Sprint CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Sprint Corporation (S)

Sprint (NYSE:S)

Q4 2013 Earnings Conference Call

February 11, 2014, 8:00 a.m. ET


Brad Hampton - Vice President of Investor Relations

Dan Hesse - Chief Executive Officer

Joe Euteneuer - Chief Financial Officer

Steve Elfman - President of Network, Technology and Operations


Michael Rollins - Citi Investment Research

Brett Feldman - Deutsche Bank

John Hodulik - UBS

Adam Ilkowitz - Nomura Securities International

Phil Cusick - JPMorgan

Jonathan Chaplin - New Street

Kevin Smithen - Macquarie Research


Good morning. At this time, I would like to welcome everyone to the Sprint fourth quarter earnings conference call. [Operator instructions.] Thank you. Mr. Brad Hampton, VP of Investor Relations, you may begin your conference.

Brad Hampton

Thank you, operator. Good morning everyone, and welcome to Sprint's fourth quarter 2013 earnings call. On today's call, Dan Hesse will discuss operational performance in the quarter. Steve Elfman will provide an update on the network and Joe Euteneuer will cover financial results. After that, we will open the call up to your questions.

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

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

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

Let’s move on to earnings, on slide four. Similar to last quarter, we are providing financials for our predecessor period that includes activity related to Sprint Nextel Corporation prior to the closing of the SoftBank transaction on July 10 and on a successor basis that represents results for Sprint Corporation, formerly Starburst II.

In order to present financial results in a way that offers investors a meaningful calendar period to period comparison, we have combined the current year results of operations for the predecessor and successor periods. These periods are broken out in the tables that accompany our earnings results. However, the rest of the remarks made today will be in reference to the combined results unless otherwise noted.

Please refer to the notes and the tables that accompany our earnings results for a more comprehensive discussion regarding the basis of presentation for the predecessor and successor periods.

As a reminder, the operations of Starburst II have been included in the successor results, so this will account for an immaterial difference between previously reported results and the combined basis results.

I would also like to announce today that subject to approval by our board of directors, we expect to move to a new fiscal year, beginning on April 1, 2014, in order to align with SoftBank’s reporting schedule. As a result, we expect to file an annual report on form 10-K for the transition period from January 1 to March 31, 2014. However, I would like to make clear that all comments related to 2014 on this earnings call are for the calendar year of 2014.

Basic and diluted net loss per common share for the fourth quarter was $0.26, and there were a few noteworthy items that I’d like to cover. First, there was $206 million or negative $0.05 per share associated with severance and lease exit costs, with approximately $165 million being related to the implementation of our recently announced workforce reduction plan.

Total depreciation and amortization was approximately $1.5 billion for the fourth quarter, and $6.2 billion for the full year 2013. As you may recall, the first half of 2013 included accelerated depreciation, primarily related to the shutdown of the Nextel network, and therefore we expect total depreciation and amortization in 2014 to be down to approximately $5.2 billion to $5.3 billion.

Net tax expense was approximately $15 million in the fourth quarter, and we expect net tax expense for the year 2014 to be between $230 million and $270 million. Lastly, although Clearwire’s financial results are now consolidated with Sprints, and included in today’s presentation, its standalone audited financial results will be available on our website in the next several weeks, as required by their debt covenants.

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

Dan Hesse

Thanks, Brad, and we appreciate everyone joining us this morning. Thanks for your interest and support. I’ll touch on the operational highlights for the quarter. Please turn to slide six. Our fourth quarter adjusted EBITDA of $1.15 billion is up nearly 40% compared to the fourth quarter of 2012, our highest year over year adjusted EBITDA for any quarter in over 7 years.

The fourth quarter marks the tenth consecutive quarter we’ve exceeded or matched the Street consensus expectation for adjusted EBITDA. Sprint platform customers reached an all-time high at just under $54 million, as we achieved 682,000 wireless net adds in the quarter. Sprint platform postpaid net adds were 58,000, with growth in tablets and smartphones, a record 95% of our postpaid Sprint platform handset sales were smartphones in the quarter.

We also logged another quarter of progress on our network, with our 3G and voice modernization effort on track to be completed by midyear and LTE coverage now available to over 200 million people.

During the fourth quarter, we also launched Sprint Spark, and we now carry 10 triband LTE capable devices, including Sprint’s newly updated Samsung Galaxy 4. I’ll focus the balance of my remarks on our key priorities: cash generation, improving the customer experience, and strengthening the brand. Please turn to slide seven.

