Sprint Nextel Corporation Q3 2009 Earnings Call Transcript

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Sprint Nextel Corporation (NYSE:S) Q3 2009 Earnings Call October 29, 2009 8:00 AM ET


Yijing Brentano - Investor Relations

Daniel R. Hesse - President and Chief Executive Officer

Robert H. Brust - Chief Financial Officer


Mike McCormack – JP Morgan

John Hodulik - UBS

Jason Armstrong - Goldman Sachs

Phil Cusick - MacQuarrie Research Equities

David Barden - Banc of America

Michael Rollins - Citigroup

Rick Prentiss - Raymond James

Timothy Horan - Oppenheimer & Co.

David Dixon - Friedman Billings Ramsey

Jonathan Chaplin - Credit Suisse


At this time I would like to welcome everyone to the Sprint third quarter earnings conference call. (Operator Instructions) I would now like to turn today's call over to Yijing Brentano.

Yijing Brentano

Good morning and welcome to Sprint Nextel’s third quarter earnings call. Thanks for joining us this morning. For the format of the call, Dan Hesse, our CEO, will discuss operational performance in the quarter, and then our CFO, Bob Brust, will cover the financial aspects of the quarter.

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 Web site. Slide 2 is our cautionary statement. I want to point out that in our remarks this morning we will be discussing forward-looking information, which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review, including our Form 10-Q for the second quarter of 2009 and when filed, our Form 10-Q for the third quarter of 2009.

Turning to Slide 3, throughout our call we will refer to several non-GAAP metrics. Reconciliation of our non-GAAP performance and liquidity measures to the appropriate GAAP measures for the third quarter can be found on the attachments to our earnings release and also at the end of today’s presentation, which is stored on our Web site at www.sprint.com.

Next, I would like to quickly cover our EPS results. Basic and diluted loss per common share for the third quarter was $0.17 compared to $0.13 in the second quarter of 2009 and $0.11 in the year-ago period. As we mentioned last quarter, we are not providing adjusted net income or loss or adjusted earnings or loss per share values. Table 5 now provides you with selected items, net of taxes, for your analysis.

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

Daniel R. Hesse

Good morning everyone and thanks for joining us and for your interest in Sprint.

If you go to Slide 5, on our last earnings call, I said Sprint is not the same company that it was a year ago. A study showed that customers who had experienced Sprint's service in the past 12 months had a much more favorable view of Sprint than people who had not. I am pleased to report continued progress. Customer Satisfaction with Care and First Call Resolution has now improved for the seventh consecutive quarter and third-party sources, including J.D. Power, Boy Genius, PC World, and Laptop Magazine, confirm the progress we've made.

In addition to improving these two important areas, the customer experience and the perception of Sprint, or our brand, we continue to generate cash, our third key priority. We generated $664.0 million of free cash flow, even after a $200.0 million pension contribution, and ended the third quarter with almost $6.0 billion in cash and short-term investments.

We are far from satisfied in that we have not returned to subscriber growth yet. We did lose a total of 135,000 retail subscribers, which is a combination of our post-paid and prepaid subscribers, but this is the company's best retail net subscriber result in more than two years.

If you go to Slide 6, with respect to post-paid, after years of gross add declines, we are beginning to change this trend. Both our sequential and our year-over-year improvement in post-paid gross adds were the best in Sprint Nextel history. The year-over-year gross add improvement is the best in four and a half years and the sequential improvement in gross adds is the best in more than five years.

Based on our preliminary analysis, we believe that our third quarter share of post-paid gross ads improved sequentially by more than 120 basis points. Because of the strength of our third quarter gross adds, we improved our post-paid net subscriber result by almost 200,000 subscribers sequentially, and by more than 300,000 subscribers compared to last year.

While acquiring more customers put pressure on our third quarter OIBDA [Operating Income before Depreciation and Amortization], the improved productivity of our sales and marketing costs resulted in an 8% sequential decline in our average post-paid acquisition cost per customer. We are being prudent and selective. The percentage of our post-paid customers that have prime credit ratings are the highest in Sprint Nextel history as well.

On Slide 7, the other element of our retailer subscriber number, our prepaid business, delivered another very strong quarter, with our third consecutive quarter of over 600,000 net adds. During the first three quarters of 2009, Boost has generated over 2.1 million net adds, which is more prepaid net adds than any carrier reported on a full-year basis in 2008. We are still on track to close the Virgin Mobile acquisition in the fourth quarter, with the goal of strengthening our position in the growing prepaid market.

Slide 8. Over the last seven quarters, we have focused on six initiatives, which have each contributed to improving our performance. The first was Simply Everything, which soon after launch helped us to stabilize ARPU by growing CDMA data ARPU, which at above $19 continues to be the highest in the industry. Of customers who migrate to Simply Everything, more buy up than buy down.

Slide 9. The second one is Ready Now, an industry first which provides Sprint customers one-on-one device set up and training, especially helpful with complicated smart devices. Customers who participate in our Ready Now program stay with us at twice the rate of those who do not participate and Laptop Magazine recently gave our store experience a grade of A-, tied for first place.

