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Edited Transcript of S earnings conference call or presentation 31-Oct-18 12:30pm GMT

Q2 2018 Sprint Corp Earnings Call

OVERLAND PARK Nov 7, 2018 (Thomson StreetEvents) -- Edited Transcript of Sprint Corp earnings conference call or presentation Wednesday, October 31, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Mark Davies

Sprint Corporation - CFO

* John C. B. Saw

Sprint Corporation - CTO

* Jud Henry

Sprint Corporation - VP & Head of IR

* Michel Combes

Sprint Corporation - President, CEO & Director

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Conference Call Participants

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* Brett Joseph Feldman

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Jennifer Murtaugh Fritzsche

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* John Christopher Hodulik

UBS Investment Bank, Research Division - MD, Sector Head of the United States Communications Group, and Telco and Pay TV Analyst

* Jonathan Atkin

RBC Capital Markets, LLC, Research Division - MD and Senior Analyst

* Matthew Niknam

Deutsche Bank AG, Research Division - Director

* Michael Rollins

Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst

* Philip A. Cusick

JP Morgan Chase & Co, Research Division - MD and Senior Analyst

* Richard Hamilton Prentiss

Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research

* Simon William Flannery

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good morning, and thank you for standing by. Welcome to the Sprint Fiscal Second Quarter 2018 Conference Call. (Operator Instructions)

I would now like to turn the conference over to Mr. Jud Henry, Vice President of Investor Relations. Please go ahead, sir.

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Jud Henry, Sprint Corporation - VP & Head of IR [2]

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Good morning, and welcome to Sprint's second quarter fiscal 2018 conference call. Joining me on the call today are Sprint's President and CEO, Michel Combes; our CFO, Andrew Davies; and our CTO, Dr. John Saw.

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 Sprint Investor Relations website at www.sprint.com/investors.

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.

Throughout our call, we will refer to several non-GAAP metrics, as shown on Slide 3. Reconciliations of our non-GAAP measures to the appropriate GAAP measures for the quarter can be found on our Investor Relations website.

Lastly, like last quarter, we have included reconciliations and qualitative disclosures to the tables that accompany our release and investor update to provide additional clarity regarding the adoption of the new revenue recognition standard on our quarterly results. For the remainder of this call, we will discuss results, excluding the impact of the accounting change, to provide clear comparability with prior periods, unless otherwise noted.

I will now turn the call over to Michel to provide you an update on our results.

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Michel Combes, Sprint Corporation - President, CEO & Director [3]

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Thank you, Jud, and good morning, everyone. I am pleased to share with you our fiscal second quarter results on Slide 4, which demonstrates our focus on improving the profitability of the company.

First, we reached a major milestone by delivering year-over-year growth in wireless service revenue for the first time in nearly 5 years, and earlier than our commitments, to reach this milestone by the end of the fiscal year. We generated the highest adjusted EBITDA for the second quarter in 12 years, as we continue to execute on our cost reduction initiatives. Meanwhile, we delivered net income for the fourth consecutive quarter and operating income for the 11th consecutive quarter. Furthermore, we delivered positive adjusted free cash flow for the sixth time in the last 7 quarters. We reached new milestone in our digital transformation and continue to lead the industry in several key metrics around digital sales and the implementation of artificial intelligence.

In addition, we nearly doubled our network CapEx year-over-year, and our network continued to improve as demonstrated by Ookla Speedtest data, which shows Sprint's network was the most improved of any national carrier in terms of average download speeds.

Turning to Slide 5. We delivered retail net additions for the fifth consecutive quarter. Let me take you a step back and share with you how we think about our commercial strategy to balance growth and profitability for the company.

First, given the increasing saturation of postpaid phones, as well as new competitors in the market, we are driving a renewed focus on growing revenue per account from non-phone devices. Our postpaid net additions were 109,000 in the second quarter, as our focus on growing revenue from other devices, such as tablets, watches, were partially offset by slight losses in phones. We delivered positive tablet net adds for the first time in nearly 3 years and continued to build the momentum in other devices, such as wearables with more device options to come.

Looking back over the last few years, Sprint has suffered from poor network perception following the complete rebuild of the network with Network Vision. This is compounded by the fact that we cannot afford to spend big dollars on advertising, like the other big carriers in the industry. As a result, we have utilized several promotions to encourage customers to give the new network a try. This promotions was structured to have a lower introductory rate that would then step up at a later date, very similar to what you see in the cable industry. We knew, going in, that this approach would put some incremental churn pressure on future periods, as not all customers would stay upon the expiration of their promotional period, and this has been the primary driver of the year-over-year increase in churn. We expect the churn trend to continue through year-end with a seasonal sequential increase in the third quarter, likely around 15 basis points, before improving seasonally in the fourth quarter.

