kind of going back to our original disclaimer. I don't want to talk too much about what the new company could potentially look like and what we might do after a transaction might be closed with SOFTBANK. But there clearly are scale advantages they have that we believe that we can mitigate going forward. There are other internal investment opportunities, we believe, we have that we have had to forgo in past quarters, as well as it's taken us a while because of our scale. We were late, not only in terms of, we'll call it, having the financial wherewithal to invest in LTE 4G, but late with the iPhone. We're just -- the iPad has been hugely successful for both Verizon and AT&T. And we have not had that in past quarters and will have it going forward. So we have -- we've constantly been playing catch-up. We are good at playing catch-up. We closed the gap very quickly, but we believe with additional financial resources, that we can do that much more effectively. And we have some thoughts and plans, but we're not going to share those today. But I appreciate your questions. They do have some structural advantages, and we intend to try to mitigate those over time.

Operator

Your next audio question comes from the line of Kevin Smithen with Macquarie.

Kevin Smithen - Macquarie Research

Now that you have closed the convert, do you imagine increasing your marketing and customer retention initiatives in the first half of next year? I know you mentioned Q4, but why wouldn't you step up marketing activities in the first half of next year, ahead of the deal, now that you've strengthened your balance sheet?

Daniel R. Hesse

Kevin, Dan here. We're not going to provide guidance yet on 2013. We'll do that at the end of next quarter. I appreciate your interest, and the question's a good one. But we're just not going to provide additional guidance for 2013. We're only going to talk about 2012.

Kevin Smithen - Macquarie Research

And Dan, do you have any anecdotes on CDMA churn and iDEN recapture rates in markets where you've already launched LTE?

Brad Hampton

Do you mean like whether it's a little bit better or something than other markets, is that what you're asking?

Kevin Smithen - Macquarie Research

Yes, if you have any specific or early directional indication of whether you've seen an improvement in recapture rates or increased gross add activity in the LTE market, or it's too early to tell?

Steven L. Elfman

This is Steven. And frankly, it is a little too early to tell. We launched our first markets last quarter and we're growing the sites day-by-day. But I think that you need to give us another quarter to be able to respond more than anecdotally.

Operator

Your next question comes from the line of Michael McCormack with Nomura.

Unknown Analyst

This is Peter for Michael. We have some questions regarding industry pricing. How do you believe industry pricing is tracking? Is there motivation for more aggression or will the industry bifurcate with some price -- with some raising price? Also, do you think you could raise price before the LTE network is fully complete?

Daniel R. Hesse

This is Dan. I caught the first half of the question. What was the second half of the question?

Unknown Analyst

Do you guys think you guys could raise price once the LTE network is complete -- before the LTE network is complete?

Daniel R. Hesse

Thanks, Michael (sic) [Peter]. Number one is what we're seeing right now is not really a change in the industry pricing phenomenon or structure in terms of up or down. It's really more we're seeing changes in structure. And I had a question earlier, shared data versus unlimited or what have you, just seeing what'll be most effective in the market. So I am not seeing any trends right now in the industry either, if you will, increase or decrease price, but really change what I call the business model with respect to pricing given the evolving device trends, not only the evolving move toward smartphones and more data use, but devices like tablets and what have you. We would -- I'm not going to -- I wouldn't say any definitive yes or no with respect to what we might do in terms of raising prices going forward. But we certainly would be in a much better position to raise prices if we felt we had a very strong competitive network and we would be hesitant to do that while we're still building out Network Vision and while our -- while we have what I've alluded to earlier on the call as a temporary disadvantage in terms of 4G coverage, which, again, we intend to close that gap, but we have a disadvantage now. So it would be risky to increase prices when you still have a 4G network disadvantage. Thanks.

Brad Hampton

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

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time.

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