Slide 10. Another area we have given a lot of attention to is our device portfolio. Back in 2008 our handset portfolio was considered, by some, a liability. It is now widely considered a strength. PC Magazine and C-Net, along with other third parties, acknowledge the quality, breadth, and depth of our device portfolio. ZDNet observed, "Sprint now has the most compelling line up of smart phones out of the four major U.S. wireless carriers."

Our handset portfolio is not defined by a single device. The CTIA, at the recent San Diego show, named the eco-friendly Samsung Reclaim as the hottest-in-show. The HDC Touch Pro 2 was named hottest smart phone and the MiFi Mobile Hotspot was named hottest mobile Internet device or netbook. The Pre, which was recently recognized by Popular Mechanics magazine as one of the top ten most brilliant products of 2009 and it was also the only device to receive this honor.

In 2009, Sprint has launched or announced 16 new smart touch or QWERTY devices with a full selection of operating systems. During the quarter we also enhanced our iDEN handset portfolio with the Motorola Clutch I4-65, the first push-to-talk handset with a full QWERTY keypad and the I 856 Debut, the first push-to-talk slider. We will be the first to launch another powerful sleek and affordable device, the Palm Pixi. It will be available in November, exclusively from Sprint, for $99.

Sprint was a charter member of the open handset alliance. We recently launched the HTC Hero and announced the Samsung Moment, both Android-based devices. And Gadget recently said, "HTC Hero seems to trounce the My Touch 3G. It's really hardly a contest."

Walt Mossberg of the Wall Street Journal noted, "Overall, I found the HTC Hero to be the best Android device I have tested and a worthy competitor to the iPhone, the BlackBerry, and the Pre."

PC World said, "The unveiling of the Samsung Moment is definitely the biggest handset announcement at the fall CTIA conference in San Diego."

Slide 11. The simplicity and value we introduced to the prepaid market in the first quarter of this year with Boost Unlimited has yielded the record-breaking prepaid market results I've already covered.

Going to Slide 12, we have worked hard to build and engineer a large 3G network, twice the size of AT&T's and 14 times the size of T-Mobile's. Yes, 14 times. But data leadership will require the capacity and the speed that only 4G can provide. Sprint has launched 17 markets and we plan to cover over 30.0 million people by the end of this year. We plan to launch many additional markets in 2010.

Slide 13. We introduced another innovation, Any Mobile, Anytime, three weeks before the end of the quarter. It builds on our core brand attributes of simplicity and value and the early results are encouraging. Kiplinger just named Any Mobile, Anytime the best cell phone plan in the company's annual Best List. You can pick up a copy at your newsstands.

Slide 14. Our top priority has to improve the customer experience. As I mentioned, we now have seven straight quarters of steady improvement in our core customer care metrics, which are: first call resolution and customer care satisfaction. Calls per subscriber were down 17% year-over-year and we were able to discontinue the use of four more vendor call centers during the third quarter. This brings the total for seven quarters to 27 sites closed.

Our September survey results shows customers chose the top box and gave us the highest possible score increased by 26%, while respondents who chose the bottom box and gave us the lowest score decreased by 38% on a year-over-year basis.

Slide 15. Network performance is also a key element of the customer experience. Our network is performing at new, best-ever levels as the network advantage is recognized by PC World which names Sprint's 3G network as the most reliable in comparison testing. A Boy Genius-sponsored comparison test showed that Sprint's 3G average download speeds were the fastest among the major national carriers.

Slide 16. Business and wholesale customers are very important to Sprint. Sprint tied for first in an independent third quarter company liable wireless loyalty survey. We were recognized earlier this year by Atlantic ACM as best-in-class for our wholesale data product quality and the wholesale provisioning in customer service experience.

More recently, we were recognized again by Atlantic ACM with an excellence award for our VoIP quality and for the quality of our customer service for our business customers that use IP-based and converged services.

We recently launched our emerging solutions business unit, focused on innovative devices and applications that will transform how wireless are used to interact with people and machines.

As part of our commitment to new wholesale solutions, we recently introduced the partner interexchange network, which is a community of partners who can directly exchange VoIP services while operating on Sprint's global IP network. Because there is a direct exchange between partners, terminating access fees to [the Lex] can be avoided.

Slide 17. We lead by example in the areas of corporate social responsibility like our environmental initiatives. Newsweek recently conducted the most comprehensive evaluation of U.S. corporate environmental policies and performance. We are pleased that Sprint ranked 15th out of 500 corporations on Newsweek's 2009 Green Rating List. Sprint was the only telecom company in the top 100.

In conclusion, we had some successes in the third quarter but we still have much progress to make. We are beginning to turn the corner in gross adds but we must reduce churn further. The innovations we have introduced these past seven quarters have made a positive difference and they will continue to contribute to our turnaround. We plan to continue to innovate.

We are generating cash to strengthen the company financially but we need to make even more progress on the subscriber front before we can improve earnings. I would now like to turn it over to Bob Brust, who will discuss our financial performance in more detail.

