Sprint's (S) Management Presents at Bank of America Merrill Lynch Leveraged Finance Conference (Transcript)

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Sprint Corporation (NYSE:S) Bank of America Merrill Lynch Leveraged Finance Conference December 2, 2014 2:50 PM ET

Executives

Joe Euteneuer - Chief Financial Officer

Yoshimitsu Goto - Managing Executive Director, SoftBank

Analysts

Ana Goshko - Bank of America Merrill Lynch

Ana Goshko - Bank of America Merrill Lynch

Thank you for being with us this afternoon. Again, I am Ana Goshko and I am the telecom and technology high-yield research analyst from Bank of America Merrill Lynch, and we are thrilled to have a joint presentation this afternoon from Sprint and SoftBank. From SoftBank we have Mr. Yoshimitsu Goto, who is the Managing Executive Director, and from Sprint we have Joe Euteneuer, who is the company's Chief Financial Officer.

So I will start off with a couple of questions on the company's recent performance and the outlook and the perspective of both SoftBank and Sprint and then we would like also to hear from Joe and we will [indiscernible] about the new plans that were announced today. Very good timing for a conference [so something] [ph] new and fresh to talk about.

So, to start off, both Sprint and SoftBank's executive leads have recently stressed importance of returning Sprint to postpaid phone net additions. So to start off, I wanted to understand, does the companies believe that Sprint's network quality and customer experience both on voice and data is now improved enough to justify the investment in subscribers.

Joe Euteneuer

Sure. So where we are on the network is, one, we have 260 million pops now covered on 1.9 LTE. We will have 800 voice done by year-end. We are at 92 million covered pops on 2.5 and will be 100 million pops by year-end and we have started 800 LTE deployment and should be done at the end of next year. So I think from a network standpoint we have been waiting to get to this point of having a network that is substantially complete. I mean I think 260 on 1.9 will continue to go up as far as number of covered pops. But I think now with the 2.5 of almost 100 million pops that’s sort of a third of the time you have a chance to hit a 2.5 tower and most of those towers are in concentrated areas so you can experience it.

All the handsets we sell today are all tri-band. All but the iPhone 6 has Wi-Fi calling capabilities, iPhone 6 will have it downloaded to it in the next 60-90 days. So I think when Marcelo came in, he came in at that time right when things were coming together from a network perspective. Still more to do, but clearly a lot better situation than what it was 18 months ago. And the more we can put out these tri-band phones, I think the better our experiences are for our customers. So we do think we put out our core pricing at the start of Marcelo's tenure and I think today's announcement sort of takes it to the next level.

Ana Goshko - Bank of America Merrill Lynch

And for Goto San, I also would like your perspective from SoftBank of what your assessment is right now of the Sprint network quality and customer experience.

Yoshimitsu Goto

[Interpreted] The network quality is one of the most important agenda for Sprint management and the same applies to the SoftBank management as well. So SoftBank [indiscernible] that we will provide as much support as possible in terms of network quality. And that is why because in terms of network technology and product selections and so on, equipment selections that we have experienced in Japan can be also utilized in United States market as well. And at the same time we have brought our CTO of SoftBank and also the technology team engineers have been moved to Kansas in Sprint. So they have been working together with Marcelo and Joe right now.

Ana Goshko - Bank of America Merrill Lynch

Great. So not to spent too much time looking backward but I think it can be instructive. So Sprint recently lowered its 2014 adjusted EBITDA guidance by about $900 million. So from your perspective, really from both companies perspective, what was the biggest departure both in operational and financial performance over the 8-month period from when the guidance was originally issued to when you revised it and were the unanticipated issues internal, external or both?

Joe Euteneuer

I think it's really an external standpoint. I mean clearly we were experiencing subscriber losses associated with the network. And if you look historically, we kept revenue flat in '11, '12 and '13 by one, having the $10 rate increase associated with all the Smartphone penetration. So you went from 5% Smartphone penetration to where we were up at 90%. So really contributed to the top line. Through June of last year we had the iDEN conversion that we were converting at a 60% rate versus a 30% that we had planned. All of that helped the top line but then as we exited '13, you really saw the effects of the culmination of having the entire U.S. under construction because we had touched so many towers and in the third and fourth quarter experienced losses of $350,000.