We ended 2013 with cash, cash equivalents, and short term investments of $7.5 billion, even after growing our annual capital investment by $2.1 billion year over year as we invested in our new network.

We delivered year over year growth in postpaid, prepaid, and wholesale and other revenues and today Sprint platform wireless service revenue was up over 5% compared to 2012. Sprint platform postpaid RPU grew year over year for the third consecutive year, and reached its highest-ever annual level of $64.07.

Full year adjusted EBITDA of $5.4 billion grew 13% over the past year and represents the first annual increase in adjusted EBITDA generation since the year following the merger with Nextel in 2005.

Adjusted EBITDA margin grew 2 full percentage points above last year, a meaningful achievement given some of the significant headwinds we faced during the year, including the loss of revenue contribution from the Nextel subscriber base, increased year over year investment in Network Vision deployment expenses, and the absorption of Clearwire operating losses following that acquisition in July.

We’re continuing to see the cost benefits from the Nextel platform shutdown as well as closely managing operating expenses with notable efficiency improvements in areas like device service and repair and customer care.

Please turn to slide eight, and the customer experience. We continue to set new performance records in our care operations. We achieved new best-ever postpaid performance records for both calls to care for customer and care credits expense for both the quarter and for the full year.

We have now delivered quarterly year over year improvement in these two key customer care metrics for 20 consecutive quarters. These improvements translate directly to the bottom line as we have reduced the annual care opex run rate by $2 billion below where we were in 2008.

In spite of the significant improvements we’ve made in care, our postpaid churn performance continues to be elevated. As I’ve discussed with you on the last couple of calls, there are several factors impacting our churn, including the carryover impact of joint Nextel Sprint accounts who deactivated their Nextel lines earlier in the year and are now deactivating new Sprint lines, corporate account churn associated with our historically smaller LTE footprint and most importantly, the pardon our dust impacts associated with the rip and replace of our entire network, required for the ultimate integration of the Sprint Nextel and Clearwire infrastructures and diverse spectrum bands into a single network architecture that can support Sprint Spark.

During the construction phase, there is a period of disruption to our network service which will manifest itself in higher voice service drops and blocked calls. Voice performance is very noticeable to customers, so heightened blocks and drops contribute significantly to churn.

These customer experience issues are particularly painful to me, as we’ve made the customer experience our top priority, being recognized in the second quarter of 2013 by the American Customer Satisfaction Index for the most improvement in customer satisfaction of any U.S. company over the past five years across all 47 industries that they study. The intense network replacement phase we’re in is impacting customer satisfaction with Sprint.

Turning to slide nine, we believe these voice quality churn impacts will be temporary, as we’re seeing improved blocks and drops and hence improved churn performance in markets where the voice and 3G modernization are mostly complete. We now have several large markets where we’re nearing voice completion and voluntary churn performance in each market follows a similar pattern.

While construction is underway, churn elevates above pre-Network Vision levels. As we reach approximately 70% completion of the voice and 3G modernization, churn moderates to prior levels, and as we move from 70% toward 100% completion, churn drops below the pre-construction levels.

In markets where we’ve been greater than 70% complete for several months, the churn improvement, compared to pre-construction levels, is even more pronounced. This trend, which is represented in aggregate across 20 markets represented on slide nine, is playing out directionally consistent in every market so far, as we progress through Network Vision.

These performance trends, plus the expectation that our voice and 3G modernization effort will be completed by the middle of this year, give us confidence that our consolidated postpaid churn performance will improve in the second half.

Absent significant changes in the competitive environment, and acknowledging the normal seasonal quarterly patterns in industry churn, we expect overall postpaid churn to remain elevated in the first half of 2014 and show gradual improvement beginning in the second half.

Turning to slide 10, and transitioning to our brand, consistent with the churn performance dynamics we’re seeing during the network construction, we are seeing similar impacts to our market level gross add volumes, but delayed by a few months.

We have observed an inverse relationship between the network construction impacts and our customer’s likelihood to recommend Sprint to others. As the construction dust peaks, likelihood to recommend Sprint declines. There’s a strong statistical correlation between our customer’s likelihood to recommend Sprint and our gross add share.

We see a similar pre- and post-dust impact with gross adds to what we have seen with churn, albeit with a longer timeline. So, we expect our gross add share to rebound as well as the network build progresses.

In spite of the network headwinds that I’ve just described, we were able to deliver a 36% sequential increase in postpaid gross adds from Q3 to Q4, and a 3% year over year increase. We were pleased with tablet sales in the quarter. A majority of the tablet adds were to existing Sprint customers, which enables us to grow revenue per account and reduce account churn, even though it does reduce reported RPU. Prepaid gross adds were also up slightly year over year in the quarter.