Robert H. Brust

Moving on to Slide 19, we had another strong quarter in terms of free cash flow, generating $664.0 million in the third quarter, after a $200.0 million pension contribution. Excluding the pension contribution, free cash flow was $864.0 million compared to $676.0 million in the second quarter. Good working capital results contributed to the cash results. We continue to expect to generate positive free cash in the fourth quarter.

Or liquidity position continued to strengthen in the third quarter. During the quarter we repaid our $607.0 million Nextel Communications convertible senior note that was due in 2010. We also issued a $1.3 billion senior note due in 2017 for general corporate purposes. We have no remaining significant maturities in 2009 and we have $1.7 billion in debt maturing in 2010 including the $1.0 billion return we have drawn on the revolver.

We increased our cash balance, ending the third quarter with $5.9 billion in cash and short-term investments and $7.5 billion total liquidity. Our liquidity position continues to be a primary focus, ensuring that we can meet our financial obligations.

We have more than enough cash on hand to pay our debt maturities through 2011. Looking out further, we need to generate $1.7 billion in cash, or an $100.0 million per quarter, to fund our debt obligations through 2013.

In addition to this, we will make the necessary cash payments associated with Virgin Mobile and IPCS transactions. We currently expect the combined cash required to close these two deals will be up to approximately $700.0 million.

We are acquiring IPCS for approximately $831.0 million, including the assumption of $405.0 million in net debt. We expect to achieve around $30.0 million of synergies annually in the IPCS transaction and we expect the transaction will cash flow accretive in 2010. Under the terms of the agreement, Sprint Nextel commenced a cash tender offer to acquire all IPCS outstanding common shares at $24 a share.

We spend approximately $430.0 million in capital during the third quarter compared to approximately $320.0 million in the second quarter of 2009 and $485.0 million in the third quarter of 2008. The 2008 number included $134.0 million of 4G expenditures.

Year-to-date we have spent over $1.0 billion in capital. We expect our full year 2009 capital spend will be less than $1.7 billion. We remain focused on network quality for our customers and will continue to spend the capital necessary.

We are investing in two areas in particular that I would like to mention. The first is our affiliate modernization program which involves expanding our EVDO footprint, replacing end-of-life equipment, and adding capacity in certain markets that we acquired during the affiliate purchases. This program is well under way and will continue into 2010.

Second, we recently approved building over 600 additional cell sites to improve quality and expand coverage into high-growth areas. With the strong growth we have seen in Boost subscribers, we continue to monitor the iDEN network very closely to ensure that we are sustaining the appropriate level of capital spend.

Moving on to Slide 20, our consolidated OIBDA for the quarter was $1.506 billion, down sequentially from $1.769 billion in the second quarter and $1.824 billion in the year-ago period. Consolidated operating revenues declined 1.2% sequentially, primarily as a result of fewer post-paid subscribers. Post-paid ARPU remained flat at about $56 for the seventh quarter in a row as we saw ARPU benefiting from fixed rate bundle plans such as Simply Everything, offset by lower usage and roaming revenue. Strong growth in Boost prepaid subscribers and ARPU continued to help offset post-paid revenue declines.

Turning to the cost side, net subsidy expense increased sequentially by $108.0 million as a result of higher post-paid gross adds and increased post-paid upgrade volume. Post-paid subsidy rate also increased due to growth in the mix of smart phone and touch devices.

Internal labor and care expenses were down sequentially, however, cost of service was higher due to seasonal factors. Bad debt also increased sequentially, however, the percentage of post-paid customers that have prime credit ratings continue to improve.

Wireline OIBDA was sequentially lower with approximately half the decline due to lower revenue and the remaining due to higher net cost. Boost contribution to OIBDA improved sequentially during the third quarter as we benefitted from a full quarter of customers brought on during the second quarter, as well as strong net additions in the third quarter.

In summary, the 3.0 million post-paid subscriber losses in the first three quarters of 2009 put pressure on the third quarter OIBDA. Additionally, most of our cost reductions occurred in the first half of the year with little incremental benefit in the third quarter.

Looking ahead, we are encouraged by the recent progress we are seeing in post-paid subscriber results and are in the process of identifying the actions to improve our cost structure in 2010 to ensure that we continue to generate sufficient cash flow to meet our obligations.

Now I will turn it back to Yijing for our Q&A.

Yijing Brentano

In just a minute Celeste will instruct our listeners on how to queue up for the Question and Answer session. I want to point out that you may access an audio replay or Web cast of our presentation on www.sprint.com. We will now open the line for your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Mike McCormack – JP Morgan.

Mike McCormack – JP Morgan

Just a couple of things. First, on the subsidy cost, any sense for how that might be trending, sort of looking into next quarter? Obviously we still have a decent improvement in gross adds but paying for it on the subsidy side.

And secondly, when thinking about being a nationwide provider of service, a certain level of selling and marketing expense probably has to be there. Can you give us any sense for fixed, if you want to call it a fixed cost versus a variable cost, in the business as far as leverage goes.

And secondly, the Any Mobile, Anytime product, can you give us a sense for the early takeaways there, whether you are seeing people going up or down towards that product?

Daniel R. Hesse

Was that only three questions this time? Let me try to take them one at a time.