As we work towards parity in LTE, preparing for 5G and embarking on a multiyear capital program on our Next-Gen Network, we have introduced new service plans to drive profitable revenue. At the beginning of the second quarter, we introduced new unlimited plans that were less promotional, related to our previous rack rate pricing, providing multiple service tiers under the umbrella of Unlimited for All. These plans load different features and services into a variety of bundles and options for customers, which creates valued opportunities versus a single rate plan offered previously.

While the combination of these actions and the competitive environment contributed to a year-over-year reduction in phone gross adds, we also saw an increase in the quality of our gross adds with our prime mix of postpaid phone gross adds up over 300 basis points versus last year.

Most importantly, we saw a 28% lift in monthly recurring charges on new account gross adds coming to Sprint compared to last year. The resulting ARPU stabilization from both base customers and new gross adds led to year-over-year growth in wireless service revenue 2 quarters earlier than we originally guided.

Optimizing the balance of gross adds, churn and ARPU is expected to deliver a superior financial outcome over the long term, and this quarter's results are early signs that the strategy is working.

For new accounts coming in, our consumer phone gross adds value added, or GAVA, which is a product of CLV times gross adds, was up compared to the second quarter last year, as the increase in customer CLV from the new plans more than offsets the volume impact that we saw.

In addition, our business segment continues to have strong momentum with phone gross adds up year-over-year for the 10th consecutive quarter, delivering postpaid phone net adds from business for eighth consecutive quarters.

Now let's discuss prepaid, where we were relatively breakeven in net addition for the quarter. However, it's important to understand the underlying trends. Boost continued to have strong momentum, with nearly 200,000 net adds before migration to postpaid, driven by year-over-year growth in gross additions for the fifth consecutive quarter and continued year-over-year improvement in churn. This strength in Boost was offset by losses from other prepaid brands.

Turning to Slide 6. We continue to make good progress in our Next-Gen Network deployment to provide customers a network built for unlimited. As I have said previously, we remain full steam ahead on our Next-Gen Network deployments during the merger review process, and we continued to build momentum in the second quarter with our efficient increase in capital spending.

First, we upgraded thousands of our existing macro sites to an LTE on 800 1.9 or 2.5 to sites that lack those bands previously, as we work to deploy all 3 of our spectrum bands to provide improved coverage and capacity across our footprint. We now have 2.5 deployed on roughly 70% of our macro sites, compared to about 50% a year ago, and expect to complete the majority of our 3 band upgrades by the end of fiscal '18.

In addition, we have deployed thousands of outdoor small cells in the quarter and now have 21,000 small cells on air compared to only 2,000 at this time last year. This ramp in small cells includes more than tripling the number of min-macro sites on air year-over-year and a very successful rollout of strand mounts, which are delivering significant improvements in coverage, capacity and time on LTE to improve the customer experience.

These network initiatives are delivering performance improvements, as seen in Ookla Speedtest Intelligence data, which showed that Sprint has the largest percentage increase year-over-year of any national carrier in national average download speed and is #1 for fastest average download speed in 123 cities and the most city wins in Sprint history.

While expanding our 2.5 footprint is delivering strong results, we have recently rolled out LTE advanced features nationwide, which will further turbocharge the customer experience. The advanced capabilities include 4x4 MIMO and 256-QAM to complement our 3 carrier aggregation rollout for enhanced download speed, as well as rolling out uplink carrier aggregation for improved upload speeds. These enhancements are expected to deliver up to 2x faster average speeds on capable devices to deliver an even better customer experience.

Our massive MIMO deployment is delivering the significant improvement in LTE performance, as expected, and provide the building block for our mobile 5G network. We now have Massive MIMO sites commercially on air in a few markets, where we're seeing very promising results, including 4x improvement in download speeds, double the upload speed and a 7x increase in capacity, a key benefit of this technology.

We are also preparing to launch our mobile 5G network in the first half of '19. Our Massive MIMO radios are software upgradable to 5G NR, as you know, allowing us to fully utilize our spectrum for both LTE and 5G simultaneously, while we enhance capacity even further with 5G and begin to support new 5G use cases.

The other carriers are not standing still, but our significant network investments, spectrum resources and cutting-edge technologies will help us continue to improve our network.

Furthermore, on Slide 7, we continued to play to our strength, which is a capacity of our network to deliver the best unlimited plans in the industry, and we recently made our unlimited plans even better to provide customers a network build for unlimited at the best price. In July, we launched new plans that give customers more choice to find the unlimited plan that fits them. Unlimited Basic is perfect for customers who may not need additional features, but would still want unlimited talk, text and data at a great value. Meanwhile, Unlimited Plus is a feature-rich plan that includes unlimited data, talk and text with more mobile hotspot data and bundled music and video services. Then at the end of August, we expanded our portfolio of unlimited plans to include Unlimited Premium, a VIP wireless plan for the customer who wants it all with the combination of top-notch features and services that customers won't find anywhere else in wireless. As I mentioned earlier, these new plans have delivered year-over-year increase in monthly recurring charges for new account gross adds, should help future revenue trends.

