Sprint Nextel Corporation (NYSE:S)
Q1 2006 Earnings Conference Call
April 26, 2006, 8:00 a.m. EST
Kurt Fawkes - IR
Gary Forsee - President and CEO
Paul Saleh - EVP and CFO
Len Lauer - COO
Dan Hesse - CEO of Local Telecommunications Division
Mike Rollins - Citigroup
Jason Armstrong - Goldman Sachs
Mike McCormack - Bear Stearns
Timothy Horan - CIBC World Markets
David Barden - Banc of America
Tom Lee - JP Morgan
Colette Fleming - UBS
Simon Flannery - Morgan Stanley
Rick Prentiss - Raymond James
Good morning. My name is Judy, and I will be your conference operator today. At this time I would like to welcome everyone to the Sprint Nextel First Quarter 2006 Earnings Conference Call. (Operator Instructions) Thank you. Mr. Fawkes, you may begin your conference.
Good morning, everyone, and thanks for joining us on our call today. For the format, our President and CEO, Gary Forsee is going to kick off the discussion, and then Paul Saleh, our Chief Financial Officer, will review our corporate performance, including some key balance sheet items and cash flows. Len Lauer, our Chief Operating Officer, will update you on the integration progress and discuss the wireless and long distance businesses. Then Dan Hesse, the President of Local Phone, will close out our prepared remarks with a discussion of that business unit's performance as well as an update on our local spin. And then we'll finish our call with some questions.
Turning to slide 3. I want to point out that in our remarks this morning we will be discussing forward-looking information, which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a detailed discussion of various risk factors in our SEC filings, and I of course, strongly encourage you to thoroughly review our filings.
Throughout our call this morning, we will be referring to several non-GAAP metrics. Reconciliations of these metrics to the appropriate GAAP measures can be found on the attachments to our earnings release and at the end of today's presentation, which is going to be stored on our website. I'd also like to remind you that year-over-year comparisons for consolidated and wireless results will be provided on a pro forma basis this morning.
Now, here is Gary.
Thank you, Kurt and good morning to all of our listeners. As always, I enjoyed meeting with many of you in New York during our Investment Community Meeting, and I am very pleased to report on our 2006 progress today.
If we can turn to slide 5, the main attribute of our Company which sets us apart from other large cap telecom companies is our strong growth rate. For the three months ending March 31st, 2006, Sprint Nextel generated net operating revenues of $11.5 billion and adjusted OIBDA of $3.6 billion. Our consolidated revenues increased by 9% from one year ago. Our total adjusted OIBDA increased by 10% versus pro forma numbers from one year ago.
We continue to post good top line growth and profitability while integrating our merged and acquired businesses, and investing for the long-term. Paul and Len will describe these investments in greater detail, but they closely mirror the four operating priorities discussed at our Investment Community Meeting:
- Profitable subscriber growth;
- Improving the customer experience;
- Maintaining product leadership;
- Delivering on our synergy plan.
The Company continues to generate strong cash flow. Our free cash flow was $1.2 billion for the first quarter before acquisitions. We acquired three companies that will add to our growing scale. Adjusted OIBDA less CapEx, may be a more straightforward proxy for measuring free cash flow. You can see that this metric increased by 18% to $2.2 billion in the first quarter of 2006, from $1.9 billion on a pro forma basis in the first quarter of 2005.
Consistent with other companies, which have been involved in M&A activity, we continue to report an adjusted earnings per share figure which removes the effects of special items and the amortization required by purchase price accounting methods. For the quarter, our adjusted EPS before special items and amortization expense was $0.35 or 13% higher than the pro forma numbers from one year ago.
Turning to slide 6, we delivered balanced revenues, cash flow and subscriber growth for the quarter. We had more than 1 million direct subscribers and approximately 275,000 wholesale and affiliate subscribers. Our direct subscriber base increased to 48.9 million or 14% larger than one year ago.
At the same time, we continue to execute against our merger integration plans. We completed the re-branding of the vast majority of our retail stores and closed more than 100 stores in overlapping territory. We migrated iDEN long distance traffic through our wireline backlog. We are selecting key vendors who will continue to differentiate Sprint Nextel for the continued scaling of our business. We announced our billing vendor and we are close to announcing our customer care outsourcing vendor.
We closed two more affiliate acquisitions in the quarter, Alamosa and Enterprise, which we firmly believe will enhance our growth profile. Integration for each of the former affiliates is going smoothly. By the middle of second quarter, we'll be managing virtually all aspects of the operations under the larger Sprint Nextel business. We also announced and closed the Velocita transaction which adds an important 900 megahertz Spectrum for the Sprint Nextel.
Looking forward, obviously, to closing Nextel's partners and UbiquiTel acquisitions expected during the second quarter, just as soon as we can achieve the necessary approval. These transactions will increase our direct subscriber base by approximately 2.7 million, and will bring our wireless revenues to a leading level among US carriers.
Our work with the cable companies is off to a good start in 2006, and Len will describe how our LD assets are enabling the growth of cable telephony. This was a $50 million revenue stream for Sprint in the first quarter and is grown rapidly. In addition, we are diligently working with our cable joint venture partners and preparing to launch seven markets with bundled communication services in the second half of 2006.
Another path which has been keeping a lot of us very busy has been the preparatory work in the spin-off of Sprint Nextel's local phone business. You'll hear more details from Dan Hesse, but the short story is that we remain on track to complete the spin-off next month. We believe that this transaction will align strategic interest for both companies and their respective shareholders. Our Board has also announced its intent to pay cash dividends of $0.025 per share per quarter to Sprit Nextel shareholders after the spin-off is complete.
In summary, we're off to a good start with first quarter results and very good progress on integration activity, and we're beginning to flesh out our cash distribution policy. Now, I'll like to turn it over to Paul.
Thank you, Gary, and good morning, everyone. Sprint Nextel delivered solid results in the first quarter of 2006 while continuing to integrate our businesses and repositioning Sprint Nextel to be a leader in mobility services.
Slide 8 illustrates the normalizing entries to net income and EPS. In the first quarter we reported net income of $419 million or $0.14 per share, which compares with pro forma net income of $380 million or $0.13 per share in the year ago period.
We incurred several one-time items during the first quarter, including $64 million of after-tax merger related costs, a $14 million benefit resulting from a $55 million gain in investing activities, offset by restructuring and asset impairment of $41 million. Also in the quarter, we incurred a $564 million charge for amortization related to the merger with Nextel and the purchase of five PCS affiliates. Approximately $75 million of the amortization expense is a result of the five affiliate acquisitions.
Adjusted for all these items, net income is $1.33 billion or $0.35 per share for the first quarter compared with pro forma adjusted net income before amortization of $902 million or $0.31 per share in the year ago period. On an adjusted basis, Sprint Nextel grew earnings at a rate of 13% year-over-year.
In the first quarter, net operating revenues were $11.5 billion, a 9% increase over the pro forma revenues from the prior year. Wireless revenues of $8.5 billion were 13% higher than one year ago and 4% higher sequentially with strong contributions from both service revenues and equipment revenues. The affiliate acquisitions accounted for less than 2% of the year-over-year increase in service revenues.