On the subsidy cost, fortunately or unfortunately, the mix of, in essence, smart phones continues to increase. It was actually up significantly sequentially in our third quarter mix versus our second quarter mix, and we don't see any of that abating.

The good news is ARPU is higher and churn is lower for people who go to smart phones. So from a long-term point of view, from a customer lifetime value, that is a positive trend but it does hit you in the short term when your gross adds go up in particular. And again, we don't see that declining.

Actually as we go into next year, when we expect to launch a number of multi-mode 3G/4G devices, which we think will be very hot, those will carry some significant subsidies as well. So I think it's a trend that's kind of with the industry to stay. But it's not necessarily bad for the industry health, it just changes the economics in that the subsidy expenses will be higher.

Second, with respect to selling and marketing costs, I don't think we break those out specifically, but there is no question, there is a fixed cost element. For example, retail stores and what have you, so we are hoping actually, as we look at our cost and margin performance going forward, that if we continue it improve trajectories and things like gross adds, that our costs as a percentage of revenue or the effectiveness as you think of it in terms of the cost per gross add, or what have you, will improve with volume because there are significant fixed costs.

The third question with respect to Any Mobile, Anytime, we only launched it with three weeks left in the quarter and it's kind of too early to—I had similar question with respect to Simply Everything—it's too early to make any definitive statements because you can see different trends very early than you see over a long period of time, and I think I can tell you more after the end of next quarter, but suffice it say we are pleased with what we are seeing in Any Mobile, Anytime, including the customers that buy up versus buy down.


Your next question comes from John Hodulik – UBS.

John Hodulik - UBS

Just a quick question on the margins. Obviously margins saw a bit of a hit this quarter and looking forward it sounded like you were saying that you don't really to see improvements in profitability until we see further a further improvement in the sub-losses segment. And then you talked a little about having more smart phones in the market in the fourth quarter. It sound like we are going to see further margin degradation in the fourth quarter and maybe some stabilization in 2010 if we can get some more cost cutting through the system. Does this make sense? I'm just trying to get a sense of how we should look at margins, leaving 2009.

Robert H. Brust

There was a lot of pressure on margins due to the cost associated with getting those new adds and the continued drop in revenue. Revenue dropped 1.2% during the quarter. As you look at the cost of operations, we kind of do that in three pieces. One is the day-to-day cost, we constantly monitor and keep pressure on day-to-day spending. We review all projects that are coming up for spending every week.

And then as we go into a new year, which we are about to, and we look at how things are setting up for next year, when you look at the big project changes, the big cost changes that we have to implement.

And so those will be lined up so that we can successfully generate plenty of cash and get the margins more stabilized. There was a drop in the quarter, there will be pressure in the fourth quarter as we go into new product adds in what's hopefully a busy quarter, but that should get better next year as we launch a whole new set of cost initiatives as we move into the 2010 planning process.


Your next question comes from Jason Armstrong - Goldman Sachs.

Jason Armstrong - Goldman Sachs

On the comments in terms of improvement in post-paid losses, guidance for improvement into Q4, can you give us any more granularity on that, maybe talk to us about pacing through Q3 that puts you on that type of trajectory.

And just given what we've seen competitively, that the T-Mobile refresh, the device refresh from both T-Mobile and Verizon, just why you are confident in that trajectory into Q4.

And second question, on credit standards, 85% prime, very strong improvement there, I'm just wondering is that a level that you think is sustainable from here or do further gross add improvements really require loosening those standards a bit?

Daniel R. Hesse

I think the guidance is pretty straight forward for the fourth quarter and for the year in that we intend, or expect, to have not only have better year-over-year total performance, but we expect that sequentially Q4 will be better in terms of both total and post-paid losses than Q3. All I will say, because I am not going to talk specifically about Q4 performance, but the fact that we are saying that confidently in the middle of Q4, I think I will just leave it at that.

As you did mention, we have seen some new competitive activity. We think we were kind of out in front with Any Mobile, Anytime. As I mentioned earlier, the early results of that are positive. So we think from a rate plan perspective we have a really good strong set of offers whether it's Simply Everything, Any Mobile, Anytime, or family plans and what have you.

The device line up, because it's a very important part of adds for Q4 as well as 2010, launching two new Android devices. You know, the HTC Hero, which has gotten a lot of buzz, very positive buzz, in on the market. The Moment coming soon, the Pixi coming soon, in the fourth quarter. So we have some new hot devices. Of course, you've got the BlackBerry Tour and the MiFi and the Reclaim, the new Instinct HD, which has a high definition camcorder in the phone. All of those, which is also a new device. We have a strong device line up which is also very important. We continue to get great third-party recognition, we are starting to get credit for how much we've done to build a great network in 3G.

And also, very importantly, as I mentioned in my comments, it is too early for it to move the needle a lot but it's going to give us momentum, we hope, into 2010 and that's 4G. We have launched 17 markets but most of the POPs for 2009 will come near the end of the quarter, but that's giving us some good lift in mobile broadband, in particular in those markets. And as we expand the device line up in 4G—dual-mode 4G/3G—it will really put us in a good position, going forward, kind of leaving 2009 and going into 2010. So we think 4G and dual-mode devices, as they come on board, will start to give us some lift going forward.

