Source: Seeking Alpha
Sprint Corporation (NYSE:S)
Q1 2014 Earnings Conference Call
July 30, 2014 08:30 am ET
Brad Hampton – Vice President of Investor Relations
Dan Hesse – Chief Executive Officer
John Saw – Chief Technology Operator
Joe Euteneuer -Chief Financial Officer
Kevin Smithen – Macquarie
Amir Rozwadowski – Barclays
Jennifer Fritzsche – Wells Fargo
John Hodulik – UBS
Jonathan Chaplin – New Street
Michael Rollins – Citi Investment
Tim Horan – Oppenheimer
Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprint Fiscal First Quarter Earnings Conference Call. After the speakers’ remarks, there will be a question-and-answer session. Thank you.
Mr. Brad Hampton, VP of Investor Relations, you may begin your conference.
Brad Hampton – Vice President of Investor Relations
Thank you, Christie. Good morning, everyone and welcome to Sprint’s quarterly earnings call. On today’s call, Dan Hesse will discuss operational performance in the quarter. John Saw will provide an update on the network and Joe Euteneuer will cover financial results. After that, we will open up the call to your questions.
Before we get underway, let me remind you that our release, 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 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 our call, we will refer to several non-GAAP metrics. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures for the 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 our earnings on Slide 4, please. Financial results include a predecessor period for the second calendar quarter of 2013 related to the results of operations of Sprint Communications Incorporated, formerly Sprint Nextel prior to the closing of the SoftBank transaction on July 10, 2013, and the applicable successor periods.
In order to present financial results in a way that offers investors a more meaningful comparison of the year-over-year quarterly results, we have combined the second calendar quarter 2013 results of operations for the predecessor and successor periods.
The following remarks relating to second quarter calendar of 2013 are in reference to an unaudited combined period, unless otherwise noted. Trended financial performance metrics on a combined basis can also be found at our Investor Relations website at sprint.com/investors.
As announced earlier this year, Sprint changed its fiscal year end to March 31st. Making this our first fiscal quarter of 2014. However, for ease of comparison to ease of comparison to prior periods, any references to the first quarter ended June 30, 2014 on today’s call, will be referred to as our second calendar quarter.
Net income for the quarter was $23 million compared to a net loss of approximately $151 million last quarter and $1.7 billion in the second quarter of 2013. Total depreciation and amortization was approximately $1.3 billion for the quarter, consistent with last quarter and compared to $1.6 billion in the year ago period.
As you may recall, 2013 included accelerated depreciation, primarily related to the shutdown of the Nextel network and certain legacy 3G equipment. We had a net tax benefit of $15 million in the quarter, due to a decrease in valuation allowance on deferred tax assets, resulting from the planned disposition of certain FCC licenses. We expect net tax expense of $140 million to $180 million for the calendar year.
Lastly, although Clearwire’s financial results are now consolidated with Sprint’s and included in today’s presentation, its standalone quarterly financial results will be available on our website in the next several weeks as required by its debt covenants.
I will now turn the call over to Sprint’s CEO, Dan Hesse.
Dan Hesse – Chief Executive Officer
Thanks Brad. We appreciate everyone joining us this morning. Thanks for your interest in Sprint. Let me start by touching on the operational highlights of the quarters.
Turning to Slide 6, our net income of $23 million for the quarter represents our best performance in almost seven years; excluding one-time non-cash transaction related impacts reported last year.
Adjusted EBITDA of $1.83 billion represents growth of 30% year-over-year and our adjusted EBITDA margin of almost 24% is up over six percentage points compared to last year, our largest year-over-year growth on record. This marks the 12th consecutive quarter we have exceeded or matched the Street consensus expectation for adjusted EBITDA.
I’m pleased to report; we hit all of the key network deployment mid-year targets. Sprint LTE service now reaches 254 million people. The multi-year rip and replacement of our core voice and 3G platform is now largely complete and HD voice service is now available nationwide.
Given our strong HD voice call quality and continued improvements in the customer experience, including network performance, which John will discuss later, we currently or we recently reinstituted the Sprint satisfaction guarantee, the opportunity for customers to try Sprint for 30 days worry free.
Finally in keeping with our track record of innovation, during the quarter we launched exclusive new devices and mobile content into high demand consumer lifestyles segments music and fitness.
I will focus the balance of my remarks this morning on our unchanging priorities generating cash, improving the customer experience and strengthening the brand.
Please turn to Slide 7. We ended the second quarter with cash, cash equivalents and short-term investments of $5.5 billion. We delivered operating income of $519 million, our second consecutive quarter of positive operating income and our best operating income performance for any quarter in over seven years.
Joe will take you through the drivers of our adjusted EBITDA performance shortly, but as we have discussed with you in recent quarters, we remain focused on cost management and driving efficiency in the business, even as we fund sizable investments in our network.
We’ve made notable year-over-year progress in reducing expenses in areas like customer care, selling expenses and roaming expenses, contributing to wireless adjusted EBITDA growth of almost 40% year-over-year and service margin of over 25%. This represents an almost eight percentage point increase in wireless adjusted EBITDA margin over the year ago quarter.
Please turn to Slide 8, and the customer experience. We continue to set performance records in our customer care operations. I’m pleased to report that in 2014’s, American Customer Satisfaction Index released in May, Sprint is the most improved U.S. company in overall customer satisfaction across all 43 industries over the last six years.
The second quarter represents our 22nd consecutive quarter of improved performance and lower costs in customer care. In our postpaid business calls per customer to care and care credits granted to customers both, again best ever levels and each improved on a year-over-year basis for the 22nd consecutive quarter.
Turning to Slide 9, as I have discussed in detail on the last couple of calls and as expected, our postpaid churn continues to be elevated as we work through the significant construction impacts associated with the rip and replacement of our entire 3G and voice network. This intense network overhaul impacts the performance of our voice and data service, while the infrastructure is being replaced and thus negatively impacts our customers’ experience, which we had improved from industry-worst to industry-best levels before the construction began.
The impact to the voice call experience is the largest driver of the elevated churn we are experiencing during the construction. As I have discussed last quarter churn elevates during the construction period, but begins to stabilize once we reach 70% complete with the voice and 3G replacement in the market.
Market-level churn improvements correlate strongly with the number of months that market has been 70% or more complete, for example consistent with what I reported to you last quarter, in markets where we have been 70% or more complete for seven months or longer, consumer voluntary churn in the second quarter was 14 basis points lower than market 70% complete for fewer than seven months.
The typical customer makes or receives 80% of their calls on their top five towers. For markets 70% complete for 7 to 10 months, customers with their top five towers complete had six additional basis point of churn improvement. Customers with their top towers complete in markets 10 months or more after getting 70% complete saw another 16 basis points of churn improvement or 36 basis points in lower voluntary churn than customers and markets 70% complete for less than seven months. This gives us the confidence that voluntary churn will eventually go below pre-Network Vision project levels.