Long distance revenues of $1.7 billion were down by 3% from the first quarter of 2005, as the strength in our dedicated IP business partially offset declines in consumer voice and a legacy data services. On a sequential basis, long distance revenues were slightly higher. Local revenues of $1.6 billion were up 1% versus a year ago and down 3% sequentially, as our focus on DSL and other premium services help offset the 5% decline in access lines over the past year.
Adjusted OIBDA for the Company was $3.6 billion this quarter, a 10% increase over the pro forma amount from the prior year. Adjusted OIBDA margins for the Company increased by 20 basis points to 31.5%. On a sequential basis and year-over-year basis, we increased our margins by 20 basis points. We reported wireless adjusted OIBDA of $2.7 billion, a 15% increase from the pro forma figure from the prior year. Adjusted wireless OIBDA margins were 35%, an 80 basis points compared when compared with the first quarter of 2005 and 40 basis points improvement when compared with the fourth quarter.
We are making progress on our objective of expanding wireless margins by 200 basis points for the year, even as we reinvest in our business for future growth. These investments include higher network expense resulting from our network coverage expansion and our EV-DO rollout to 190 million pops by the year end.
Our target also reflects spending on the cable joint venture, higher media spending in conjunction with our NFL sponsorship, our ongoing investments and innovations in our 4G technology trials. We believe that these investments will enable Sprint Nextel to attract high quality customers, improve the customer experience, and enhance our leadership position in the industry.
Over the balance of the year, we expect the primary drivers of margin increases will include accelerating operating synergies, organic growth from the large subscriber base, and continued strength in wireless data services.
For the long distance segments, adjusted OIBDA was $236 million, 9% lower on a year-over-year basis, but was 6% higher sequentially. For the first quarter, the adjusted long distance OIBDA margin was 14.1%, which compares to 15.2% one year ago and 13.4% in the fourth quarter. The local phone business, soon to be called EMBARQ, delivered $715 million of adjusted OIBDA during the quarter for a margin of 44.1%.
In the first quarter, Sprint Nextel generated strong free cash flow from operation with positive contributions from all three segments. Wireless generated $1.6 billion of adjusted OIBDA in excess of capital spending, a 41% increase over pro forma figures from the prior year. In the long distance business, adjusted OIBDA exceeded CapEx by $144 million, while our local segment reported positive cash flows of $536 million. For the quarter, consolidated adjusted OIBDA exceeded CapEx by $2.2 billion, an increase of 18% over the prior year's pro forma numbers.
We ended the first quarter with $7.5 billion of cash and marketable securities, an access to approximately $4.5 billion of committed, but undrawn credit lines. Gross debt as of March 31, totaled approximately $26 billion. Sprint Nextel has a solid investment grade profile, which was supported by strong credit metrics, included debts to annualized adjusted OIBDA of approximately 1.8X.
In fact, S&P and Moody's recently reaffirm our current credit ratings and stable outlook. Our average cost of debt is less than 7% and the Company reported $103 billion in assets and $53 billion in shareholder equity at the end of the first quarter.
For the quarter, Sprint Nextel funded $3.4 billion of acquisition net of cash acquired, including two affiliates and the purchase of Velocita for its 900 megahertz spectrum assets. The Company also initiated a Commercial Paper Program in the second quarter, which is expected to reduce our borrowing costs and further enhance our flexibility.
Slide 12, pro forma net debt, Sprint Nextel ended the first quarter of 2006 with $18.4 billion of net debt. We have illustrated the pro forma impact of our announced transactions on this chart. Last week we announced our intent to purchase UbiquiTel for $1.3 billion. The Nextel partner's acquisition when completed will increase net debt by approximately $7.5 billion. With the completion of these transactions; Sprint Nextel will directly control more than 94% of its CDMA network and 100% of its iDEN networks for approximately 270 million pops.
Additionally, the spin-off of Sprint local business is on track to occur in May pending final FCC approval. Shareholders of Sprint Nextel will receive their proportionate share and EMBARQ and Sprint Nextel expects to reduce its net debt by $7.3 billion. Earlier this week, EMBARQ received investment-grade ratings from both Moody's and Fitch.
In summary, the company's pro forma net debt following all of these transactions will be approximately $19.9 billion, before the benefit of free cash flow earned over the remainder of 2006. We continue to target net debt to annualized OIBDA of approximately 1.5X, which is consistent with a solid investment grade profile.
On slide 13, our cash distribution. We expect to build on our financial strength as we generate strong cash flows from operations. At our investment community meeting on March 7, we shared with you our three-year target of $23 billion in OIBDA less CapEx. We have ample financial flexibility to fund our previously announced acquisitions, reinvest in the business and return cash to our shareholders.
Last week, Sprint Nextel announced that we expect to continue to pay a recurring dividend of about $75 million per quarter or approximately $0.025 per share after the spin-off of EMBARQ. In the future, our board may consider additional cash distributions such as stock buybacks and special dividends. While no plan is in place at the time, any future cash distribution plants must comply with the tax restrictions from our spin off.
Looking at our 2006 guidance, the first quarter was a good start to the year and we are on track to deliver on our 2006 guidance. Specifically, we continue to expect to generate net operating revenues of $41 billion or more in 2006 for our wireless and long distance businesses. Our wireless business is expected to continue to outperform the industry by delivering a high single to low double-digit revenue growth. Long distance revenues are expected to decline at mid to high single-digit rate although the first quarter performance suggests that this outlook may prove to be conservative.
We expect full-year adjusted OIBDA to be approximately $13 billion. As I discussed earlier, we expect wireless OIBDA service margins to increase by about 200 basis points and long distance margins to be in the low teens.
Capital spending for the full year is expected to be $6.3 billion, including rebanding capital of approximately $600 million. Total rebanding cost for 2006 are expected to be about $1.4 billion and includes the $600 million in capital and $800 million in other costs that will be recorded as spectrum assets.
We are on track and on budget with regard to our rebanding efforts. We remain on track to deliver on $14.5 billion of synergies on a net present value basis. Our 2006 target is $900 million to $1 billion of OIBDA synergies and $300 million to $500 million in capital expending synergies. In summary, we delivered a solid quarter and we are building on a track record of solid execution.
Now, I'll turn the call to Len.
Len Lauer, Sprint Nextel Corp.
Thank you, Paul. It's great to be here in this morning. Let's move to slide 16 and we will start with the discussion on our progress toward realizing the significant synergies from the Sprint Nextel merger. You can see on slide 16, we continue to be on track to achieve our 2006 synergy target of $900 million to $1 billion in OBIDA.
Late in 2005 and in the first quarter of this year we began implementing many of the programs that will lead this significant cost savings not only this year, but also through 2008. From a financial standpoint, the synergies were just under $200 million the first quarter and are going to ramp throughout 2006. The slide left many of the major integration initiatives that are now in place.
Let me just take a couple of minutes to highlight several of these. First is retail store rationalization. We closed 104 retail stores as of the end of the first quarter. This is roughly two-thirds of approximately 170 stores we'll be closing this year. In the first quarter, we've announced that the marketing organization will be consolidating into a single organization, with savings accruing in the second half of this year.
We announced that the billing system will be consolidated under AMDocs. The savings here is expected to grow over the balance of 2006 with significant savings accruing in 2007. In the first quarter, there was greater spending in billing especially in IT in preparation for this transition.