So net-net, here we are kind of well into Q4 and we feel good about the forecast that we are providing for Q4.

Jason Armstrong - Goldman Sachs

And on the credit standards question?

Daniel R. Hesse

I keep forgetting these multiple questions. As we mentioned earlier, we are at about 85% prime and we see nothing in the future that would change that percentage significantly so we think that's probably about where we will be for some time, in terms of our prime/subprime mix. It's something that we monitor very, very closely. Because it's not just—there are very profitable segments of subprime. You can't just take a look at subprime as a total. So what we try to do is figure out what are the offers—and of course, Boost Unlimited is a very, very important element of that in terms of taking a look at the overall market and how best to address it, and it's primarily focused—not exclusively, but primarily focused on the subprime market and that has been very successful.

But we also have certain products and offers in our—and of course, there's deposits and other kinds of things in the post-paid world that help us market some products and capabilities to subprime that still make economic sense for us.

But we will monitor it very closely but right now, again, think of that 85% prime range roughly as something at least we forecast going forward.


Your next question comes from Phil Cusick - MacQuarrie Research Equities.

Phil Cusick - MacQuarrie Research Equities

I wonder if I can go back to Jason's question a little bit and try to talk again through the Q3 trends. It seems like July you just weren't doing a whole lot. Things started to ramp up in August and then you did a lot of promoting in September. Can you help us think through those trends, and has the business really hit an inflection point in terms of the gross add mix, or the gross ads, similar to August and September, that should continue.

And then second of all, on churn, we're still running at this sort of low-2s level. We've been talking about this for quite a while and with credit metrics ramping up, customer service impressions very high, what do you think of the timing for this starting to come down, and is there something that's really holding us back from getting that down to a more reasonable level?

Daniel R. Hesse

With respect to the third quarter, if you go out and do your research, you are correct, we finished the quarter stronger than we started the quarter and the real credit has to go to Any Mobile, Anytime. That, we launched, as I mentioned earlier, near the end of the quarter and we have seen nice lift from that offer. And again, of course, it's in the market in the fourth quarter and I won't give any more detail beyond that, but our trajectory leaving third quarter did improve and it was largely a result of Any Mobile, Anytime.

It's too early to tell, but what we're hopeful is that now with the billing cycles beginning to hit and we're providing Any Mobile, Anytime to our base, people who are on, if you will, any of our Everything plans, as well as hopefully getting customers to migrate, that this new offer will make a difference in churn.

We want to have a lower, and we have a lot of efforts in place to try to reduce post-paid churn below where it is. There are seasonal factors, of course, between Q2 and Q3. We actually had less of an increase in Q3 versus Q2 than we did a year ago. We were up 12 basis points this year, we were up 17 last year. But still, it is too high.

There are elements of brand perception, if we continue, and you mention this as well, if we continue to improve the customer experience and just do this quarter after quarter, we hope that will make an impact. Simply Everything did a lot for churn last year, but at the high end. As a matter of fact, before we launched Simply Everything, our highest churn was with our highest ARPU customers. And after we launched it, our highest ARPU customers became our lowest churning customer base, so we know these plans, these really simple plans, have a very good impact on churn.

So we're moving it, if you will, down the right card. We're hoping there will be a churn improvement impact of Any Mobile, Anytime, but we need to continue to improve the brand and of course, competition is getting tougher among post-paid competitors as we are increasingly needing to go after each other's base for growth. And the industry growth, largely in terms of decisions, is more on the prepaid side, which is another reason that we are kind of doubling down on the prepaid market and that we think there will be more growth there generally than in the post-paid market.

But you've put your finger on a very, very key issue for us. We need to improve churn further on the post-paid side and we are going to do everything we can to accomplish that.

Phil Cusick - MacQuarrie Research Equities

Can I follow up on the Any Mobile? Given what's a pretty significant ARPU drop sequentially, still rounding to 56 but definitely below it now, should we look for that to come down again in the fourth quarter, given Any Mobile, or is that plan not going to be very dilutive overall?

Daniel R. Hesse

We are not providing that specific forecast or guidance yet with respect to—as I mentioned, it's very early with Any Mobile, Anytime and we're not providing guidance year for Q4 ARPU either, but like Simply Everything, where we had a good mix of customers buying up as well as buying down, we're going to work very hard to try to do that with Any Mobile, Anytime as well. So we will provide more of that going forward.


Your next question comes from David Barden - Banc of America.

David Barden - Banc of America

If I could kind of follow-up along those lines, from a business strategy and financial perspective, Dan, you've been working at this a long time, getting the customer metrics up, getting the network improved. Handset pricing is moving to zero. Your competitors, from a pricing standpoint, are kind of moving on top of you. The churn number isn't moving anywhere and industry growth is kind of slowing down. Is there any thought to maybe a change of strategy, which is let's not go out and try to give away $700 to $800 a customer in the form of free hand sets and services and such, but maybe just put all our energies into the churn side of the equation and try to shore up the business to the strongest part we can? I guess when I hear Bob talk about cash flow, fifteen times in his presentation, for a wireless company it does feel like you are more focused on more of the survival aspect of the business than the growth side of it. And I would love to hear what you thought about that.