Turning to Slide 8. We are driving a digital transformation of our company. Because we lack the scale of the other wireless carriers in the industry, we must be more innovative by leveraging digital capabilities and employ advanced analytics and artificial intelligence in our operations to further optimize our cost structure. The world is in digital. As a company with a rich history of innovation, we want to make sure Sprint not only evolves in this new world, but we want to emerge as a digital telco leader. To become a digital telco, we created a new way of working called The Hive, the digital organization within Sprint that brings together innovators from across the organization to collaborate and solve problems for the business. The Hive will lead with data-first mindsets, and it includes a common center, AI-powered care, digital channel operations and important initiatives, such as same-day delivery and buy online, pick up in store. The Hive helps us operate better, faster and more collaboratively, for example, with our top customer care employees working side-by-side with our engineers to make sure that our AI chatbots are best-in-class to meet our customers' needs. We use data gathered in The Hive to build, test and deliver unique digital experience for our customers. Our digital transformation is based upon 3 main features: increased digital revenue for improvement in gross adds and upgrades for digital channels; provide intelligent customer experience by leveraging AI analytics and data-driven decisions; and improve digital engagements with our in-house digital marketing agency and enhance our functions. Third-party benchmarks would suggest that Sprint is leading the U.S. telco industry in many of these categories, and I see tremendous opportunity to scale this initiative based on what I've seen in other markets that are much more digital than the U.S. Some countries have carriers with over 40% of gross adds for digital channels.

From a digital sales perspective, benchmark shows that we are the leading U.S. carrier in terms of both the mix of sales for digital and the conversion of traffic. Postpaid gross adds for digital were up nearly 60% year-over-year in the second quarter. This is driven by best-in-class traffic conversion for complete redesign of the end-to-end digital customer experience. This allows Sprint to have as many gross adds for digital as any other carrier, despite adding by far the least amount of website traffic among the national carriers.

In addition, we exited the second quarter with over 20% of upgrades coming through digital. This is supported by our innovative priority status program, a recently launched exclusive program via the My Sprint app, which gives upgrade-eligible customers the flexibility to reserve their spot in line and confirm their order for new iconic devices, like the new iPhones.

Likewise, we are ramping our rollout of a cutting-edge intelligent customer experience leveraging AI and analytics. AI agents can be available any time and can provide a faster engagements with customers compared to live agents. Third-party surveys suggest that 76% of telecommunications customers are satisfied with a fully digital customer service experience. We are seeing growth in digital customer engagement through chats. And on top of that, we have ramped to over 25% of chats being handled by virtual agents, and the experience continues to show improving SPS or customer satisfaction. We have even enabled an artificial intelligence program, so customers can easily and quickly complete a device upgrade via a chat function. We added visual carousels and product selections to create a simple and seamless experience from start to finish. This is complementary to our overall customer experience, as the automation of simple customer request allows our live agents to spend more time helping customers resolve their more complex issues.

Lastly, our in-house digital marketing agency is delivering solid early results compared to our previously outsourced model, with web conversions up year-over-year, while online media spend and cost-per-click are down significantly. This digital transformation and data-driven culture is expected to contribute to the next wave of cost reductions for the future.

I will now turn the call over to Andrew to take you through our financial results.

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Andrew Mark Davies, Sprint Corporation - CFO [4]

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Thank you, Michel. And as Jud mentioned in his opening remarks, for better comparability, I'm going to discuss results based on prior revenue recognition standards, beginning with revenue on Slide 9.

Consolidated net operating revenues were $8.3 billion for the quarter, an increase of $345 million year-over-year. As Michel has ready mentioned, wireless service revenue of $5.7 billion in the quarter increased year-over-year for the first time in nearly 5 years, mostly due to growth in our retail customer base and stabilizing ARPU trends.

Postpaid ARPU of $44.99 was down 2% year-over-year but has grown sequentially for the last 2 quarters, due to base customers rolling off promotions and increasing their monthly spend with us, along with other pricing actions.

Prepaid service revenue of $1 billion grew year-over-year for the fourth consecutive quarter, mostly due to continued customer growth within our Boost brand.

Now let's turn to cost and profitability on Slide 10. We've continued to execute on our cost transformation in the quarter, as we realized about $100 million in net reductions year-over-year and combined operating expenses across cost of services and SG&A costs when adjusted for $56 million of merger-related costs that were included in SG&A. Cost of services of $1.7 billion in the quarter were up marginally by $60 million year-over-year, mostly due to some incremental expenses associated with our increased network investments. SG&A costs were $2 billion in the quarter. And when adjusting for merger costs, which are not included in adjusted EBITDA, SG&A was down $115 million year-over-year, mostly due to more efficient marketing spend. Excluding the impact of the new revenue recognition standard on merger costs, we have delivered over $500 million of combined year-over-year gross reductions in cost of services and SG&A in the first half of fiscal 2018 and approximately $200 million of net reductions year-to-date.