So we entered into 2014 with the idea that we needed to come up with something new to continue to attract subscribers. We came up with the family plan idea, which when you look at the start on January and probably in the mid-February, was a great start. It went after the one, two to three, up to five lines. But then very rapidly it start to deteriorate as people started to post their accounts on eBay and Craigslist and all those things. And at the same time, for the first time competition hit with the early termination offer that T-Mobile put in the market and really went after our customers who were dissatisfied with the disruption of the network. So by the time you got to August, you were into this decision mode of, are you going to make your EBITDA number and sacrifice subscribers or now that losses have doubled, how we get this thing turned around because the cumulative loss is a burden that you have to be able to absorb. And when the early termination fee offer came in our losses doubled, we didn’t have the runway room to take all the expenses out that we were to cover that. I mean going into the year at 350,000 net adds, we figured we could cover that.

So I think it was really some external factors and then the decision was weighed with Marcelo coming in that we needed to turn subscribers around and you literally saw in the first month go from our share of gross add to 10% up to 16%. You saw our shift of prime versus subprime just jump dramatically. We went net port positive for the first time in a year. So if you really think about growing long-term value, a little bit what we needed to do was sort of pull the band aid off to get the thing turned. And we have gotten -- our volume has been so great, we are out hiring 500 more sales reps to cover the volume that’s going on in our stores. So I think that’s a good sign of what's going on. I think this new promotion that we have is another way to attract a bunch of new subscribers and focus on the growth back in profitability, which really if you think about how to evaluate Sprint going forward, you got to look at four things.

One, you got to look at postpaid handset net adds. That really drives the business. And if we can get that -- if you can go from 750,000 a quarter loss to something close to zero in one quarter, that’s a miraculous recovery. The second thing is, I think you have to make sure that we are bringing churn down. Churn has got to come from both the benefit of involuntary churn reduction from now having more prime customers and to the voluntary churn associated with the much better network. And we saw a little bit of that from the second to the third quarter. We did have voluntary churn go down but you need that continued trend as a result of having a good sustainable, reliable network.

The third thing is, we have committed to take 1.5 billion of expenses out going into '15 and we need to do that and more. And so our commitment in making that happen to grow our profitability I think is key. And then finally is the continued investment in the network to make sure that we stay competitive from a network standpoint and have something that has a differentiation. If you look at those four things, you are growing value.

Ana Goshko - Bank of America Merrill Lynch

Okay. Great. So to the fresh news of the day, the company is clearly very focused on returning to postpaid phone subscriber growth. And on that front it seems that the actions announced today, the promotion that’s announced today is designed to drive that. So I have been up here all day so I may not be fresh on all the details, so correct me if I get it wrong but I understand that it's an ETF, an early termination fee plan, that you are willing -- Sprint is willing to buyout customers of AT&T and Verizon only. Up to $350 per line. You hand in your phone and then you bring in your bill and Sprint will cut the bill in half. Is that all accurate?

Joe Euteneuer

The service [indiscernible]

Ana Goshko - Bank of America Merrill Lynch

The service rate in half. Right.

Joe Euteneuer

Yes. So whatever your service rate is, we will cut that in half.

Ana Goshko - Bank of America Merrill Lynch

Okay.

Joe Euteneuer

But you have to convert -- one of the keys is, if it's a four person bill, all four people have to convert, all four phones have to come to us and then we can. But when you look at the -- what we have experienced as a result of the -- a lot of the benefit we got out of the initial core pricing changes we made was that in coming up with the new double-data that we did when Marcelo first started, really attracted the families who saw the value of paying the same amount but getting double the data. And so when you think about the price differential between AT&T and Verizon prices and our existing prices, we are the best value in wireless right now when you look at it from a total cost of ownership.

So in cutting the service price, the customer still has to either go on a leased phone or an installment billing phone. So net-net they are still probably getting a 20% sort of net discount. So it's a great value creator. When you look at the comparable rates, I think a lot of them are going to find out that going to some of our existing plans might even be better than cutting your bill in half.