And the second question would be—presuming the answer to that is no way, then from the standpoint of Virgin Mobile and that acquisition, could you run us through how you are thinking about that business and how it strategically fits with the rest of the company, has evolved since the announcement.

Daniel R. Hesse

Boy, after that first part, it's kind of like other than that, Mrs. Lincoln, how was the play? But there is no question it's a very competitive environment out there, but that being said, I can't think of an industry I'd rather be in and I think Sprint Nextel is in a fantastic position if you take a long-term view, given the fact that we're a pure play in a terrific industry. And there are dynamics that are changing and they're moving, as you mentioned, to more expensive handsets that do more.

But I think very much like, you know, when we talk about digital one rate over a decade ago, bringing—really the growth revenues came in from pay phones and calling cards and other sectors. I think we're going to see that in our industry as well. And you are going to see this whether it's the Googles, the Microsofts, you look at all these companies, they're putting a lot of emphasis on wireless and wireless devices and we believe, long term, we have to be there and there is just so much more upside, even if there are some short-term impacts that you mention with respect to subsidy.

So we have to have a balanced attack, if you will, to get to growth. Our intention is to get to growth, to get to subscriber growth, to get to revenue growth, and we need to both decrease churn and improve gross adds. So our plans are really, we believe, a very balanced and thoughtful effort to do that while continuing to generate positive cash flow.

And as Bob indicated in his comments, we are now working really on 2012's maturities, so we have got a lot of head room, if you will, or runway, to get that done.

Another important area of growth, though is we mentioned, like data and what's going on in 3G and 4G. And again, our leadership position in 4G I think will give us—and one of the reasons we're building the brand around 3G and 4G, or data, is because I think the industry's best days are still ahead of it.

But the other area of growth, in addition to data—which tends to be heavily post-paid world just because of the expense of the devices, today. That may change over time but the smart phones are pretty expensive devices and really require a contract—is prepaid. Prepaid is growing very nicely because a lot of users want the flexibility of no contract or they may not have a credit rating that will allow them to enter a post-paid contract. So Boost has been very successful and we think that Virgin, because it uses our platform, not only will bring us synergies, in terms of our post-paid, but we think there's an opportunity to use that Virgin brand in conjunction with our Boost brand, very effectively, to increase our share of the prepaid market.

So we are, in terms of growth, looking at prepaid as a potential growth engine for the company and we do still intend to get our post-paid business back to growth and we can't do that by only focusing on churn reduction. We have to do that and—you know, you can't win a game on just defense, if you will. You have to have a defense and an offense. And so we're going to have, if you will, a two-pronged attack. So I guess that's a long way of saying no way. I think that was your first question.


Your next question comes from Michael Rollins – Citigroup.

Michael Rollins - Citigroup

Two quick questions. First, if you just divert into your CDMA business, could you give us an update as to what percent of the subscribers are actually 3G EVDO capable, and are you seeing a different trend for those customers versus the broader base.

And the second question is if you could just talk about capital for 2010 and how investors should think about capital spending levels over time.

Robert H. Brust

On the capital for next year, as we currently see next year, we don't see much change from the initial guidance we provided this year of somewhere around $2.0 billion. As we go through the final budgeting process and we look at any more expansion and cell sites or anything, we will fine-tune that, but somewhere around that area would probably be a good place to go.

Daniel R. Hesse

With respect to your first question, we don't break it out in terms of what we talk about publicly with respect to EVDO versus non-EVDO. What we do talk about, though, I guess a good surrogate, if you will, would be what we call Smart Touch QWERTY. They tend to be heavily, if you will, kind of surfing or data or 3G devices. It is starting to creep up to certainly well over a third of our gross adds and increasing each quarter, that are those devices.

And from an ARPU perspective people who buy those devices are $80. So we do look at the economics, we look at CLVs. We look at it on a phone basis, we look at it on a rate plan basis, we look at it on a market segment basis. But we don't look at it on the platform EVDO versus 1X. I haven't seen that number so I can't give you—even if I had it I might not tell you. But we see higher CLVs, if you will—customer lifetime value, sorry—with customers that take data than those that don't.

Michael Rollins - Citigroup

And just if the gross adds over one third on smart devices, how should we think about the ending penetration at the third quarter of those smart phone devices, or integrated devices?

Yijing Brentano

We don't disclose that number. And it's well over a third of the gross adds and upgrades.


Your next question comes from Rick Prentiss - Raymond James.

Rick Prentiss - Raymond James

Dan, you have spoken a couple of times about the 4G plans having 30.0 million POPs by year end 2009 covered. Can you talk a little about how much more funding Clearwire might need and you ready to put some money in to get those POPs up even higher than what they're funded for.

And the rebanding issue, can you update us where you are on that? It looks like there is still, from the FCC original commitment, maybe over a billion dollars still outstanding on that. Just what your thoughts are as far as how you're coming along on that. Is it going to be extended or is that the right number to be thinking about?