For the full fiscal year, we continued to expect to deliver gross reductions of more than $1 billion for the fifth consecutive year, with net reductions of slightly less than $500 million after reinvestments in our Next-Gen Network, digital capabilities and other initiatives.

Adjusted EBITDA of $3 billion for the quarter was the highest fiscal second quarter result in 12 years and improved by approximately $300 million year-over-year.

Turning to Slide 11. Operating income was $553 million in the quarter, marking the 11th consecutive quarter of positive operating income. The current quarter had several nonrecurring items, including $68 million related to a loss on asset dispositions, $36 million related to merger costs, $25 million in severance and lease exit costs and a $32 million net benefit from hurricane-related reimbursements. Adjusting for these nonrecurring items and approximately $34 million of hurricane-related charges in the year ago period, operating income would have been up year-over-year.

Net income of $18 million was the fourth consecutive quarter of positive net income and compares to a net loss of $48 million in the year ago quarter.

We now turn to Slide 12 on CapEx and free cash flow. Network cash capital expenditures of $1.3 billion nearly doubled year-over-year and were up $134 million sequentially, as we ramped up our Next-Gen Network initiatives.

Net cash provided by operating activities of $2.9 billion improved by $125 million year-over-year, while adjusted free cash flow, which has been positive for 6 of the last 7 quarters, was $525 million in the quarter and improved by over $100 million year-over-year, even with the significant increase in network cash CapEx.

We continue to have strong liquidity, with over $11 billion of general purpose availability, including nearly $9 billion of cash, cash equivalents and short-term investments as we prefunded a significant portion of our capital investments and debt maturities for this fiscal year. However, we will continue to be opportunistic in looking at the capital markets and maintain flexibility while we're in the merger process.

Let's now move to our latest outlook for fiscal 2018 on Slide 13. Due to the strong year-to-date performance, we are raising guidance for adjusted EBITDA to a range of $12.4 billion to $12.7 billion, above the previous expectation of $12 billion to $12.5 billion. Similarly, and excluding the impact of the new revenue recognition standard, we are raising our guidance for adjusted EBITDA to a range of $11.7 billion to $12 billion, compared to the prior expectation of $11.3 billion to $11.8 billion.

Regarding network cash capital expenditures, we continue to expect spending to increase significantly year-over-year, as we ramp up our Next-Gen Network initiatives and prepare for the launch of 5G in the first half of 2019. As we are now halfway through the year, we are narrowing our previous expectation of $5 billion to $6 billion to a range of $5 billion to $5.5 billion.

Additionally, we are increasing our adjusted free cash flow expectations from around negative $1 billion for the full year to a range of between negative $1 billion to negative $500 million on a full year basis.

And with that, I'll now turn the call back to Jud to begin the Q&A. Thank you.

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Jud Henry, Sprint Corporation - VP & Head of IR [5]

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Thanks, Andrew. In just a moment, we will begin the Q&A. Cathy, please inform our participants on how to queue up for the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from Philip Cusick.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [2]

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I wonder if you can start by talking more about the strategy of increasing revenue per account rather than going after, it sounds like, new accounts. How does that play into your data device and tablet efforts? Tablet gross adds, are those picking up with the stability? Or is it just the churn is down? Because we've seen this before, it doesn't seem like a repeat of the tablet wave a few years ago, but I want to hear what you're thinking about.

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Michel Combes, Sprint Corporation - President, CEO & Director [3]

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Phil, so first, on your questions related to the non-smartphone handsets, I guess that it's fair that given the increasing saturation of postpaid phone, as well as new competitors in the market, we are driving a renewed focus on growing revenue per account from non-phone devices. Our competitors did that last year. I guess, that's where we're putting a lot more efforts this year. It brings additional ARPU. On top of that, it should reduce churn at the end of the day because that means more devices per account. As reported, we delivered positive tablet net additions for the first time in nearly 3 years and continue to build momentum in that space, as well as doubling momentum in other devices, such as wearables, with more device options to come. And to your precise question around gross adds and churn, I mean, we see an uplift in terms of gross adds concerning the tablet, so an appetite for -- from our customers to get those additional devices. Then on your question on -- so, of course, that has an impact on the postpaid ARPU and that has helped us to stabilize our ARPU and -- or even to deliver growth sequentially in between Q1 and Q2 of 1%.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [4]

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Can you expand on that? Are you subsidizing the new devices, like tablets and watches, or are you just highlighting them more in stores and in advertising? How should we think about that?