Finally, I’d like to discuss an important hallmark of the Sprint brand: innovation. In 2013, like in 2012, Sprint was granted an average of over two U.S. patents every business day. Today, we’re launching our innovative Spark capabilities in our 13th and 14th markets, Baltimore and Philadelphia.

We continue to innovate in a number of areas in addition to Spark, including those which make us a more responsible citizen. We recently announced how we’re deploying hydrogen fuel cell technology as backup power to rooftop network sites, with financial assistance from the Department of Energy, because hydrogen fuel cells, an area where Sprint holds 30 patents, emit no greenhouse gases.

One week ago, President Obama recognized Sprint’s contribution of free wireless internet service to up to 50,000 low income K-12 students for four years, in support of the president’s connected program. We recently launched the innovative Framily plan too. We’ve now made family plan benefits available to a growing segment of the U.S. population, households with fewer than three people, that were previously underserved by family plans.

An especially creative aspect of Framily is that it incentivizes our customer base to recruit new customers into their group. In just the first day in the market, we generated over 400 million Framily social media online impressions.

We’ve only been in the market for a month, and Framily is currently only available in Sprint-branded channels, but we are pleased with early adoption of the Framily plans. Our field sales reps are energized by the early customer response, and we are encouraged that more than 60% of gross additions on Framily to date are choosing the unlimited data and annual upgrade buy up option.

Our award winning end to end telematics solution, Sprint Velocity, is another example of our ongoing innovation. We now have multiple Chrysler models on the road with the embedded Sprint Velocity platform and we recently announced an agreement with Rogers Communications to expand our connected vehicle platform into Canada. Sprint was recently named number two among the top 10 global operators in the automotive market in a study by Informa Telecoms & Media.

In the fourth quarter, we opened a new mobile health accelerated facility in the growing startup district in Kansas City, providing opportunities to accelerate development and commercialization of emerging mobile healthcare applications and services.

So, in conclusion, 2013 has been a transformative year for Sprint. We closed transactions with SoftBank, with Clearwire, and with U.S. Cellular. We shut down the Nextel network, and we are now nearing completion of probably the most complex network modernization and integration effort in the history of global wireless, plus beginning to deploy the next phase of our network, Sprint Spark.

I’m proud of what our team has accomplished in 2013 and I look forward to making more progress in deploying this new network in 2014. On that note, I’ll turn the call over to Steve Elfman.

Steve Elfman

Thanks, Dan. I’d like to give you an update on network vision progress and our plans for this year with Sprint Spark. Turning to slide 14, we continued our steady pace through the fourth quarter, and now have nearly 33,000 sites on air, with over 37,000 sites, or more than 96% of the Sprint sites, completed or under construction, and expect to complete our 1.9 GHz network modernization by midyear.

In addition, we expect to have voice service on our 800 MHz spectrum on air across most of our footprint by midyear, further enhancing the coverage and quality of our voice network. We have launched 4G LTE in 340 markets, covering more than 200 million POPs, and expect to cover approximately 250 million LTE POPs by midyear.

Turning to slide 15, I’m particularly pleased with the improvement in the network performance that we are seeing in the markets, where voice and 3G upgrades are more than 70% complete. The ultimate proof is in the improved market level churn, as Dan mentioned, but we are seeing significant improvements in the key performance indicators as well.

For voice service, which is most evident to the consumer, we are seeing a 41% decline in blocked calls. From a 3G data perspective, we are seeing 25% increase in 3G data speeds as a result of the new equipment and enhanced backhaul. We are also seeing LTE speeds on 1.9 that are 13 times faster than the legacy 3G, and significantly faster when on Sprint Spark.

Also, we continue to see encouraging reductions in roaming, as markets near completion, which we expect to further improve as we complete the remaining elements of the network vision program.

Most importantly, these metrics, including churn, continue to improve the longer markets have been past the 70% threshold as the market is completed, an optimization takes place, and the customer experiences the network over time.

Turning to slide 16, as we discussed last quarter, with the launch of Sprint Spark, our plan is to continue to improve our network experience by building a multiband LTE network that includes our 800, 1.9, and 2.5 GHz spectrum to provide greater coverage, speed, and capacity for our customers.

Sprint Spark is currently available in 14 markets, where customer are enjoying peak download speeds of 15 megabytes per second, with more markets coming soon. While we are pleased with the pace to be largely complete with our LTE coverage buildout on 1.9, by midyear we plan to continue to evolve the enhanced LTE network capabilities at Sprint Spark throughout the year by expanding both the 800 MHz and the 2.5 GHz LTE footprint. We began turning up 800 MHz LTE radios on our sites in fourth quarter, and will compared to expand across the markets, where we have spectrum rebanding complete.