Our announced reduction of approximately 4,500 positions were largely be complete by the end of the second quarter. Of this total a portion will be realized through a voluntary separation program that has been offered in IT, marketing, training and public relations. Another significant portion will come from attrition.
I'll talk later about the incredible success we're having with air card sales, but from a synergy standpoint, the financial benefit will begin to be more apparent as the EVDO footprints continues to rapidly expand. As you are probably aware, we announced in the first quarter that we would be aggressively expand in the EVDO footprint to 190 million pops by the end of this year.
We are already well along on these plans and this expansion does result in higher network operating expense and CapEx, but it will be offset over the long-term from the additional customers we expect to be bring on.
We are in the process of moving Nextel traffic to the Sprint long distance backbone. There was some savings this quarter, but by the end of the year, we estimate that the quarterly savings will be four times what it was in the first quarter.
Regarding the acquired PCS affiliates, our integration model is designed to take 13 weeks from acquisition announcement to completion. The first four PCS affiliates have completed most of the integration activities and now are being manages part of the larger of Sprint Nextel business. Alamosa is nearly complete and is expected to be transitioned by mid second quarter.
From a cost standpoint, we're closing at roughly 10% of the legacy affiliate retail stores and we have realized significant savings from lower head count. To date we have added several thousand employees and although we have had some reductions, we. We are only halfway to our targeted head count reductions. These reductions are not part of our 4,500 figure I mentioned earlier.
We have launched iDEN postpaid and Boost prepaid services in all legacy PCS affiliate territories, except those which overlap with Nextel Partners. The launch coincided with the store conversions to the new Sprint Nextel look and feel of our Company. The Virgin Mobil prepay was also launched where it was not already offered.
So as you can see, we have put in place a plan and committed a lot of energy to realize significant synergies and cost savings over the course of this year. In some cases, in order to realize these synergies, there were up front costs that had to be incurred.
In total, our integration costs were $105 million in the quarter. Going forward, in addition to organic growth, synergies will be a big contributor to the increase in margins we expect to achieve in 2006 and beyond.
Turning to slide 17, I want to get into our wireless performance. The first quarter was a good quarter for our wireless business as it continued to produce solid results. In the quarter, total wireless revenues grew 13% compared to the year ago period, primarily due to a larger customer base, higher handset volumes, growth in wireless data, and due to the acquisition of several PCS affiliates.
In the quarter, service revenues are up 13% compared to the first quarter of last year. Equipment revenues of $830 million are up 22% compared to the first quarter of last year, primarily driven by higher average revenue per handset. Wholesale and affiliate revenues were $198 million, down 12% compared to the year ago period and down 8% sequentially primarily due to the affiliate acquisitions.
Adjusted OIBDA on the quarter was $2.69 billion, an increase of 15% compared to the pro forma adjusted OIBDA of the first quarter of last year and an increase of 5% sequentially. The adjusted wireless OIBDA margin in the quarter was 35% of service and wholesale and affiliate revenues. This was an increase of 80 basis points in the perform margin of 34.2% a year ago. Sequentially, the adjusted OIBDA margin increased 40 basis points.
Wireless capital expenditures in the first quarter, including those related to the 800 megahertz rebanding, were $1.1 billion. This spending included investment in EVDO whose reach is now over at 150 million pops; investment to expand coverage and increased capacity on the CDMA network and increase capacity on the iDEN network. We ended the quarter with about 55,000 wireless cell sites, more than any other carrier in the United States. Rebanding CapEx was approximately $99 million in the first quarter.
Now, turning to operating expenses, during the quarter, cost of services of $1.8 billion increased 1% sequentially and 16% year-over-year. The annual increase was due to network expansion, growth in customers and customer usage, incremental backhaul cost for EVDO sites, and the affiliate acquisitions. Cost of service in the quarter was 20.7% of total revenue, which is up from 20.1% of the first quarter last year, but down from 21.2% in the fourth quarter.
Equipment costs in the quarter were $1.3 billion, a 12% increase compared to the year ago, but down 5% sequentially. This year-over-year increase is due to higher Boost Mobile volumes and increase sale of connection cards. Selling, general and administrative expenses were 32.9% of revenues during the first quarter, compared to 32.9% in the first quarter last year and 30.9% in the fourth quarter.
Sequentially, sales expenses increased due to headcount-related expenses and acquisition of five affiliates. Throughout 2006, we'll continue to focus on increasing the productivity of both our direct channels and those of our third-party retailers. Productivity in several channels has come up short of our expectations, and as a result, we have adjusted certain aspects of the compensation structure and we're closing less productive retail stores.
Marketing expenses were also up sequentially due to NFL sponsorship, especially around the Super Bowl and continued spending to capitalize on post merger branding campaign. We expect these expenses to decrease in the second quarter.
Customer care expenses increased sequentially, due to increases in the customer base and increased direct head count associated with internal call centers. These investments are paying off as we're seeing consistent improvement in our service level metrics, including lower average wait times and higher first call resolution.
G&A increased sequentially, due to higher bank credit card fees associated with customer payments by credit cards and increased outside collection agency fees. However, because of these activities and good management of the spending limit programs, we reported a sequential decrease in bad debt expense and bad debt as a percent of revenue. Additionally, we saw a reduction in the absolute number of accounts written off, and a reduction in the average write-off per account. In the quarter, bad debt was 1.2% of revenue compared to 1.5% in the fourth quarter and 1.1% in the same period last year.
I would like now to turn to slide 18 for some detail on key first quarter wireless operating metrics. In the first quarter, Sprint Nextel added 1.3 million new subscribers to the network, bringing the total to 48.9 million, an increase of 14% compared to the total Nextel and Sprint subscribers at the end of last year. These figures include our direct postpaid subscribers, direct prepaid subscribers, wholesale subscribers, and PCS affiliate subscribers, but exclude Nextel Partners subscribers.
If Nextel partner subscribers are included, total subscribers added in the quarter would have been 1.4 million, and total subscribers on a network would have been 51 million.
During the quarter, Sprint Nextel added over 1 million direct subscribers including 563,000 postpaid subscribers and 502,000 Boost subscribers. We also added 228,000 wholesale subscribers and we added 45,000 subscribers.
As you can see in the pie chart in the upper right corner of the slide, roughly 80% of our first quarter net adds came from Sprint Nextel and Boost brands while 20% came from our MVNOs and the affiliates.
Postpaid direct gross additions were 3 million for the quarter, down 2% from the seasonally higher fourth quarter and 4% lower when compared to one year ago. Fair and Flexible plan offerings continue to have strong take rates across CDMA and are increasing across iDEN.
Finally, slightly more than a majority of our gross adds come from the direct channel. This is consistent with what we have seen in both the fourth quarter and the first quarter of last year.
Churn on the direct postpaid base was 2% in line with both the fourth quarter's churn rate and the first quarter of last year. First quarter postpaid paid ARPU of $62 was the highest postpaid ARPU across the national carriers. This is 1% below the fourth quarter and 3% below the first quarter last year.
Within ARPU, we are seeing a much larger data contribution offset by lower overage charges and negative impacts from the PCS affiliate acquisitions due to the loss of travel revenue and the effects of lower ARPU mix. As you can see from the pie chart on the right side of the slide, 82% of our ARPU is from voice and other revenue like fees and roaming, while overage has declined to 7%. This is down from 10% in the year ago period. Wireless data ARPU continues to grow and is now 11% of ARPU.