Daniel R. Hesse

With respect to Clearwire, they are intending to continue to raise funds for what we consider an aggressive build-out of the 4G network. The Clearwire call is coming up in a few weeks. I think it's maybe the second week in November, if I remember correctly, and it's probably better to leave—I think it's November 10—to leave some of those specific Clearwire questions to them because they are a separate public company.

But as I said earlier, the Sprint is able and supportive of funding our proportionate share of what it would take if the company decides to go internal to its investors to raise money. If that is the case, we are in a position to do that because it is very important to our future that this 4G network get built out and so we are quite supportive of that.

I'm sorry, what was the second question again?

Rick Prentiss - Raymond James

About the rebanding. Just an update on how much you've spent, when it has to be fully spent, if it's sliding out or if the dollar level is still maybe a billion dollars outstanding commitment.

Daniel R. Hesse

The range of total cost is still expected to be in the $3.2 billion to $3.6 billion and we have spent, if you will, $2.3 billion so far. There is, of course, a letter of credit. It's currently at $1.8 billion, which is down from the original $2.5 billion. We have got, in the second quarter, an FCC reduction in that letter of credit commitment, so we're still ready and intend to complete the rebanding and the retuning, but those efforts will probably continue beyond March of 2010.

Rick Prentiss - Raymond James

And that's obviously, I would expect, not in Bob's guidance on capex?

Robert H. Brust

Yes, it is. We include that in capex.

Rick Prentiss - Raymond James

There have been a lot of discussion on industry consolidations. Will it take industry consolidation to get some rationality here? Or just kind of where are your thoughts on price discipline and how this industry is playing out. Do we need to see consolidation to make it more logical?

Daniel R. Hesse

That's a hard question. It's interesting, here we are a company of over $35.0 billion. We're a pretty large company, on our own, if you will. You're correct, there's more competition in the U.S. than any wireless in the world. That is the case. So it's hard to say whether there will be any consolidation in the industry, going further, particularly among the major players. That's not to say that there couldn't be some benefits to consolidation, but I don't think it's required. So I'm not saying it's not beneficial that there would be consolidation going forward of the industry, but I don't think it's required.

I feel good about Sprint and our position from a long-term point of view.

Robert H. Brust

I misspoke on that. We do not—the rebanding is not in the guidance for the capex. That's in addition to. It's too early in the morning for me, but I misspoke on that one.


Your next question comes from Timothy Horan – Oppenheimer & Co.

Timothy Horan – Oppenheimer & Co.

Dan, maybe you can talk a little about the pricing environment for the industry. I know it's related to what you were just talking about, but there have been a lot of moves the last 18 months, on both post-paid and prepaid. Do you think we have kind of hit a point where we can maybe see some stability here on post-paid and prepaid? And how do you think your pricing lines up at this point versus your peers?

And kind of related to this, with all the pricing movement in the prepaid market here in the last couple of months, has that impacted your prepaid business and wholesale business much? And maybe the trends throughout the quarter in that business.

Daniel R. Hesse

First of all, with respect to prepaid and our pricing position, we like very much where we are. We think we're at a good spot. As I mentioned, three quarters in a row of over 600,000 net adds. So a very steady, very, very strong performance at the price levels where we are.

With respect to post-paid pricing, really the only significant move we made was Simply Everything, which as I mentioned earlier, really stabilized ARPU. And we tend to think about pricing more from an ARPU perspective. And in the industry ARPU has actually been holding in there pretty well. And what we're doing on the pricing side is we're really focusing more on the simplicity. Not only because customers like it, it's a way, from our perspective, to get customers, if you will, to buy up. And very importantly, to reduce churn and to reduce calls to care.

The one area where there has been, if you will, more aggressive price competition in the past years, is around handsets, and it's the increase in the number of smart devices out there in the marketplace and they carry heavier subsidies. But we kind of regularly take a look at our pricing, with respect to the industry. Our rate card versus others. And even though there have been, and there will always be in a market as competitive as the American wireless market, there will always be changes. We think we are well positioned.

Timothy Horan – Oppenheimer & Co.

And the recent T-Mobile pricing, do you think that will have much impact on you? They seem to be kind of pricing in line with where you're at. It sounds like you think your pricing is competitive even with these recent moves.

Daniel R. Hesse

We do. We think our pricing is competitive with the market.


Your next question comes from David Dixon - Friedman Billings Ramsey.

David Dixon - Friedman Billings Ramsey

I wondered, Bob, first of all, with respect to capex guidance that you provided there, for 2010, whether that would include the impact of any potential strategy shift on prepaid, on iDEN versus CDMA. We are seeing that iDEN business being de-emphasized in other jurisdictions, particularly in Canada and monetizing that iDEN business specifically. Perhaps if you could give us some commentary around the implications of [inaudible] over the CDMA potentially, for very different usage profiles on prepaid versus post-paid and certainly surprised by how low the capex is being indicated here for 2010.

And just a question, shifting to the advertising strategy, Dan. Could you talk about the evolution of the adverting strategy here? The tweaks and the focus there, perhaps in reaction to the competitive dynamics.