Regarding the TD LTE on our 2.5 GHz spectrum, we completed over 5,000 of the former Clearwire sites last year and expect to convert another 2,000 legacy Clearwater sites in the first half of the year. By midyear, we expect to begin overlaying the 2.5 GHz on our existing network as the new 8T8R radios are available. We expect to have approximately 100 million 2.5 GHz LTE POPs deployed by the end of the year.

Small cells are another important part of our investment strategy for capacity augmentation and extending Sprint Spark capabilities in more places across our network, and expect to begin both indoor and outdoor deployments later this year.

Customers are already benefitting from Sprint Spark as we have launched 10 triband LTE devices. Also, we expect all our postpaid smartphones this year to be triband LTE, and expect to launch devices capable of two-carrier aggregation before the end of the year, providing even faster speeds.

Another important feature for our customers is the deployment of HD voice, which we expect to be complete across our nationwide network by midyear. We currently have over 12 million customers in our base today with HD voice capable handsets that will experience the enhanced call quality this year. While we remain focused on completing Network Vision, we are committed to building out Sprint Spark using our 2.5 GHz and 800 MHz spectrum.

I’ll now turn it over to Joe to take you through the financials.

Joe Euteneuer

Thank you, Steve, and thanks everyone for being here today. Since I joined Sprint almost three years ago, I’ve been asked when the company would be able to return to EBITDA growth. I’m pleased to report with the 2013 results that we have passed that inflection point, as consolidated adjusted EBITDA grew 13% from last year, even while absorbing Clearwire operations and including the dilutive impacts of purchase price accounting from the Softbank transaction.

Remaining disciplined on the cost side of the business was crucial in 2013, as we have made heavy investments in our network. Because we expect elevated levels of investment to continue in 2014, we plan to continue focus on driving cost out of the business and maintaining a disciplined growth strategy.

However, before I share more on our expectations for this year, I’d first like to take you through our fourth quarter and full year results. Moving to slide 18, we have added 58,000 Sprint platform postpaid customers in spite of elevated churn levels, as Sprint platform postpaid gross adds were up 3% year over year. We added 466,000 postpaid tablets in the fourth quarter, as the introduction of our installment billing option and a popular device portfolio helped us gain meaningful share in the tablet space.

While the tablet net adds were certainly a driver of our total Sprint platform postpaid net adds, we also added 157,000 higher revenue generating smartphone customers in the quarter. Sprint platform postpaid churn of 2.07% in the fourth quarter was up 9 basis points year over year and 8 basis points sequentially.

As Dan discussed, churn is likely to remain elevated in the first half of this year, before we expect to see improvement in the second half, following the completion of the network modernization. As a result, we expect that postpaid net adds will be negative in the first half but positive in the second half of the year.

Moving to RPU, sprint platform postpaid RPU of $64.11 in the fourth quarter was up 2% year over year. The year over year RPU growth was mostly driven by ongoing initiatives aimed at reducing customer discounts and credits and additional revenue from our handset insurance program. We did see a sequential decline in RPU due to a higher mix of tablets and lower usage based revenues.

In total, Sprint platform postpaid service revenue of nearly $5.8 billion in the fourth quarter remained near historically high levels and grew 2% year over year, representing the 14th consecutive quarter of year over year growth.

Let’s move on to our Sprint platform prepaid business, on slide 19. As expected, net prepaid customer additions of 322,000 in the fourth quarter were up sequentially and each of our brands added customers in the quarter. Sprint platform prepaid gross adds were up 3% year over year and churn of 3.01% also improved slightly from the year ago period.

Sprint platform prepaid service revenues in the fourth quarter were up nearly 6% year over year, driven by both growth in RPU and subscribers. As we look to 2014, lifeline regulatory changes have allowed us to concentrate the annual recertification timeline for most of our base into a tighter window, instead of being spread more evenly throughout the year. So we do expect assurance churn to be concentrated in the March/April timeframe again this year.

We also plan to direct more of our prepaid resources toward the higher-RPU segments of our prepaid business to better position us for where we see the longer term growth in the industry. As a result, we expect total Sprint platform prepaid net subscriber losses in the first half of the year, driven by assurance, before returning to growth in the second half of the year.