This is a good lead in into our next slide, 19, on our wireless and leadership. Sprint Nextel continues to hold the full position in Wireless Data Mobility. In fact the leadership has increased. Postpaid wireless data ARPU is now $7 of our reported ARPU. This is up from $6 in the fourth quarter and $4.50 in the first quarter of last year. This growth is driven by increases in data usage and a higher penetration rates from both CDMA and iDEN.
On iDEN, we're seeing strong growth in mobile office and messaging. On CDMA, usage of the award-winning Vision and PowerVision offerings, which includes the ability to download ringers, music, screen savers, and games, and to watch TV and surf the web has accelerated. As you have heard us announcing CPIA, we quickly reached over 2 million music downloads from our music store. We're also seeing very strong growth at SMS.
PowerVision, which uses our EVDO network, saw a very strong growth in subscribers. We reached nearly 750,000 subscribers at the end of the first quarter. This is a threefold increase from the roughly 250,000 subscribers at the end of the fourth quarter. EVDO aircard sales have ramped much faster than expected. These aircards have very strong data ARPU associated with them and very low churn.
PowerVision aircard sales accelerated in both the business and consumer channels. We continue to expect very robust aircard sales and multimedia handsets driven by the customer's demands for higher wireless data speed as well as the aggressive expansion of the US's largest broadband wireless network.
Our current broadband network reaches a 151 million pops and we expect it to cover 190 million pops by year end 2006 and 220 million by the third quarter of next year. This will secure our leadership in this area while preparing for the deployment of the EVDO revA and support our plans to launch high performance CDMA walkie-talkie services.
From a financial perspective, wireless data is growing extremely quickly and is contributing to top line and bottom line growth. In the first quarter, wireless data revenue was over $800 million, an increase of 77% compared to the first quarter of 2005 and up 21% sequentially. Annualized wireless data revenue is $3.2 billion.
I would like now to turn to Boost on slide 20. The first quarter saw Boost Mobile post very strong financial and subscriber results. Boost Mobile continues to execute very well and is at or ahead of plan. Boost Mobile revenues of $312 million in the quarter, reflect an increase of 25% sequentially and 94% compared to the first quarter of last year.
In the first quarter, Boost Mobile net additions were 502,000. Total subscribers are now 3.1 million, which more than doubled compared to the first quarter of last year. Boost Mobile also saw an increase of OIBDA contributions sequentially and year-over-year. Boost is on track to achieve 80% or higher revenue growth in 2006 and is on track regarding their margin expansion plans.
Additionally, from a subscriber perspective, there is some upside as Boost will begin selling in Nextel Partners territories, once that acquisition closes. Boost Mobile subscribers had a $36 ARPU in the first quarter. This was down slightly from $37 in the fourth quarter, due to reduced pricing in Direct Connect from a $1.50 per day to $1 per day. Boost Mobile data ARPU increased both year-over-year and sequentially, due to increased usage and new content offerings. We expect ARPU to increase to the high 30s over the balance of 2006, due to continued growth in data revenue and continued growth in Direct Connect usage, resulting from the recent price change.
In the first quarter, we put into effect a policy change that increased churn for this period. This policy change was associated with how we accounted for inactive subscribers that had a small account balance, but were not using any services. Boost normalized churn was 5.4% in the quarter, which is an increase sequentially and compared to the first quarter of last year. Going forward, we expect churn to be in the 5% range.
I now, would like to turn to slide 21 and talk about our long distance results. Long distance had a good quarter. We saw revenue pressure that was less than anticipated and OIBDA that was above our expected run rate for the year. We continue to see pricing stability especially in voice pricing floors, this continues the stable voice pricing trends we've seen for a year now.
Going forward, there's still pressure on the top line as we expect to lose the RBOX business due to the acquisitions of both MCI and AT&T. We see continued pressure on the top line as the price in the base continues to reprice to current market pricing.
However, we're still very pleased with this quarter's results. Sprint's long distance business has exceeded the performance of peers for several quarters, driven by less exposure to consumer long distance, strong growth in our differentiated MPLS services and volume increases in our wholesale voice business, due to growth in cable telephony and wireless backbone demand.
Total LD revenues were $1.67 billion, which was flat sequentially but down 3% year-over-year. Declines in consumer voice revenue and the transition of legacy data products to IP continue to be the main drivers of top line pressure.
Business voice revenue sequentially by 3% from the seasonally slower fourth quarter and increased 2% year-over-year as declines in retail voice, driven by reprice of the base, were more than offset by strong growth in affiliate and wholesale revenues.
Consumer voice revenue declined by 39% compared to the first quarter last year, and declined 19% compared to the fourth quarter. These declines were merely a continuation of recent trends as more traffic goes to bundles. Consumer long distance voice revenues is now 6.5% of our total long distance revenue and under 1% of the Company's consolidated revenues.
Revenue from data services declined 9% from the year ago period and was down 6% sequentially. These declines were due to lower frame relay and ATM revenues as customers migrate to IP.
Internet revenues increased to 17% sequentially and increased 26% compared to the year ago period, as the effects of exiting the dial IP business is finally behind us. Strong IP results are due in part to our MPLS offering and migration for other data products. Regarding MPLS, the theme that we are hearing from our customers is that we are very attractive, very high-quality alternative to the RBOX, especially after the purchase of the previously independent long distance carriers MCI and AT&T. We really like this position and we believe it will allow us to expand our market share.
Turning to profitability, the long distance business delivered adjusted OIBDA for the first quarter of $236 million, this was an increase of $13 million or 6% sequentially, but 9% lower than the first quarter of last year. There were sequential and year-over-year declines in SG&A, while cost of service was up both sequentially and year-over-year, driven by increased volumes and investment in the cable telephony business. The net result of flat revenues and net lower expenses was a sequential increase in LD margins from 13.4% to 14.1%.
Adjusted operating income declined by 20% compared to the year ago period, while revenue declined at a slower rate than cash operating expenses, there was an increase in depreciation. The higher depreciation is due to shorter life capital investments and additional asset retirement allowances. Sequentially, adjusted operating income increased 32% due to lower expenses and lower depreciation. In the quarter, long distance capital expenditures was $92 million.
Long distance CapEx has increased reflecting growing demand for MPLS services and strong growth in the wireline cable telephony business. In the quarter, OIBDA was $144 million ahead of our capital investments.
Turning now to slide 22, we have some details on our wireline business with the cable companies. As I mentioned on the previous slide, our consumer voice revenues are declining rapidly is consumer migrate toward bundle. Many of which are offered by cable companies. By being in line with the leading cable companies, we're well positioned strategically regarding these macro trends.
In this business, we continue to see very strong growth in both wireline cable subscribers and revenue. At the end of the first quarter, there were over 1 million wireline cable subscribers and wholesale revenue for the quarter was nearly $50 million or almost $200 million annualized. Another significant benefit of this business is that the capital investment required is generally success based.