Ana Goshko - Bank of America Merrill Lynch

Okay. And can you discuss the strategy behind focusing on AT&T and Verizon and not T-Mobile?

Joe Euteneuer

I think the fact that 75% of the customers sit in AT&T and Verizon. The majority of the prime customers out there are sitting there. And we saw really success with measured service, doing the shared data. That simple message seemed to resonate with customers and we think this is another simple message that should resonate with those type of customers. And the whole idea is to attract people back into our stores, to get an opportunity to talk to them about the benefits of the new network, these tri-band phones, and getting them to experience something that over the past 18 months was maybe not the best experience.

Ana Goshko - Bank of America Merrill Lynch

Okay. The company and our Goto San as well, has emphasized the importance of continuing to invest in the network. But one of the striking things about the company's plan this year is you have actually reduced capital expenditures by about $2 billion, from $8 billion to $6 billion. And the question we often get from investors is, if this is so important and you really need to address the network quality issues and surpass expectations, why have you rolled back the capital expenditures guidance or spend?

Joe Euteneuer

Sure. So we're clear, the capital is less but all of the targets we had originally set out at the beginning of the year have been met. And if you remember exiting '13 going into '14, there was a lot of concern and it was, could we meet the targets. And really as a result of all of the SoftBank help, I mean Miyakawa could move in here to the U.S., bring in 100 of his engineers. Having all of the learnings from how they deployed Japan and being in more cost efficient, being able to leverage our spend, getting better rates. And then as a result of getting the network back on time, the third piece of savings was really cost avoidance. So hundreds of millions of dollars that I was going to spent on capacity capital, that I didn't need to spend because we were back on time and that then avoided a lot of the capitalized labor et cetera.

So that reduction in capital has nothing to do with the completion of the network. So we are on time and delivering that on time. It's really a result of better deployment, more efficient deployment, being on time and getting better rates.

Yoshimitsu Goto

[Interpreted] When it comes to the CapEx side, with any of the countries, any of the carriers have this agenda, the never-ending agenda for them. And from the financial capability wise, Sprint is not as good as AT&T and Verizon. However, within the limited source of the amounts of money that we have that we should provide the maximum performance out of it. So that although that Sprint has been putting every effort to provide a better quality network and making investment, however still used to have congestion in also some of the area that could not enough performance in some of the areas and regions. However, I believe those kind of things that can be solved by technical ways or the wisdom that we may have. So that not because of the reduction of the CapEx, the amount of the CapEx, that will decrease or deteriorate the quality of the network. I believe that is kind of prejudiced. But we see Sprint and SoftBank's cooperation and with our experience, knowhow and technology that we have, we believe we will be able to solve and provide the maximum performance out of the limited source of CapEx.

Ana Goshko - Bank of America Merrill Lynch

So another follow-on question on CapEx. So when Marcelo first started making some public appearances then introduced his concept of the Tokyo like experience and in a couple of markets. And you know really what the company had previously coined as the Spark experience, right. And it is highly dependent upon deployment of the 2.5 gigahertz in my understanding. So wondering when will the Tokyo like experience in the couple of select markets become a reality? And then also just what is the plan for a more broad deployment of 2.5 gigahertz and what can be achieved more broadly rather than just these couple of showcase markets that you are focused on.

Joe Euteneuer

As we have the advantage of having all the 2.5 that we have, we have got the 100 million pops which was critical to get that up and running. We need to announce what the plans are going forward, but clearly the plans going forward are one, to continue deployment of 2.5 in the right areas. To continue to take advantage of the capacity and speed that 2.5 allows us. Leveraging of the deployment of 800 voice and 800 LTE. Integrating now the Wi-Fi capabilities. When you think about every building in United States is lit up with Wi-Fi and everybody's home having the option of using Wi-Fi calling as another coverage issue, is a big opportunity for us. So I think if you want to use a microcosm of something that’s done that you could experience sort of what the Sprint network is all about, I would use Chicago O'Hare airport.