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Michel Combes, Sprint Corporation - President, CEO & Director [5]

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Both, I would say. We've been a little bit more aggressive in terms of tablet promotions as well as watches. But the most important is that we have highlighted those devices more in our stores. We have also changed the compensation of our retail reps in order to be more incentivized to drive those handset -- those non-handset sales, and that's the result that we have seen. And I expect that it will continue to grow. Obviously, our priority remains to continue to sell smartphones and that's the first piece that a rep is easier do. But on top of that, we wanted to drive the right behaviors from our reps in order to make sure that they sell, as well, tablets and watches. So that's what we have been able to achieve. That was top of the strategy. Our strategy on one side was to rebalancing between smartphones and non-smartphones. And within smartphones, to drive an uplift in terms of MRC by bringing those new pricing plans that we have implemented, which gives us some ability to step up in plans. And as you have seen, we've also been able to drive this improving MRC, thanks to good loading of our Unlimited Plus versus Basic, so which means that, all in all, our gross add story is working and is delivering exactly in the way we were expecting it to deliver, and that has translated in GAVA, which is higher this quarter compared to last -- compared to Q2 last year.

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Operator [6]

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Your next question comes from the line of Brett Feldman.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

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Few questions about your deployment of 2.5 gigahertz spectrum. The first is, once that is complete, how should we think about the CapEx profile of the company? Do you think your CapEx will start to moderate or go lower? Or do you think you'll just redeploy that into some of your 5G initiatives? And then second, how do we think about your go-to-market strategy once you've completed that deployment of spectrum? It seems like, at that point, you'd be very capacity rich. Would that be a good moment to maybe pivot back towards driving subscriber growth as opposed to being mostly focused on ARPU growth?

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Michel Combes, Sprint Corporation - President, CEO & Director [8]

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Well, on the second piece of your question, which is when that will be done. It's obvious that one of the real competitive advantage of Sprint will be capacity, so meaning that what we want to play as a strength, vis-à-vis our competitors, which we already do, by the way, with the offers that we have implemented in the market with, for example, the amount of data that we give for hotspot and all that stuff, which probably drive very differentiated offers for Sprint compared to its competitors. But it's obvious that we'll put more emphasis on that. And I expect that it will drive gross adds in the future. But when I look at it, I would say that from the gross adds perspective, our share of gross adds is still 50% higher than our market share, so which is quite significant and which is quite good, to be fair. The point is more that we have an higher churn than our competitors, as you all know. And one of the piece which is driving churn was weakness of our network. So with these 2.5 deployments, what I expect the most is that it will help us to close the gap from a churn point of view, and then our net adds profile should be much better. And so -- which means that it will be the right way to move forward in terms of, let's say, net adds profile moving forward. In between -- I guess that what we have said in this presentation earlier on is that, thanks to all the investment that we have done, we are able to announce LTE Advanced on national basis. And so that exactly plays to the question that you were asking, which is that by highlighting LTE Advanced, we are going to reemphasize the quality of our network, this capacity benefit that we have and this ability to drive more gross adds but, more importantly, to reduce churn.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

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And then on CapEx.

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Michel Combes, Sprint Corporation - President, CEO & Director [10]

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From a CapEx point of view, I guess that what we have always said is that we have 2 to 3 years of increased CapEx in order to cope with the deployment of 2.5 and to cope with the deployment -- let's say, the -- to the implementation of the network that we are seeing right now. And then you should expect a slowdown of our CapEx investment within 1 to 2 years.

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Operator [11]

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Your next question comes from the line of Jennifer Fritzsche.

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Jennifer Murtaugh Fritzsche, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [12]

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I just wanted to ask what you're seeing in the prepaid environments or competitive landscape. Both you and T-Mobile seem to come in lighter than we would have thought on the prepaid side. I know Cricket or AT&T has been more aggressive. But just can you comment on a little of the trends you're seeing there?

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Michel Combes, Sprint Corporation - President, CEO & Director [13]

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Just -- we see a market which is quite competitive. And so you are seeing the reports of our other competitors. Nevertheless, we continue to experience a very strong momentum in Boost, which is offset by losses in our other brands that we have deemphasized. But as far as Boost is concerned, Boost net adds were nearly 200,000 before migrations. And Boost gross adds grew year-over-year for the fifth consecutive quarter. On top of that, our total product churn have improved year-over-year for the ninth consecutive quarter. So I really believe that the strategy that Sprint has implemented since several quarters now, which is about expansion of our distribution, being more aggressive from a network point of view, driving family offers in order to reduce churn, is really paying off. And so despite the aggressiveness that we see in the marketplace from a pricing point of view, from a device subsidy point of view, we have been able to drive quite well the growth of Boost.

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Jennifer Murtaugh Fritzsche, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [14]

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And Michel, if I may, should we expect fourth quarter trends then to show improvement sequentially? Or any comments on just -- on the prepaid category?

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Andrew Mark Davies, Sprint Corporation - CFO [15]

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We expect strong momentum in Boost to continue, as we have experienced in the past few quarters. But we expect those -- prepaid, sorry, to remain slightly negative for total -- for fiscal Q3 '18, due to the impact of the other brands, as we have seen in Q2, before returning for total prepaid to growth in fiscal Q4 '18.