And then just stick with the trends on the third question, just in terms of the device line up here, it seems like we're moving away from perhaps a unitary focus on particular devices to more of a portfolio approach. It looks like the industry is taking bigger bets on the lower-cost Android platforms here. I wondered if you could comment on your positioning there and your relationship with Google going forward.

Daniel R. Hesse

You're probably calling from the U.K. and it's later, if you are, in the day. It's kind of early in the morning to keep track of so many questions, but I'll do my best.

The first, with respect to capex and migration, we launched Boost Unlimited, as you know, as a way of using the spare capacity on the iDEN network. And it's been very effective in doing that. And so going forward, so it really has been a very good way for us, the best way, we believe, of monetizing that asset. And so it has not required additional capex on the iDEN network, significant as we also have been able to increase revenues and contribution from that network with Boost Unlimited.

If we get to the point where certain markets—and again, you look at it on a city-by-city basis, because we are committed to maintaining great quality for all of our customers on the iDEN network, post-pay or prepaid—we would look at increasing the capacity of our network in those cities. And we'll look, because we have two platforms, CDMA and iDEN, we will take a look at what makes the most sense in terms of the best return on our capex investment in 2010. And we're in the process of doing that, whether that is on iDEN or CDMA, to handle that traffic.

But we see our current strategy of using prepaid as a way of using, if you will, filling up the seats on that airplane that we own, as a very prudent one.

The other thing I will say, is on for future in terms of capex, think of Clearwire, as well, as the next wave of capex requirements in the U.S., particularly on the post-paid side, is going to be building out 4G. And think of Clearwire as helping us almost cap, because we will still continue to improve coverage and increase capacity in our 3G network. But we can mitigate the amount of capital required for continued expansion of capacity in our 3G network with 4G. So as you are thinking about—it seemed like you thought our capex spending might be perhaps low going forward. A lot of that capex, the data capex, is being picked up on the Clearwire side.

With respect to advertising, we have actually had the Now Network campaign going for some time now, and as I think we mentioned on the last call a quarter ago, it was picked in Cannes as the best comprehensive advertising campaign in the world, out of thousands of entries. The Now Network is a tag line that in a very short period of time is extremely well recognized by customers. So we feel very good about how that is doing.

And of course, it's great when you have a good message, Any Mobile, Anytime. One of the reasons that we chose that as an offer was—we did some market research—it's very easily understood and very interesting to customers. So your advertising is pretty much as effective as the offer that you have to go along with it. And so we feel good about our advertising campaign, which has really been consistent around the Now Network for quite some time.

The third question had to do with the device line up and we do think that it's important to have a broad portfolio. That is our plan. You mentioned Android, I want to make sure I answer your question. We have two devices in the portfolio now that are Android. I think it's fair to assume that we will have additional, significant—we will have more Android devices going forward. As well as other OSs. We just recently launched a phone, the Samsung Intreprid, which as Microsoft Windows Mobile's new 6.5 operating system. Of course, we've got the new Palm Pixi coming out, which as the Palm OS. Recently we launched the BlackBerry Tour a few months, which has RIMS OS, so we're going to continue to support a number of operating systems, including Android.


Your final question comes from Jonathan Chaplin – Credit Suisse.

Jonathan Chaplin – Credit Suisse

On the churn front, in the past you've said some of the efforts that you had put into improving churn trends had been masked by an increase in churn related to the economy, so I think predominantly in the corporate sector. I'm wondering if that is still a factor, if you sort of look at the underlying trends in churn, whether there really is an improvement in the non-economically sense of the portion of the base.

And I'm wondering if you could perhaps provide some insights into the churn on the CDMA network versus the iDEN network.

Daniel R. Hesse

With respect to the churn—and I appreciate you having one multi-part question—you're right, iDEN churn is higher than CDMA churn but the iDEN trends are better than the CDMA churn trends. With respect to your question, with respect to economically-driven churn, we're not seeing that get worse. Whereas we have seen that stabilize and that's positive. It portends well for business churn versus consumer churn. So the increase in churn that we were seeing early this year was being driven primarily by business and economically-driven factors, i.e. lay-offs, in cost cutting in companies. We are seeing that stabilize. That is definitely not getting worse. Does that answer your question?

Jonathan Chaplin – Credit Suisse

Yes. It would be helpful to know if you take out the economically-sensitive impact, whether the underlying base, the normal consumer base, whether you are seeing an improvement in churn trends there.

Daniel R. Hesse

No, we are not seeing an improvement in churn there yet. We saw sequential churn go up and that is Q3 from Q2, there have really not been large economic impacts on the consumer side. The economic impacts have been much more on the business side. We have seen more customers generally go to prepaid so it is funding, if you will, some growth there. But in the third quarter sequentially, part of the increase—the lion's share of the increase was seasonal, but we also saw some increased competitive pressure on the consumer CDMA side.


At this time we have reached the allotted time for question and answer session.

Yijing Brentano

Thanks for our participation today. If you have any additional questions, please contact Sprint's Investor Relations team at 1-800-259-3755.


This concludes today’s conference call.

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