When you look at all the third party data about our performance at that airport, it is very very favorable. And so if you can think about that type of experience getting more deployed across the U.S., I think that sort of where we are headed.

Ana Goshko - Bank of America Merrill Lynch

Another new initiative that Sprint has announced is the iPhone leasing program. Initially for the iPhone, I believe that actually maybe extended now to other devices other than just the iPhone. And the relationship with Brightstar, both Marcelo's move to Sprint but also SoftBank's ownership of Brightstar I understand were critical in allowing that program to materialize. And maybe a competitive advantage that Sprint has over the other U.S. carriers in being able to provide this leasing type arrangement. So wanted to understand the role that Brightstar plays and if you believe that is a competitive advantage.

Joe Euteneuer

It's something great to have because of their expertise and just sheer distribution in the whole 4PL. Distribution, one is they have their own Hong Kong reselling. So that was really our big advantage because they know the value of the resales of these phones. So when you think about setting up a lease, it's all in establishing the residual value and to be able to take that liability off of our books and push it on to somebody else's. So that we can just take the price of the phone plus the residual and amortize that over the 12 or 24 or 30 months leases that people are signing up for. That’s been a big advantage.

And the real benefit of the transaction is the simplicity for the consumer. So if you think about our offerings in the marketplace right now, we have the traditional subsidy offering which -- you know the average subsidy runs a couple of hundred bucks, $200 give or take, upfront money. And then you have got the monthly recurring bill. On an installment billing you probably have $75, give or take, of upfront cash to get into a transaction. And then you have the lease program which requires no upfront cash and just your monthly payment. And the ability is, is that you can -- we do offer it now on the Samsung Galaxy device for 24 months. On the Apple device we now have a 12 month lease, a 24 month lease and introducing 30 months. So you have some flexibility. But it does allow the consumer to adjust sort of what price they want to pay and if they are not hung up on owning the phone that they know they are going to replace it anyway, they come back at the end of the lease period, turn it back in.

We have the ability to try to go in early and say, hey, would you like the upgrade early and swap it up. Because we know what the resale value of the phone is and make some money on the backend. So there expertise has helped a lot in crafting a new way to look at phone distribution and profitability on it.

Ana Goshko - Bank of America Merrill Lynch

Since we have a credit crowd here that’s very focus on cash flow, I can tell you. We are going to talk to some cash flow a little bit. So, Joe, you haven't provided 2015 guidance yet but you have provided a preliminary outlook which is EBITDA should be flat to slightly up. We do expect capital expenditures to remain high next year. You have your interest load, so probably means you are negative free cash flow still. I wanted to understand, with your existing cash balance and potential other sources including the vendor financing that you have talked about and some securitization facilities. Do you believe you are funded for the next year worth of operation?

Joe Euteneuer

Yes. So we haven't provided guidance yet. But the liquidity sources we talk about, one is, we have always talked about our existing cash balance and how as we get the completion of these networks done we could start bringing that cash balance down. We have the existing $1.3 billion service securitization on our receivables. We are in the process of expanding that to cover installment billing and lease receivables. We have the existing vendor financing associated with the original network vision and now the new vendor financing coming on to cover the 2.5 along with another piece to just give us some extra cash on a capital basis. So we have that in place. So that gives us a lot of liquidity. And then I think the piece that, we need to see us come back and give you guidance for what we ultimately think the performance is going to be which is a lot tied to how we exit the fourth quarter and our confidence in what we were able to get done since Marcelo started, which we feel pretty good about.

Ana Goshko - Bank of America Merrill Lynch

I wanted to ask Goto San, just in terms of the level of leverage on Sprint is often concerning to some of the investors in the U.S. Wanted to understand your level of comfort with the leverage. Do you believe it potentially is constraining operation? And I think people are very interested to know, if necessary is SoftBank willing to help fund Sprint?