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Operator [16]

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Your next question comes from the line of John Hodulik.

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John Christopher Hodulik, UBS Investment Bank, Research Division - MD, Sector Head of the United States Communications Group, and Telco and Pay TV Analyst [17]

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Maybe a clarification and then a broader -- more broader question. First on the postpaid phone subs, Michel, the commentary -- the answer to the first question or what the prepared remarks suggest that you're going to lose post -- you expect to lose postpaid phone subscribers for the next year or so. Or just sort of how you had losses this quarter after a really strong momentum a year ago. Just how do you expect that to play out? And then maybe just give -- if you could give us some more detail on that 5G rollout for first half of '19. What spectrum are you going to be building that mobile 5G on? And how extensive of a build-out are we talking maybe by the end of the year?

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Michel Combes, Sprint Corporation - President, CEO & Director [18]

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John, you want to take the second question first?

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John C. B. Saw, Sprint Corporation - CTO [19]

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John, with regards to the 5G plans, we are very well on track. The tool that we're going to use to build our 5G network is using Massive MIMO. And the 5G spectrum that we're going to be leveraging is our 2.5 gigahertz spectrum. So we have restarted building our Massive MIMO sites. We are very encouraged with the results we have seen so far. We're seeing about 7x improvement in capacity, at least 4x improvement in speed. That bodes well, that bids well for when we add 5G. So 5G, for us, once we have these Massive MIMO sites built, will be a software and line-cut upgrade only, so no tower climbs needed. And we expect to launch in 9 markets next year. And we have also announced recently our first 5G smartphone with LG, so we have a good momentum. Results from Massive MIMO trials looks very encouraging. In a couple of months, we will add the 5G software. We will be able to enable both LTE and 5G simultaneously on the same sites.

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Michel Combes, Sprint Corporation - President, CEO & Director [20]

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So and -- so just to emphasize what John has just said on -- from a network point of view, I guess that coming back also to previous questions, I guess that we are in a right momentum moving from where we were to LTE Advanced today, which allows us really to unlock the benefit of our network and 5G kicking in, in H1 '19. So that should help us to really reposition the network in a proper manner and take the benefit of that in order to add some impact on churn moving forward. Of course, as we all know, there is always [a lag] in between what is delivered from a network point of view and perception received by the customers, but we expect that to improve in the next coming months and quarters. And you might expect from us to take some marketing initiative in that field. Coming back to your first question, in terms of postpaid phone net adds, I guess that even if we don't give quarterly guidance, it's probably fair to say that fiscal -- you -- we -- you should expect, sorry, likely seen the results in fiscal Q3 '18 as we do expect some additional seasonal churn pressure of 15 basis points sequentially, partially offset by a seasonal lift in gross adds. But as I have already said on different occasions, we continue to expect to be positive for the full fiscal year.

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Operator [21]

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Your next question comes from the line of Matthew Niknam.

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Matthew Niknam, Deutsche Bank AG, Research Division - Director [22]

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How should we think about the magnitude or volumes of customers who are rolling off these promo discounts next quarter relative to this past one? And when do you expect this to peak? And then as we just think about this in terms of retention rates, any early data you can share for customers seeing their builds reset? How many of these customers are you actually able to hold onto?

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Michel Combes, Sprint Corporation - President, CEO & Director [23]

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So you can expect we don't to give a precise figures on this type of stat. I can just tell you that customers on introductory price plan, such as our 50% off on Unlimited Freedom with free line continue to roll off of these promotions over the next several quarters. So it was something which was spread during the past few and the past coming quarters, as customers join Sprint via this promotion over time. So there is not a real peak. It's spread over different quarters. These promotions, as you remembered, was structured to have lower introductory rate that would then step up to a later date, very similar to what does exist in the cable industry. And why we have seen some incremental churn pressure, that I have reported just earlier, which is one of the reason of the increase in churn in between last year and this year, many customers do stay after the promotional period ends. And so it has helped our wireless service revenue trend. So on one side is a kind of sales-inflicted churn, which explain part of that gap that we have with our competitors, but not all the gap. There are some structural things that we have to solve. On the other side, it clearly has had a positive effect on our wireless service revenue, and that explained why we have been able to be wireless service revenue positive starting this quarter.

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Operator [24]

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Your next question comes from the line of Ric Prentiss.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [25]

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Michel, I wanted to go back to what you were talking about. Obviously, churn is the big item. Network quality is the point you're trying to make. I think you mentioned that 50% of your sites had 2.5 gigahertz deployed 1 year ago. Can you help us understand, have you seen better churn on those areas where you have the 2.5 already deployed or where you have the triband already deployed?