Now turning to slide 23, I'd like to highlight some of the new or expanded relationships we have with four business customers. We recently signed a two-year contract with The Associated Press for up to 1,500 EVDO air cards. Associated Press saw the significant productivity opportunity and value proposition of this alternative to transporting information and therefore allowing journalists to cover breaking news in environments were truck or satellite phone is not practical or available.
Sprint Nextel and the Blue Cross/Blue Shield Association renewed our relationship for several more years. This renewal included 28,000 wireless units across CDMA, iDEN, and EVDO with voice and date services allowing the Blue Cross/Blue Shield Association, 38 Member Blue Plans and 250 and greater affiliates to expand their enterprise application wirelessly to improve operational efficiency, increased patient safety, and enhanced consumer, provider and patient satisfaction.
Our third customers, Frontier Airlines, a new customer of Sprint Nextel as they entered into a multi-year agreement for Global MPLS VPN service. Frontier Airlines MPLS wide-area network will host critical data to ensure efficiency of their day-to-day operations in over 60 destination cities in the United States and Mexico.
Finally, Universal Forest Products Incorporated, the nation's leading manufacturer and distributor of wood and wood-alternative products, and Sprint Nextel renewed our relationship for three years. The Universal Forest Products are using MPLS, long distance, iDEN walkie-talkie, GPS, BlackBerry and CDMA wireless data services from Sprint Nextel.
The wireless component includes 2,500 iDEN CDMA units. They are using the services for our headquarters communications, plant-to-plant communications, customer communications, fleet management and tracking and mobile email. They're also providing better service to the customers by leveraging information available from GPS information.
In summary, we continue to have success in the marketplace across both our wireless and wireline portfolios. Additionally, going forward, we are very excited about the very positive customer response to wireless data MPLS. Now, we'll go to slide 24 for an update on local. I'll hand it off to Dan Hesse.
Thanks, Len and good morning, everyone. As you know, we have had a dual focus in local over the last several months. Delivering solid financial results has been the primary goal and at the same time, we have been preparing to become a standalone company. In both respects, I am pleased with what we have accomplished this quarter, particularly given that neither is a small undertaking.
We're now in the homestretch of the separation process. A few weeks ago, we received the last outstanding state PUC approval from Pennsylvania. Hooray. And as Paul mentioned, on Monday, we received word that both Fitch and Moody's have given us investment grade credit ratings, BBB minus from Fitch and BAA3 from Moody's, both with stable outlooks. We continue to expect the spin-off to occur prior to end of the May. And once we receive SEC approval of our Form-10 registration statement, we will be able to establish a specific schedule.
Now, if you go to slide 26, looking at our first quarter performance, the headlines are that both revenue and operating income were higher than in the first quarter of 2005. We achieved these results in spite of the fact that access lines ended the quarter 4.9% below the year-ago level. Most of the access line losses we're seeing are in the residential market; in fact, at only 1.3%. The year-over-year decline in business lines this quarter was on the low end of what we have seen in the last two years.
Last quarter I indicated that cable companies have the ability to provide voice services to roughly 40% of the households in our territories, and that by the end of this year, we expect that coverage to increase to almost 90%. Along with wireless displacements, expanded cable voice coverage is having an effect on the rate of residential access line losses. And as that coverage grows over the remainder of the year, we think we will continue to see this effect.
However, it remains to be seen whether the impact will be sustained over the long term, in light of our pending separation and renewed emphasis on marketing and customer satisfaction.
Even with the decline in access lines, total first quarter revenues for local increased 1% year-over-year to $1.62 billion. Much of this growth was attributed to our product distribution business. Some of you may know it is North Supply where non-affiliate revenue, non-Sprint revenue, increased more than 50% on a year-over-year basis. This growth was partially offset by a 2% decline in first quarter telecom revenues to $1.47 billion.
Within our telecom business, voice revenues, they were down 5% to $1.05 billion, but data revenue continues to grow strongly. At $267 million in the first quarter, data revenue was 15% higher than it was in the year-ago period.
DSL service, which we call high-speed internet or HSI, was again a key driver in the overall growth in data revenue. The 84,000 lines we added this quarter were the most in our history and quarterly DSL revenue is approaching $100 million. DSL services are more than just an important contributor to the quarterly results. They are a very important part of our future. Our marketing approach emphasizes bundling DSL with voice service, because we believe increasing DSL penetration will help us retain voice customers.
Now turning to profitability, adjusted operating income for local in total increased 4% year-over-year to $452 million. In our telecom business, adjusted operating income increased 2% compared to the prior year, as expenses declined in all categories.
In the quarter, we reported a year-over-year increase in capital spending to $179 million. This was mainly driven by our strong DSL performance as well as the timing of expenditures. As a result, local's first quarter adjusted OIBDA of 715 million was slightly better than in the prior-year period, while adjusted OIBDA minus CapEx declined 4% to $536 million.
Now going to slide 27, in closing, we will continue to focus in the near term on completing the separation. We have invested a great deal of time and energy to ensure there is a smooth transition. And at this point, I believe we're all prepared. Among the things that still need to be accomplished, completing the FCC registration process is perhaps the most important. As I mentioned earlier, approval by the FCC will enable us to be more specific with respect to the timing of this separation.
Internally, there is a great deal of excitement about the new company. Establishing the EMBARQ brand and leveraging it as we become a marketing driven public company will be crucial to our success. Financially, although we can't provide guidance for the stand alone company today, we plan to do so before the separation occurs. What I can tell you, however is that we will focus on delivering results and on becoming a more effective competitor. With that, I will turn it Kurt for the Q&A.
Okay. Thanks, Dan. In just a minute, we'll go to your questions. I want to point out to everybody that you may get both an audio-only and webcast replay of this presentation on our website at www.sprint.com. The audio rebroadcast can be accessed at 1-800-642-1687 or 706-645-9291, if you are dialing from international location. The conference code is 7606407.
Before we open it up to questions, I also want to take a moment to introduce [Trevor Irkslavin] who has been named our Director of Investor Relations for EMBARQ. Trevor is ready and willing to support you on EMBARQ investment matters. As many of you know, Trevor was formally on the Investor Relations staff at Sprint. And I think you will agree with me that he is an excellent addition to the management team at EMBARQ. Trevor's number can be reached at 913-345-7681. So operator, will you please now instruct the participants on the questions.
(Operator Instructions) Your first question comes from the line of Mike Rollins with Citigroup.
Mike Rollins - Citigroup
Hi, good morning. I was curious if you could talk a little bit about the postpaid market and the type of seasonality that you may be expecting as you look at the last couple of quarters of performance? If you could talk a little bit more broadly about acquisition costs and how those in overall terms, with the blend of customers that you have, have been trending? Thank you.
Mike, this is Len. On postpaid, as far as seasonality, the first quarter normally is a continuation a little bit and fourth quarter; usually is sequentially down. But you obviously have still the holiday by through January and then Valentine's Day. Second quarter tends to pick up towards the end of the quarter with mom's/dad's day, and then also with graduation. So it tends to be back end loaded.
Third quarter tends to be somewhat flat to second, and then you obviously pick up in the fourth quarter. We are seeing about the same seasonal trends in terms of what we've seen in previous years. So we really haven't seen a difference in the seasonality.
In terms of acquisition costs, our acquisition costs are up slightly on a year-over-year basis. It is primarily due to what we refer to in terms of we had higher marketing costs a little bit due to the Super Bowl. We also are spending more money on retention, and we have seen results of that in terms of churn coming down.