Moving on to wholesale, our Sprint platform wholesale and affiliate business added subscribers again in the fourth quarter, and posting 302,000 net customer additions, mostly driven by our connected vehicle program. Sprint platform wholesale affiliate and other revenue was flat sequentially and down slightly from last year.

Let’s move on to our wireless operating expenses on slide 20. Total wireless cost of service of $2.2 billion in the fourth quarter was down $79 million sequentially and up only $38 million from the fourth quarter of 2012. The additional operating expenses from Clearwire operations, including spectrum lease costs that are now included in our results, were approximately $280 million.

The sequential decline was mostly driven by seasonally lower 3G roaming expenses and additional network savings related to lower decommissioning costs and utility expenses. As we continued shutdown activity, wireless cost of service was basically flat from a year over year perspective, as the inclusion of Clearwire operating expenses and the growth in our Sprint network modernization spend was mostly offset by lower Nextel network expenses, the removal of roaming payments to Clearwire, and lower service and repair costs.

Moving to subsidy expense, total wireless net subsidy for the fourth quarter was approximately $1.6 billion, which was up $127 million sequentially and down $413 million year over year. Seasonally higher selling activity in the fourth quarter drove additional subsidy expense sequentially. From a year over year perspective, fewer upgrades associated with the Nextel to Sprint recapture effort contributed to the lower net subsidy expenses.

Switching to SG&A expenses, total fourth quarter wireless selling, general, and administrative costs of approximately $2.4 billion were flat year over year and up $88 million sequentially. Even with the inclusion of Clearwire expenses, we were able to keep total SG&A expenses flat compared to last year by continuing to reduce customer care cost.

While customer familiarity with smartphones has helped, we have also focused on encouraging our customers to use self-service options and this has continued to drive lower call volumes on both a sequential and year over year basis. The sequential increase was also impacted by seasonally higher selling expenses.

Wireline adjusted EBITDA for the fourth quarter of $105 million was down $27 million sequentially and $76 million from the year ago period. As expected, cable migration activity accelerated in the fourth quarter and was the primary driver of the sequential decline.

We expect this activity to continue as we move into 2014, and lower intercompany revenue from the wireless segment due to the annual resetting of our intercompany transfer rates to reflect current market prices will also pressure margins in our wireline segment this year. Therefore, we expect to see a significant decline in wireline adjusted EBITDA, both sequentially in the first quarter of 2014 and for the full year. On a full year basis, we expect wireline adjusted EBITDA to decline approximately $400 million, with roughly $150 million being intercompany related, and therefore neutral to consolidated adjusted EBITDA.

Please turn to slide 21. Consolidated adjusted EBITDA of over $1.15 billion was up $327 million from the year ago period and down $189 million from the third quarter. While the sequential change is largely driven by seasonally higher sales volumes, the year over year improvement really illustrates the changes we have made in the business.

We have achieved significant expense reductions from shutting down the Nextel platform and we no longer have upgrades related to the recapture effort. However, we did lose revenue from the Nextel subscribers that we were not able to recapture. Sprint platform postpaid RPU was up over $1 and postpaid subsidy rates were down year over year for the first time in over three years.

Moving to slide 22, we continue to improve our liquidity and capital structure this quarter. We issued $2.5 billion of notes and redeemed $2.85 billion of 12% Clearwire notes due in 2015 and 2017, thus reducing our average coupon while also increasing the average maturity. We ended the fourth quarter with a total liquidity position of $9.6 billion, including cash and cash equivalents and short-term investments of $7.5 billion and $2.1 billion of undrawn borrowing capacity under our revolving bank credit facility.

Subsequent to the end of the quarter, we expect to amend our revolving bank credit facility to provide an additional $300 million of undrawn capacity. As we look ahead, we have less than $450 million of other maturities that come due in 2014, which we expect to retire in full, and no significant maturities due until December of 2016.

Capital expenditures of $1.9 billion in the fourth quarter were relatively flat, both sequentially and compared to the fourth quarter of 2012. As Steve mentioned, our network vision deployment maintained a steady pace, and we expect to be substantially complete by mid-2014. In addition, we continue to expand LTE on our 800 MHz and 2.5 GHz spectrum to enhance the customer experience.

Free cash flow was negative $2.8 billion for the quarter, compared to negative $909 million in the third quarter, and negative $1.3 billion in the fourth quarter of 2012. Lower operating and free cash flow both sequentially and year over year were impacted by increased cash paid for interest related to the debt acquired from the Clearwire acquisition, call premiums paid on Clearwire debt redemptions, and other changes to working capital.