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Michel Combes, Sprint Corporation - President, CEO & Director [26]

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Yes, that's a yes. And as you know, we have early indicators that we are looking at for analytics, which is what -- I guess, we have presented to you on different occasions, which is network QoE that we measure on a -- at a customer level. And it's obvious that in the regions and places where we have been able to roll out 2.5, we have a better network QoE, which is a pretty good proxy for impact on churn moving forward. So the answer is definitely yes. That's why we are accelerating our investment in network. We were at 50% 1 year ago. We are 70% now. We expect by the end of the year to be close to completion, so which means that, then, all our customers will really get the benefit of it. Of course, during this year, as we made all those improvements, that has had some impact on the quality of our network, but that will be over in the next coming months as well. So I truly expect that it will add a significative impact on our churn. When you look at the churn, I mean, it's all about network experience, hence, these investments. Second is around customer experience, hence, all the investment that we are doing in the digital area in order to really be able to step change the customer experience that we deliver to our customers and then to have the right offers in place, which is the case, because we continue to have the most aggressive offers in terms of unlimited offers in the marketplace. So I guess that we had the right setup moving forward. We are in this transition. What is positive is that we start to see early signs that our strategy does work. When I look at the mix of customers that we are attracting, more prime. When I look at the MRC that we can capture, higher MRC compared to what we were doing in the -- in previous years, so meaning more GAVA. Now we need to fix churn. We still have a churn which is twice higher than most of our competitors. And so that's what we need to focus on in order that, in the mid -- long run, this growth profile remains healthy and sustainable.

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Richard Hamilton Prentiss, Raymond James & Associates, Inc., Research Division - Head of Telecommunication Services Equity Research [27]

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And the other question I have, with the weakness possibly in the economy, have you looked at your customer base to see how sensitive? You mentioned, they're becoming more prime, but have you looked at it to see how sensitive is your customer base to general economic trends or rising interest rates?

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Michel Combes, Sprint Corporation - President, CEO & Director [28]

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Well, I don't -- so, of course, let's say, the economy went for different cycle in the past years. I don't really see major risk there or major weakness compared to any other carrier. The only piece that probably we see today is more early signs of impact of the merge discussions, so which is not really due to the economy. But of course, let's say, with the price articles every day on the merge discussions, that's put a little bit of pressure on our base, as well as on new customers. And we have some evidence that a pending merger is impacting store traffic, due to consumer confusion. So that's more this piece rather than any impact of the economy slowdown on our customer base.

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Operator [29]

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Our next question comes from the line of Simon Flannery.

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Simon William Flannery, Morgan Stanley, Research Division - MD [30]

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Andrew, I was wondering if you could just talk about -- you said more efficient marketing spend. Can you just elaborate on what exactly you're able to do and just how should that trend into the December quarter, given the holiday season? And then Michel, there's been a lot of focus on the wireless business, of course, but we haven't talked much about wireline. Could you just give us some perspective on what steps you're taking there to improve the growth and profitability profile?

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Andrew Mark Davies, Sprint Corporation - CFO [31]

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Thanks for the question, Simon. So on marketing spend, this is another feature of our use of digital and analytics within the business. So basically, we're able to do much more of a, if you will, econometric analysis of our marketing spend and ensure that we're getting the right bang for the buck. And while, as you alluded to, you see a slight increase in absolute marketing dollars, as we go through this upcoming holiday period, I think we're still broadly confident that the year-on-year improvements that we're seeing in marketing spend through the first half of this year will continue right through into the second half of the year as well.

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Simon William Flannery, Morgan Stanley, Research Division - MD [32]

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So it's like more digital, less TV? Or what are the kinds of big features of it?

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Andrew Mark Davies, Sprint Corporation - CFO [33]

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No -- yes, there's an element which is more digital and less TV, but it's just better placement of our marketing spends, so just targeting the marketing spend where we can get a much better bang for the buck.

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Michel Combes, Sprint Corporation - President, CEO & Director [34]

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And on your second question, wireline, wireline business helps the wireless business compete on a multi-element proposals in the business space, as you know. Our wireline adjusted EBITDA of minus $20 million improved $22 million sequentially and $9 million year-over-year. Our -- you know quite well, our strategy, which is all around shrink to grow, meaning shutting down the legacy voice and TDM-based IP business. Voice shutdown complete, but TDM to ethernet IP migration is still in process. It should be completed in the next coming quarters. And then putting all the emphasis on the strategic IP MPLS, which are actually growing. So we are just in this transition, which has been highlighted in the previous quarters and which we'll continue for the next coming quarters. But I guess that it's a great and critical asset for Sprint, moving forward, in order to compete in the business space.

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Operator [35]

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Our next question comes from the line of Michael Rollins.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [36]

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I was wondering if you could talk a bit about your VoLTE migration. What's happening in terms of steps you're taking? What's required to optimize the performance for the customer? And is there a deadline that you see in the future that you have to hit relative to your expectation for device availability that includes the current CDMA features?