In some of the areas, that's been offset by some involuntary increases that we've discussed before. We also expect to have better results on the churn front, as we go forward, as a result of more money we are spending on the retention side and we've put a little bit more money into the brand advertising that we had in the first quarter. So that hits us a little bit on acquisition costs.
Mike Rollins - Citigroup
The next question comes from the line of Jason Armstrong with Goldman Sachs.
Jason Armstrong - Goldman Sachs
Good morning. A couple of questions. First, on wireless margins, tied into the EVDO expansion, I know you've talked about strong PowerVision sales. I think the results imply about 500,000 PowerVision subs added, which triples the subscriber count. This has to be dilutive initially, but I imagine we could hit a tipping point relatively quickly where this can actually really contribute to margin expansion. So I'm wondering if you can offer any granularity here on this sort of 1Q impact and how this can improve over the course of the year?
Then also on wireless margins, you mentioned the marketing costs, the NFL sponsorship, you have re-branding expenses; obviously, much higher than the first quarter. It should trend down over the course of the year. Any sense as to magnitude of the step-down in expenses potentially in 2Q and beyond?
In the local business, you know, you've really sort of run this business separately as a separate entity for the last quarter or so. I guess, the question here is -- are we at a run rate of EBITDA and sort of margin level where the additional overhead expenses are actually already built in?
This is Len. I will start with the first one on the PowerVision. In terms of your question of how much that drives forward. I think if you see the guidance we have given -- I won't tell you specifically what it is and I don't have it in front of me on PowerVision, but obviously, our guidance in terms of on OIBDA for the year that obviously accelerates, as we go through the year.
A part of that is due to our leverage on the DL front. You are correct in terms as we've built up a network, you've got to pay for leased space of the cell sites and T1s for backhaul. That is dilutive. As we bring subscribers on, you know probably we have brought on about 0.5 million in the quarter, that will give us better returns, as we go through the year. And we will be bringing on more subscribers, as we go in the second quarter and third quarter. And that's why when you track, you'll see our in tying into our guidance, we will have increases in OIBDA, going forward, each quarter, and a part of that is the data revenue.
As we talked, our data revenue increased 77% year-over-year, which is above our own expectations. The network expense was up in the high teens. So I can't tell you the exact numbers, but yes directionally that is a fair.
So the question of marketing spending -- the marketing spending as I referenced earlier is coming down in the second quarter, both in terms of the sponsorship that we activated around the Super Bowl, and also a little bit slightly less spending as from a brand standpoint. So you can expect decreases, I won't let you the order of magnitude, but that will help us on the SG&A front and we move on to the second quarter the through the year. Typically the marketing expenses will go up fourth quarter, that is a seasonal piece because that tends to be a heavy promotion period.
First of all, I appreciate the question very much. I hope you can appreciate our position. We will provide guidance -- future guidance either as part of the registration process or the separate press release.
Let me just clarify a little bit Jason, we did have a step up in local spending. As you can imagine, I mentioned Trevor is on board now and he is a heavy hitter. But there will still be some additional expenses. We outlined that in our filings -- in the SEC filings as far as our expectations as far the incremental corporate overhead specifically as it becomes a public company.
Jason Armstrong - Goldman Sachs
Okay. So you're talking about a slight step up from the 1Q levels?
Yes. We are not there yet. We mover up in the quarter, we are not there yet.
Jason Armstrong - Goldman Sachs
Okay. Great. Thanks.
Your next question comes from the line Mike McCormack with Bear Stearns.
Mike McCormack - Bear Stearns
Thanks. Good morning, guys. A quick question on churn. If you look at the peer group, Cingular churned out at around 1.6, Verizon a bit lower than that. Can you give us a sense of directionally where we should expect this to go and maybe within you base the churn at iDEN versus the churn on the CDMA subs?
And then with respect to LD, it seems like your revenue guidance might be a bit conservative, particularly given the trends in cable revenue growth. Can you give us a sense there as to what you think pressure points are going to be to get to your guidance?
Let me talk to the churn piece. Yes, as we mentioned, we're flat on churn Q1 to Q1 which is similar the performance we had about a year ago. Where we stayed fairly flat fourth quarter going to first quarter. We're optimistic given the number of initiatives we have them place in and increases were seeing short term and what I would call leading indicators that we can get better at churn performance.
Some of these leading indicators, I mentioned quickly, but if you look at customers service, where we measure service levels, percent of calls answered within 30 seconds. We're executing much, much better on that metric now in the first quarter and moving into the second quarter. If you take a look at calls answered and issues resolved on the first call resolution, we are performing better during the first quarter and into the second quarter. If you look at our retail store customer satisfaction, this is a survey we used a third party to measure internally. Our retail store customer satisfaction is improving for us on a quarter-over-quarter basis and fairly significant improvements.
If you take a look at network satisfaction and through a number of different surveys and that are pretty popular third party surveys, we are seeing our network satisfaction increasing. We are putting as I mentioned, on the marketing side more expense into treatment of the base and that's whether it's process or life cycle treatment. We have better policies now, in terms of the loyalty programs and consistency for handset upgrades across our base.
So when you put that together, that should help was on a voluntary churn side. I think, a big issue for us is getting is the involuntary churn and we have a lot of initiatives that we are now putting in place to treat what we call, or refer to as accounts spending limit customer, our ASL customers, to treat them any more empathetic manner if you will and not be quite as what I would say, would be callous as we have been in the past once they reach their spending limit.
We believe, over time, as a result of about eight or 10 new initiatives we're putting in place, that this could decrease our involuntary churn. So I don't want to give set expectations in terms of where we can go, but we do anticipate we can come down from this 2/1 performance as we move through the year.
Mike McCormack - Bear Stearns
Any comment on the iDEN versus CDMA issue?
No. We're really not separating our iDEN and CDMA platforms. We are just reporting as one wireless metric.
On the long distance, I think our guidance was mid to high single-digit decline on the revenue side, but given the strength that we're seeing in the IT business, I think, it would be more in the low end of that range.
Mike McCormack - Bear Stearns
Great. Thanks, guys.
Your next question comes from the line of Timothy Horan with CIBC World Markets.
Timothy Horan - CIBC World Markets
Hey, guys. I hate to beat a dead horse but on the churn and the subscriber growth side, can you maybe tell us how it trended throughout the quarter and how it's going this year? Cingular -- they have integrated some of their GSM networks. They have seen a step function increase in network quality. Are you noticing that as you're going out there, measuring all the different networks out there? Do you have any networks where you are really seeing the quality improved? Do you think that's the number one determinant of churn?
Lastly, have you been changing your credit on requirements for the lower credit quality subs, and how do you think that compares to your peers out there? Thanks.
Your question about integration, how is that affecting churn and you really have to point to the networks. We feel very good about where our networks are performing and we're investing a lot of CapEx this year to increase that performance. But when we look at both CDMA platform and we look at the iDEN platform, and look at third-party surveys that lot of our competitors also use; and whether you look at loss, you look at drops, you look at signal density, our networks are performing well. Some markets, they are number one, some markets are number two, some they are in the middle of the path. So we feel very good about the networks and their improvements in quality and how we decrease drops and blocks.