Now I’d like to provide some guidance for the calendar year 2014. As Dan mentioned, the closing of the Softbank and Clearwire deals, the shutdown of the Nextel network, and the progress made on the Sprint network modernization in 2013 were all essential strategic activities to position the business for future growth.

On January 10, we introduced the Sprint Framily service plan and Sprint Easy Pay Installment Billing program. We are excited about the simplicity and value that Framily brings to consumers and the optionality for early upgrades for those customers that elect to buy up to the unlimited data tier.

As a result of these plans, we will recognize most of the future expected installment payments for the device on an upfront basis. This accounting treatment allows Sprint to better align the equipment revenue with the cost of the device and minimizes the amount of subsidy recognized in our operating results.

With the rollout of Sprint Framily plans and the Sprint Easy Pay equipment financing program, as well as continued traction in tablet sales, we do expect declines in Sprint platform postpaid RPU to continue throughout 2014, but also expect reduced subsidy expenses to more than offset these declines.

Therefore, the combination of these two items is an expected net positive contribution to EBITDA. During 2013, the impact of installment billing plans on our consolidated financial results was not material. For 2014, we expect the Framily plan and Easy Pay to be accretive to earnings as compared to our traditional plans, with the magnitude of the impact being dependent upon the customer adoption.

We also expect that the Framily plan and Easy Pay could require a greater use of operating cash flows in the early part of the installment contract if the customer pays less up front than traditional plans, since the customer is financing the device over a 24 month period.

We made strides during 2013 in terms of improving our adjusted EBITDA margins and we feel we are now on a pathway to growth. We expect to continue to take additional costs out of the business in 2014 as well as seeing the financial benefits of network vision.

However, the gains in our core wireless margins are partially offset by the significant decline in wireline EBITDA and the expected net dilution from Clearwire, as the revenue base declines. Therefore, we expect 2014 consolidated adjusted EBITDA to be between $6.5 billion and $6.7 billion, thus pushing margins over the 20% mark and representing a more than 20% increase in EBITDA year over year.

In addition, based on the projected depreciation and amortization that Brad provided in the opening, we expect to generate positive operating income in 2014. From a capital perspective, we’ll continue to make investments in the network with more Network Vision related activity in the first half of the year and additionally focus on the expansion of Sprint Spark throughout the year.

Therefore, we expect capital expenditures to be approximately $8 billion for the full year 2014. However, on a sequential basis, we do expect capital expenditures to be lower in the first quarter, as Network Vision expenses trends downward because we’ve passed many of the construction milestones, and the $2.5 build is weighted more towards the second half of the year.

In closing, while we are not yet where we want to be from a margin perspective, I truly feel we have turned a corner in 2013. I’m proud of what the Sprint team has been able to accomplish thus far, and I am confident their continued hard work and dedication will make us successful in 2014 and beyond.

Okay, Brad, I’ll turn the call over to you.

Brad Hampton

Thanks, Joe. In just a minute, the operator 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 a webcast of our presentation on Sprint.com/investors.

We will now open the line for your questions.

Question-and-Answer Session


[Operator instructions.] Your first audio question comes from the line of Michael Rollins of Citigroup Investment Research.

Michael Rollins - Citi Investment Research

Dan, I was wondering if you could give us an update competitively what you’re seeing since the beginning of the quarter with some of the bounty programs that have been out there, and maybe a sense of, beyond the tablets, what your postpaid customers were taking plan-wise during the fourth quarter. And then Joe, if you could just comment on the magnitude of Network Vision expenses that you saw in the fourth quarter of ’13, and what the guidance is embedding for Vision dilution for 2014.

Dan Hesse

I think you mentioned the bounty programs, and what we are currently seeing are, I would say, enhanced bounty programs, the ETF port and credit, from T-Mobile. I think you also might be alluding to AT&T changing its family plan structures.

We’re seeing more focus on families, and that’s why we believe that differentiating our plan, with our Framily plan, going beyond, if you will, the traditional family plans and addressing 60% of the potential market in group plans, and those are households with fewer people, gives us an edge in the market.

And of course we didn’t launch the plans until the 10th, or didn’t start advertising until the 17th of January, so it’s too early to tell, but the early indications are quite strong, and as I mentioned on the call, a high percentage of the customers are buying up to the unlimited with annual upgrade plan, which is a good thing for us finally.

So the competitive activity, you’re right, there’s a very strong porting credit offer that’s very rich for our industry historically, and it is having some impact out there in the market, but we have confidence that our Framily plan is differentiated. And I think the fact that there is so much focus on family activity indicates what an important market that is.