Yoshimitsu Goto

[Interpreted] The current leverage level of Sprint I believe is still high but at the same time this can be deleveraged or improved down the road. But at the same time, because they have for the future cash flow that stabilized, I believe it has to be stabilized. And because of the joint system has been managing very well with the talented people and the financial capability is very high in Sprint. And also there is a good track record of successfully issuing the bonds in the bond market and so on. So from that sense I believe that they have enough capability on financial side in Sprint.

And for the future I am still very confident. We are very confident about the financial capability of Sprint financial team. So that in principle, we remain the same for the self-funded basis or the entity of the Sprint share. However, at the same time I don’t deny the possibility of providing a finance support from SoftBank to Sprint and if there is any case we believe we will be able to improve the enterprise or the company value of SoftBank Group itself. And that I believe it is SoftBank's stakeholders decision or the board of directors decision whether to go for the financial support to Sprint or not. So that’s something that I believe is up to the value of the SoftBank Group to be improved on. From that sense we do have our preparation to do so and I don’t deny any possibility there.

Ana Goshko - Bank of America Merrill Lynch

Staying on the topic of Sprint-SoftBank working relationship, I would like to understand or if you could describe how involved SoftBank is in Sprint's operations and how that level of involvement has changed over the past year.

Joe Euteneuer

Due to the transaction with SoftBank there was a lot of back and forth going on in just in exchanging best practices. So we would learn things from SoftBank that they did in sales and marketing or customer service and vice versa. And then during the year we learned on, try to figure out how to leveraging our scale. So handset purchases, equipment purchases, you see that in the capital expenditures obviously. And now where we are is sort of why I would call the refinement. On the network we have learnt so much from them that because we are trying to get the network deployed as fast as possible and efficiently as possible. Having Miyakawa come over with his engineers, working with ours as a team has been a blessing because if you think about all of disruption that happened over the past 18 months, 2 years, and we can point out where there is blocks and drop calls etcetera. And to have these top gun teams going in across the country and just solving those problems on a day by day basis, that gives that continuous improvement. It has been a tremendous help.

And then strategically, as we think about where we are today and where we want to go now that we have got 260 million pops of 1.9, 100 million pops of 2.5, now where do we take it? How do we continue deployment and have that continuous improvement and how do we do that in the most cost effective, efficient manner. That joint knowledge of what they learned in deploying 2.5 across Japan etcetera, is hugely beneficial as we set forth our plans for 2015. So a little bit is, now that we have gotten everybody here in the U.S., it's just putting that final plan together so we can talk about it. But if you think about what we used to do, weekly phone calls with video conferences with Masa etcetera, a lot of that is going away because we are into one operating rhythm with them. I mean go to [indiscernible] and I talk all the time about the status of our financing capabilities. Where we are going, what do we think we need. And so I think it's just become a lot more cohesive and especially with Marcelo stepping in, I mean you have two entrepreneurs that have the same philosophical bent on how to run a company etcetera. And so the trust factor and integration there is its best ever.

Yoshimitsu Goto

[Interpreted] So from the communication between the finance team that we have been having a very close communication together and also one of the most talented resource I have has been sent to Joe's team now and he has been joining Joe's team right now. So from that sense we have a clear picture on real time on status of financing in Sprint. So I believe we have a very good trust towards each other.

Ana Goshko - Bank of America Merrill Lynch

We have about a minute left so I am going to Goto San for some closing comments. So SoftBank and Masayoshi Son are famous of taking a long term approach to its investment. So in general, it is possible to say what the time horizon is for SoftBank's investment in Sprint. And then if you have any closing words, generally on SoftBank's experience with the investment in Sprint in U.S. Wireless and the outlook for both.

Yoshimitsu Goto

[Interpreted] As you mentioned earlier that we are known as kind of a long investors. That’s what SoftBank is and we don’t limit that period of time, we don’t set any performance targets to limit the time, anything like that. We are putting every effort to support Sprint turnaround and we are very much looking forward to see the upside out of there.

Ana Goshko - Bank of America Merrill Lynch

Great. I think we are out of time and I appreciate Joe and Goto San for being with us today.

Yoshimitsu Goto

Thank you.

Joe Euteneuer

Thank you very much.

Question-and-Answer Session

[No Q&A associated with event]

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