I think the bigger issue is more on the advertising front, with some claims our competitors are making in terms of their network quality. You're seeing us now, and we talked about this a little bit at the Investors Community meeting, but we're now executing on that and advertising around the Nation's Most Powerful Network. And that gives you the strength we have in our network in CDMA and taking a look at, not only having the nation's largest coverage in terms of pop coverage, but also we are the nation's fastest high-speed wireless data network. In addition to that, we have the highest performing push-to-talk capability that has very strong applications to it and good customer loyalty.
But we need to really emphasize that message about our network. We've been, I think, more shy about that in the past. So when you look perception surveys, I think customer perceptions of our network is different than reality. That's on us and that's where you're going to see us advertise that more and be consistent throughout our messaging when we're doing promotional ads, to reinforce about having the most powerful network out there. I think that will help us.
All of our plans are on track for the integration of the networks that will occur as we bring out new mobile devices, as we deploy EVDO Rev A in 2007 that will provide the gateway, our rebanding efforts are on track.
I think you heard at our meeting in early March, our conviction to make our network the best network. Certainly, the commitments we are making with PowerVision gives an indication that that will play out that way. Obviously, as we all know, the perception and reality will catch up with each other and I think the reality that we're going to make the necessary investments to have a great network are going to play out.
I think your last question was on credit and obviously your deposits effect in terms of the mix of the base you bring on, sub-prime to prime. We did get more restrictive on credit going into the first quarter coming out of the fourth quarter. That should help us in terms of the mix coming onto the base, it obviously hits us a little bit on gross adds that should help us in the mix, and our focus in getting involuntary churn down.
Timothy Horan - CIBC World Markets
Your next question comes from the line of David Barden with Banc of America.
David Barden - Banc of America
Hi, guys. Good morning. My first question would be on the legacy Nextel, iDEN products, and I guess, I think, over the course of the quarter, I think you guys had expressed some dissatisfaction with how well the products have been integrated into the RadioShack channel; how well it had been branded and marketed in marketplace and also how well the third party channels have been adopting the product. I was wondering if you could talk about what momentum or headway you have had developing that initiative.
And then the second one would be, I was trying to just -- and I'm sorry, taking a step back and trying to tie together all the moving parts on the margin front. You know, in terms of hitting the guidance for the year, it does seem like the first quarter margin was a little softer than we expected. To get to those guidance numbers for the year, what are the big two or three synergy things that are happening that are going to boost EBITDA?
What are the two or three big expenses that you are pushing in the quarter that might be tailing off over the course of the year that would help give us the path to the full year number? Thanks
Dave, I'll take the first and let Paul or Len answer the second please. In terms of the Nextel brand, we are more focused on our advertising of going at the Nextel brands and obviously with its strong affinity it has in the business marketplace. On RadioShack, RadioShack is very committed to selling the iDEN capability and the push-to-talk capability.
It is a learning curve. I think some of the RadioShack comments from a week ago to bringing Cingular on; it takes a little while to learn the iDEN platform itself and for the sales associates to learn how to sell the high performance push-to-talk.
RadioShack is committed to that. We're partnering very much with RadioShack and putting training in place. We expect that to improve as we go through the year.
Generic third parties, as you know, about half of our distribution of iDEN is dependent on third parties and local third party dealers. We have changed our comp plan. We have changed the compensation plan to make it simpler. Also to focus on bringing on higher quality customers and also to get our dealers to focus more on selling the Sprint Nextel lineup and not trying to focus and trying to sell three or four different carriers. We've had very good response to that and we would expect that to increase as we go through the year. Paul, let me turn to you on the margin ones.
Yes. Certainly, one of the things that we mention during our call is that we expect synergies to ramp-up for the rest of the year. Areas that would be contributing to that would be the head count targets or the head count expectations or reduction in head counts for the year, the 4,500. Len mentioned that we are closing some stores and we should see some of the benefits of that.
We have further site consolidations coming together, and we have also on the supply chain management, a number of the initiatives in place that are going to provide us the scale that we anticipated with the merger.
As far as the core business is concerned, we expect a little bit of improvement again in the ARPUs beginning in the second quarter to help out. Also the growth in Boost should be also contributing to the bottom line. Then, as Len mentioned EVDO, as we go through the year, the additional subscriber that we're bringing on to that network should help us on the cost of service side. So we feel we'll get there.
David Barden - Banc of America
Okay, that's great guys. Thanks.
Your next question comes from the line of Tom Lee with JP Morgan.
Tom Lee - JP Morgan
Hi. Actually I just want to clarify some of the comments you guys made. Len, earlier you had mentioned that there was $100 million of integration expense in the quarter. So I just wanted to clarify that. EBITDA in wireless would have been $2.79 billion were it not for that $100 million of integration expense?
And second, just to follow-up on Michael Rollins question about the wireless market. I'm very curious if 2006 -- if the customer, sort of more on the macro side, not just your seasonality -- but have you seen a difference in the type of customers that you can capture today? Is there still a very deep market for postpaid direct that's going to pay high ARPU or, do you see the market shifting a little bit more to sub-prime?
Lastly, I didn't hear anyone ask any questions about the auctions, but as we get to June 29th, and given your pretty sizable position in Spectrum, I just wanted your thoughts on potential participation and the auction, as well as just any thoughts on 4G strategy? I know you guys are talking about a mid-year announcement of that. Thanks.
Hi, Tom. This is Kurt. On the integration expense, we have normalized that out. So when we talk about adjusted OIBDA, it is taking out merger integration related expenses.
Tom, let me answer your question about the postpaid direct. There is, in the industry, there is a mix shift going a little bit to sub-prime, but I think more to prepaid if there's a mix shift. I think we saw that. I think the industry was down about 6% in the second half of '05 on postpaid gross adds. And we've got to wait till everybody announces in first quarter and figure out where that it on prime in terms of the first quarter.
We're seeing that. I think the benefit for us is that our participation in that mix shift is through Boost Mobile. As we talked about it, ICM, the ARPU, and churn characteristics that the lifetime value of the Boost Mobile subscribers is equal to the lifetime value of Add-a-Phone subscriber on our CDMA platform. So we feel good about that, and obviously their lifestyle brand positions well for that.
As we go through the year, on a year-over-year basis, we do expect postpaid gross adds to be less, but when we take a look at the new subscribers coming on, we feel good about the ARPU we're bringing on, especially with our exposure now to the DL PowerVision area and with the strong sequential growth we had that we'd hope we can continue to grow that through the year and bring on, get quality subscribers.
It's not a surprise, more and more of this about being attractive to folks that -- who want to leave one of the competitor's networks and come to Sprint Nextel. As we increase our network performance, increase our customer care experience as I discussed earlier, and also with the offerings around the best performing push-to-talk along with the largest wireless broadband network in all the applications on PowerVision, we think that we're positioning ourselves well to be attractive to switchers.
Gary, do you want to talk at all towards the auction in 4G?
I think you kind of hit it with the question that, Tom in terms of our Spectrum position is very strong across all of the bands: 800, 900, 1900, and 2.5. So that probably gives you an indication that if we were to decide to participate, it would be at a fairly low level. But with the filing date within the next few days, it would be premature for us to declare what our strategy was until that process played out. So we won't do that on this call this morning.