Joe Euteneuer

From a Network Vision overall standpoint, the Nextel savings were bigger than any dilution that we were achieving in the fourth quarter, so therefore, net-net it was positive, and we expect that same to happen in 2014 as we continue to accrete on a positive basis for the full year.


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

Brett Feldman - Deutsche Bank

Just hoping to get a little more color here on the postpaid results you had in the fourth quarter. You put up that gain in the Sprint postpaid base. Obviously tablets were a nice contributing factor. Did you see any meaningful remaining migration of U.S. Cellular or Clearwire subs into the Sprint platform? How big was that?

Dan Hesse

Those were not significant or meaningful to the results.

Brett Feldman - Deutsche Bank

So it looks like the tablets, then, ended up being a big part of it. And I guess a lot of the weakness was on the feature phone side. Is that the right way of taking away what’s going on in that? To the extent that some of your competitors have had some renewed success, they’re mostly eating into what you would maybe call the lower end of your base? Or are we misreading those numbers in some way?

Dan Hesse

No, I think you’re reading them correctly. We had strength in tablets and growth in smartphones, but a significant decline in feature phones. So I think you’re reading it correctly.

Brett Feldman - Deutsche Bank

So as we go into this first quarter, and we do see the bounties, and you talked about that a bit, you’re still sort of dealing with the dust in the network, you anticipate that you’ll be able to get to growth in the postpaid base during the second half of the year. Is that principally because you think the network problems are going to become less impactful, or are you actually intending to maybe change your behavior from a marketing standpoint once you’re through Network Vision and you’re deeper into Spark?

And I know you don’t want to show all your cards to your competitors, but I think we’re always trying to sort of understand the ebbs and flows of what you think is going to get you to the point where you’re growing your customer base again.

Dan Hesse

Yeah, the primary driver, you’re right, is the network. And the network, from a net add perspective, not only has been having a significant impact on churn, but as I indicated, also a significant impact on gross adds, or share of gross adds. So we expect in the second half of the year, although there is a bit of a lag, where you begin to see the churn impact right away, and then over time, as the network improves, we begin to see share of gross adds go back up. So those two things together.

Obviously, we do have some things that we have planned from a marketing perspective that we’re not going to talk about now, and again, you can’t predict the competitive activity, but for example you take porting credits, as I indicated, the very high levels, the richness of those offers, are having an impact, but as we’ve seen with porting credits historically, the impact is large early and does begin to gradually decline as well.

So we don’t expect them to have as much impact later in the year as they would early in the year. But the bottom line is, network improvement second half of the year, which should improve both churn and improve share of gross adds.


Your next audio question comes from the line of John Hodulik of UBS Securities.

John Hodulik - UBS

Dan, it sounds like you guys you been busy in DC recently. Can you comment on some of the takeaways from a regulatory standpoint in terms of potential industry consolidation, given where we are in terms of a four player national market?

Dan Hesse

Well, I think I read in the newspapers that we were going to announce a transaction today. I guess we… But seriously, I don’t comment on media speculation. But that being said, I’ve said consistently, for some time, that I believe that further consolidation in the U.S. wireless industry outside of the big two, outside of AT&T and Verizon, because they’re still large, would be healthy for the competitive dynamic of the industry. It would be better for the country, and better for consumers, and I still believe that that’s very much the case. And beyond that, I can’t comment further.


Your next audio question comes from the line of Adam Ilkowitz from Nomura Securities International.

Adam Ilkowitz - Nomura Securities International

Question about cost synergies. There was a lot of talk during the merger process with SoftBank about annual synergy savings, billions of dollars per year. Can you talk about how that factors into ’14 guidance and how that layers in over the next couple of years?

Joe Euteneuer

On the cost synergy side, think about it, we’ve gotten the benefit now that we’ve announced [unintelligible] you’re seeing it more on equipment and some of the terms that we’ve got in the deals that we just signed with our three primary deployment vendors of 2.5. And then when you see the other things that SoftBank has done in regards to Brightstar, etc., those types of things we’re working on right now, so you wouldn’t really see the benefit of those until more you’re exiting 2014 into 2015. So more to come.


Your next audio question comes from the line of Phillip Cusick with JPMorgan Securities.

Phil Cusick - JPMorgan

First, I guess, Joe, could you talk about need for spectrum auctions and additional capital, just interest in participating there? And then as we think about capex, given the acceleration in the second half, how should we be thinking about ’15? Could that be up year over year?