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John C. B. Saw, Sprint Corporation - CTO [37]

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Michael, John here. We have already launched -- a soft launch of VoLTE in 35 markets out of the Sprint's 99 markets. And in a couple of weeks, we will soft launch more. The strategy is to have it commercially available in 2019. We're trying to transition our voice services from CDMA to VoLTE carefully. We do have a pretty good CDMA voice network today. And as you know, we have ample capacity, so there is really no rush to revamp spectrum for VoLTE. But at the same time, though, with voice over LTE, with the most advanced codecs that we're using, voice quality is much improved, as well as our customers are able to simultaneously use voice and data at the same time. So there are pluses with it. So in the next few months, we'll continue to soft launch the markets. What it means is that customers with phones that have VoLTE capability will be able to choose on their own the voice service they want to use, whether it's CDMA voice or voice over LTE. And then, at a certain point, probably in 2019, we will announce the commercial availability and then make a voice over LTE our primary voice service. Our phones, in foreseeable future, will continue to support CDMA. And CDMA as a voice network will continue to exist until we make a smooth and seamless transition.

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Operator [38]

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Our next question comes from the line of Jonathan Atkin.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [39]

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So I had a question about the network upgrades and you talked about filling out the 2.5 gigahertz spectrum. Do you feel like you have adequate macro density -- macro cell density? Or do you need to be adding more macro sites to get to the quality standards that you're hoping to get? And I wondered if you can maybe talk a little bit more about small cell deployments and milestones, use of strand mounts, things of that nature.

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John C. B. Saw, Sprint Corporation - CTO [40]

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Sure. Well, in-footprint coverage, we -- the reason why we're doing these upgrades, Jon, is to make sure that we fortify and dense -- and densify the capabilities and capacities of our in-footprint coverage. That includes adding a lot more 2.5 gigahertz spectrum to our existing towers. To supplement that and complement that in places where we have capacity hotspots or coverage holes, we are using small cells and strand mounts. And I think, like what Michel said earlier, we have made more progress with small cell build-out in the last 6 months than we have 2 years ago. So we have plowed this area a lot and invested, and we're starting to see good momentum. We have 21,000 small cells on air, including great progress we are making with Altice and Cox for strand mounts. So they will continue to fortify the in-footprint coverage. As of outer footprint coverage, we are looking at adding new towers to expand our coverage into neighborhoods that have outgrown our legacy coverage. In the meantime, we are also benefiting from the roaming agreement we signed with T-Mobile that actually, they have a slightly bigger outer footprint coverage, and so we're able to leveraged that as well, as we are looking at building more new towers to expand our own footprint organically.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [41]

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And then you talked about Massive MIMO and I wondered if you could maybe be a bit more specific in terms of, like, where we are. Is this 4T4R and 8T8R? Or how many channels are we aggregating when you use that term in the context of 5G?

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John C. B. Saw, Sprint Corporation - CTO [42]

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Sure. Massive MIMO that we're deploying is 64T64R. And in the context of 5G and LTE, what we are doing with 128 antenna elements is to physically and logically separate the antenna elements into 2 halves, 1/2 of it LTE and other 1/2 for 5G. You can get away with this for Sprint because we have enough spectrum to actually power up both halves of the Massive MIMO antenna. This is how we are able to use the same radio hardware to enable both LTE and 5G simultaneously using the same Massive MIMO antenna, so lots of antenna elements that allows us to run this in split mode to support both LTE and 5G. And so far, like I said earlier, the results have been extremely encouraging. The form factor is actually smaller than what we've deployed today with 8T8R because it's a one-box unit that has a radio and antenna all in one box.

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Jud Henry, Sprint Corporation - VP & Head of IR [43]

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Thanks, Jon. That's all the time we have for questions. But before we end the call, I'd like to turn it back to Michel for some closing comments. If you have any additional questions, please reach out to Sprint Investor Relations team. Michel?

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Michel Combes, Sprint Corporation - President, CEO & Director [44]

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Thanks, Jud. I want to thank everyone for joining us today and for supporting Sprint. Our second quarter results demonstrate continued execution of our plan to balance customer growth and profitability while improving network performance. We continue to deliver retail net adds for the fifth consecutive quarter. We improved profitability, delivering net income for the fourth consecutive quarter and operating income for 11 consecutive quarters with our highest second quarter adjusted EBITDA in 12 years. In addition, we are aggressively executing our Next-Gen Network deployment to deliver a network build for unlimited, while building the foundation for our mobile 5G network by deploying game-changing 5G technologies this year, such as Massive MIMO. We continue to enhance our value proposition and continue to transform our cost structure and customer experience with digital and advanced analytics. Our postpaid gross adds share remains well above our market share. And we are confident that we can improve churn over time with our LTE Advanced and our soon-to-come 5G network, as well as customer experience improvements. Thank you, and have a very great day.

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Operator [45]

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This concludes today's conference call. You may now disconnect.