Tom Lee - JP Morgan
Great. Thanks guys.
Your next question comes from the line of Colette Fleming with UBS.
Colette Fleming - UBS
I just wanted to attack the wireless EBITDA little bit differently. If I look in this relative to our numbers, it was solely related to SG&A, which sequentially was up $181 million, which I wasn't expecting given the fourth quarter is usually a pretty high point.
But if you look at, I know you went through some of the reasons, NFL sponsorship etcetera. I guess if I'm looking at the ramp in EBITDA and also kind of the integration expenses, the one thing we noticed that it was the integration costs were lower than what we were looking for and actually ramp down quite a bit from the fourth quarter.
So I guess I'm just trying to figure out, how do you determine what is integration related costs relative to what's going into the G&A bucket, and what is just a regular cost? If you could talk about, how the integration cost will then ramp up also because, I guess, the $105 million relates to a budget that you have this year around $6 million.
Then just a question for Paul, I know you did mention, or you subordinated a position on the dividend for the wireless, is there anything that's holding you back from talking about what the buyback level could be, as well?
All right. Well, let's started with the first question, the timing, actually of the cost to achieve our merger-related costs is literally tied to individual plants, individual programs that we have across the company. So we have a group of people who are tracking basically our synergies by initiative and also tracking our spending.
I think you're going to see a little bit more spending toward the rest of the year as we begin to integrate our systems both financial and actually we have already announced what we are going to do on the billing side.
So from that standpoint, I think, Len mentioned also some of the contributors to our increases in the first quarter from a cost side, EVDO ramp up and also the media spend actually that carried from the fourth quarter. I think those were the areas that contributed to our SG&A being up on a sequential basis.
As far as the cash flow generation is concerned, we highlighted again that we have of ample financial flexibility. The first thing that we did is communicated with our board, who decided to do its intent to pay a dividend on an ongoing basis, based on spin-off of EMBARQ.
As far as talking about the additional cash distribution plans, I think, first of all we have to make sure that -- we have first to wait till the EMBARQ spin off occurs and second of all, in due time, we'll have to make sure that whatever cash distribution plans we have are consistent with the spin off itself; with the tax restriction and pose by spin off.
But we have very clearly indicated that the company will have a lot of cash to distribute to its shareholders, particularly as you look at the amount of cash that company can generate over the next three years.
Colette, this is Len. Just to add on. I think our main increases quarter-over-quarter to your question of SG&A would be marketing costs. Half of that was really to tie to tied to NFL and Super Bowl for that one weekend, and other strong brand advertising we are doing as I mentioned earlier, but that we will have a pretty good decrease in that going into the second quarter.
We also had increases in SG&A in Boost. That's mainly funding what is a lifestyle brand that is performing well, so we're willing to take on more cost and more sales and marketing cost there to bring on more subscribers to build into that. Those will be two main increases. There are some other smaller things, but again we anticipate going into second quarter that, that will be coming down, except for Boost.
Colette Fleming - UBS
The next question comes from the line of Simon Flannery with Morgan Stanley.
Simon Flannery - Morgan Stanley
Good morning. On the local business, the line loss had picked up. I think you mentioned that coming into the year you were 40% cable telephony. Can you decompose the line loss in terms of the various cable and wireless and so forth? It sound like it was mostly residential. And perhaps talk about some of the trends you see for the rest of the year? Because normally Q1 I think has been fairly low line loss quarter for you. Thanks
Sure. Of the 86,000 lines we lost, roughly 50,000 of those were to cable for the quarter; that's up about 10K over what it was in fourth quarter, it was about 40,000. Kind of bringing the total loss to cable since the beginning of cable voice telephony to about 200,000 lines.
Really the change is that now cable has just recently moved to being the number one reason of line loss. It just kind of crossed over wireless displacement as number one. If you were to take a look at our market share of lines in our territory, the way we look at it is we have about 78% market share. About 6% of the lines, if you were to add it up have no phone of any kind; wireless, wireline or what have you. About 9% are wireless only so, cumulatively we have lost the most of wireless only. Cable now comes up to about 3.6% CLEC about 3%.
So, you add those up, you're going to have roughly 100%. So cable now is becoming the number one reason for line loss. And as I mentioned in my comments, they're launching new voice offerings, we hope that the largest impact will be early on with those launches we're seeing; so we saw a lot of those launch in the second half of last year, and of course this will be an even bigger year as we go from a 40% to a 90% penetration of cable voice telephony in our area in terms of lines available. A percentage of our customers that have that as an alternative.
So, yes. Overall percentage of line loss year-over-year was 4.9% on an annual basis, and that's largely driven by consumer. Then of course cable being much more of a consumer play; business line loss is pretty stable, it is not going up because I think we pretty weathered the CLEC storm and in cable it is much less of the factor on the more lucrative business market.
Simon Flannery - Morgan Stanley
Your final question comes from the line of Rick Prentiss with Raymond James.
Rick Prentiss - Raymond James
Yes, two quick questions. One, in your OIBDA that number that you reported, how is non-cash stock compensation either reflected or not reflected in that number? What was non-cash stock comp?
The second question for Len is on the data cards. You mentioned a very significant increase in PowerVision customers from 250,000 to 750,000. Were those data only subscribers or - how many were the data cards? Do you report data only customers in your subscriber numbers?
Hey Rick, I'll take a couple, then Len can talk about the data cards. In terms of the non-cash comp expense that is in adjusted OIBDA, we don't separate that out from OIBDA. So it's just part of the normal compensation expense. In terms of data customer, if a customer has both voice and data services it is counted as one subscriber.
Rick Prentiss - Raymond James
And if they get data only?
The data only is a subscriber, so it's counted in as a subscriber, if it is data only for a card.
This is Len, so if you look at an aircard subscriber, they count as a subscriber and obviously they contribute a lot more to the data revenue. The retail price of a DO aircard is $60 a month. Sometimes that gets discounted. Compared to a normal voice and data subscriber on a handset, they'll sign up for a plan that may be $15 to $25 per month.
So, that's why we commented on the high data ARPU contribution. I won't say exactly where we came out on aircards for competitive reasons, but it is a healthy percent of our adds during the quarter; it's not the majority, but it's a good percent of our adds. I mentioned about the low churn, it's a very, very satisfied customer base that has significant lower churn then our normal handset customers.
Rick Prentiss - Raymond James
Yes, I guess, as we get more and more data only sales we'll have to rethink the whole penetration curve also, comparing subscribers back to the population maybe isn't as relevant anymore?
Yes. That's a very fair point.
Rick Prentiss - Raymond James
Kurt, do you have what the number was for non-cash stock comp because in our view, we always like to back that out and try and value a company based on cash?
Yes. We reported that in the earnings release Rick, in the consolidated section. It was $117 million in the quarter.
Rick Prentiss - Raymond James
Great. Good luck guys.
Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I will now, turn the call back over to management for any closing remarks.
Okay. I just wanted to thank everybody for joining us this morning. And please feel free to give Marty, Steve or I a call, and again Trevor is available to address your questions on EMBARQ specific questions. Thanks everybody, and have a good day.
This concludes today's Sprint Nextel First Quarter 2006 Earnings Call. You may now, disconnect.