Dan Hesse

We like our current spectrum position at Sprint right now. So as you know, we just spent a lot of money for Clearwire, which gives us a very large swath of spectrum. Over the long term, though, if you take a look at our overall spectrum portfolio, we have high band, mid band, and low band spectrum. We would consider, depending upon the availability and our financial wherewithal, we would consider adding low band spectrum. But we haven’t reached any decisions yet.

Joe Euteneuer

And in regards to capital, we’ve given you the guidance for 2014, and as we said, we’re finishing up Network Vision, and then we’ll continue on with the 2.5 program. But we would not give any formal guidance past that.


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

Jonathan Chaplin - New Street

I’m wondering if you could give us a little bit more context on some of the improvements that you’re seeing in the spot markets. It would be really helpful for us to understand what the future of this business looks like. If you could give us more detail on where churn has gone to in markets like Chicago. And since you’ve launched the marketing efforts in those spot markets, what you’re seeing in terms of share of gross adds.

Dan Hesse

We of course are studying this very closely, in every market, as I indicated on the slides that I shared. There’s 20 markets that make up the slides, and the trends are very consistent. There is a difference, if you will, by market, in terms of how much you see churn go up, and then how much it goes down, but basically directionally it’s all the same. And the good news, I believe, is the peaks are getting lower as we learn how to deploy these markets with less, if you will, dust or disruption, which is a good thing.

So we haven’t talked specifically. Of course, we know, market by market exactly what’s going on month by month. We review this every week. We follow it very closely. And as I mentioned earlier as well, we have confidence in our second half improvements based upon the statistical analysis that we’re doing, market by market, very closely across the country.

So we’re not going to provide any more detail, but suffice it to say that things do get worse for a period of time. When you reach about 70% completion, things stabilize and begin to get better, and then as you get closer to 100% completion, the performance is noticeably better than it was when we began. So this is, if you will, a tough period of time, but the company is in much better shape, we believe, once this is completed.

The other thing we look at to give us a surrogate for 100% completion is we, on an individual device basis, we can tell whether their top five towers are completed with Network Vision. So let’s say if your towers are at work, at home, and maybe your child’s school or what have you, whatever those towers are, if they’re completed, we see significantly improved calls, blocks, and churn performance as a result, from those customers, which is our best surrogate for a market being completed. That as you, as the customer, you really are at completely Network Vision.

So I hope that answers your question, perhaps not fully, with the statistics you’re looking for, for your models, and perhaps we’ll provide more of that later, but we’re not prepared to provide those statistics quite yet.


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

Kevin Smithen - Macquarie Research

You’ve given a very tight range on 2014 EBITDA guidance given the fall off in wireline EBITDA and the switch to consumer pay smartphone plans. Maybe you could walk us through some of the puts and takes and what you’re expecting in terms of a marketing push in September in Q4 once iconic triband smartphones are available. And why such a tight range at this point in the year?

Joe Euteneuer

One is, look, we clearly have confidence in the efforts being taken internally to just continue to take expenses out of the model. Network Vision is being complete, Nextel is shut down, we’re getting the equipment off the towers, so we’re starting to achieve savings on property taxes, utilities.

The second thing is, Dan mentioned, we are, like Chicago etc., starting to see some good signs of what happens once the network is completed. And look, we’ve got this short period of time over the next two quarters that we have to sort of get through, but as long as we’re starting to see those positive signs, we can then look to the second half of the year to have those creative, innovative things that we’ll do to continue the growth of the business.

So I think there’s a lot of gives and takes that we have to move, but I think when you look at the overall growth of EBITDA, that we’re planning, knowing that we said the first half of the year is probably going to be negative, and we return to growth on the subscriber side in the second half of the year, I think 20% growth after a 13% growth isn’t a bad thing.

Kevin Smithen - Macquarie Research

You must have very good visibility in the cost cutting to give specific guidance, when obviously you don’t know what your gross adds will be at this point, once you start launching the 2.5 later in the year. Is that how we should think about it? The variability is the Framily plan gains, which obviously would have a positive impact on EBITDA given the change in accounting and the offset is that you have a lot of visibility on the cost side, absent marketing?

Joe Euteneuer

I think we have talked to you in the past that we have a number of projects going on. Some are short term, some are long term, but there’s this ongoing continued focus internally about continuing to drive profitability and getting margins where you guys want them to be. And I think going from where we were to announcing margins in excess of 20% is a demonstration of the efforts internally, across the workforce, in focusing on taking expenses out and increasing the profitability of the company. And with the turning of subscribers associated with the completion of network, it means that there’s only good things out of us.

Brad Hampton

Thanks, everyone, for your participation today. If you have additional questions, please contact the Sprint investor relations team at 1-800-259-3755. This concludes our call.

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