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Edited Transcript of S earnings conference call or presentation 3-May-17 12:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Sprint Corp Earnings Call

OVERLAND PARK May 5, 2017 (Thomson StreetEvents) -- Edited Transcript of Sprint Corp earnings conference call or presentation Wednesday, May 3, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John C. B. Saw

Sprint Corporation - CTO

* Jud Henry

Sprint Corporation - VP and Head of IR

* Masayoshi Son

Sprint Corporation - Chairman, Chairman of Softbank Group Corp and CEO of Softbank Group Corp

* Raul Marcelo Claure

Sprint Corporation - CEO, President and Director

* Tarek A. Robbiati

Sprint Corporation - CFO

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Conference Call Participants

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* Amir Rozwadowski

Barclays PLC, Research Division - Director and Senior Research Analyst

* Amy Yong

Macquarie Research - 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

* 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

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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 Fourth Quarter 2016 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 and Head of IR [2]

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Good morning, and welcome to Sprint's quarterly results conference call. Joining me on the call today are Sprint's President and CEO, Marcelo Claure; our CFO, Tarek Robbiati; and our Chairman, Masayoshi Son.

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 may involve 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, all references to customers or connections in our remarks represent results or expectations for the Sprint platform, unless otherwise indicated.

I will now turn the call over to Marcelo to provide you an update on our transformation.

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Raul Marcelo Claure, Sprint Corporation - CEO, President and Director [3]

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Thank you, Jud, and good morning, everyone. I cannot be more proud of Sprint's fiscal 2016 results and what our team has accomplished to date at the halfway point of our 5-year turnaround plan. As I have said before, there is no better indicator of a successful turnaround than when a company returns to top line growth. That is exactly what we did in fiscal 2016, growing net operating revenue year-over-year for the first time in 3 years as we ended the year with 3 consecutive quarters of year-over-year growth.

Our discipline to transform our business and the underlying cost structure delivered a $2.1 billion reduction in cost of services and SG&A in fiscal 2016 and an impressive $3.5 billion in the last 2 years. This ability to grow revenue, while cutting cost at the same time, is a testament to the improved operational efficiency and momentum that delivered the highest adjusted EBITDA in 9 years, the highest operating income in 10 years, and we delivered positive adjusted free cash flow.

We more than doubled our postpaid phone net additions year-over-year in fiscal 2016, and the prepaid business returned to growth as we exited fiscal 2016, with more exciting things to come in fiscal 2017.

In addition, as you all know, Sprint's network has been widely acclaimed as being the most improved network over the past year, further validating that network quality is not solely dependent on how much money you spend but rather how effectively you utilize the assets you have despite what our competitors want you to believe.

And as you will hear from Masa, our Chairman, shortly, we have a diverse toolbox of innovative and capital efficient solutions that will enable us to reach our goal of having the best network in the near future. In particular, I'm very excited to share with you an amazing innovation called the Sprint Magic Box. Magic Box is the low cost, self-configuring LTE small cell that is being used to dramatically improve the user experience, particularly in their indoor coverage and is up and running in 15 minutes.

We successfully balanced achieving our highest financial milestones in many years while significantly beating our 2 biggest competitors in the most important postpaid phone net additions, as we added 1 million more than Verizon this year and 2 million more than AT&T. These results illustrate that Sprint has good operating momentum as we enter a highly anticipated period of many strategic opportunities.

We have generated significant shareholder value over the first half of our turnaround and that gives us the confidence and the patience to evaluate any potential strategic opportunities, believing that at the end of the day, we have a strong standalone case.

Turning to Slide 5. Our customer growth continued in fiscal 2016, with 1.9 million total net additions for the year. Our postpaid phone net additions of 930,000 were the highest in 4 years and more than doubled year-over-year. Even more impressive is the swing of 2.5 million in just 2 years from a loss of 1.5 million postpaid phones in 2014 to almost adding 1 million in 2016.

Our postpaid phone gross additions were also the highest in 4 years and up 10%, year-over-year. We delivered our lowest ever postpaid phone churn in fiscal 2016 at 1.48%, with churn in the fourth quarter being relatively flat year-over-year.

Despite our competitors following us into unlimited data plans this quarter, we delivered 42,000 postpaid phone net additions in the fourth quarter, extending our streak to 10 consecutive quarters of year-over-year improvement. Furthermore, we were the only carrier to grow postpaid phone growth adds year-over-year in the fourth quarter while growing our share of industry growth adds by over 250 basis points year-over-year. In addition, we have now surpassed Verizon for 5 consecutive quarters in postpaid phone net additions as we delivered 300,000 more than Verizon this quarter, and we have also surpassed AT&T for the 10th consecutive quarter by adding more than 400,000 in this quarter.

In our last earnings call, we said that we're putting more attention on our prepaid business, while our prepaid business returned to growth exiting fiscal 2016 with positive net additions of 180,000 in the fourth quarter. Most importantly, our main brand, Boost, which is our primary prepaid brand, with an ARPU of roughly $40 a month, delivered even greater net additions in the fourth quarter. Our next step will be a relaunch of the Virgin brand, with a unique and disruptive offer in conjunction with Apple. Lastly, our wholesale and affiliate business continues to grow with net addition of 2.1 million this year.

Moving to Slide 6. We continue to build our brand and value proposition on the back of our improved network. We have played to our strength by going all-in on Unlimited Freedom as our sole offer for postpaid, giving customers value and simplicity with a simple and straightforward plan, coupled with Sprint's reliable network.

With a capacity and reliability for LTE Plus Network and the most spectrum per retail customer of any carrier, we're able to dramatically simplify our rate plans and give customers the peace of mind to not think about their data plans anymore. Likewise, we have brought Boost back to its strength with compelling rate plus and device offers, with a brand message that appeals to the core prepaid market. We expect Boost to continue to be a pillar for prepaid business in 2017 as we have exciting plans for other prepaid brands this year as well.

We're also providing our customers with the best service when they leave the United States by offering free data service to more destinations than any other carrier in the U.S., 165 countries. Customer shouldn't have to set up for trade-off when roaming overseas. Neither AT&T nor Verizon offer free data option abroad, and T-Mobile doesn't carry the offer 4G speeds outside of Canada and Mexico. Sprint has more low cost coverage than all 3 competitors, and the Sprint customers don't have to make any more trade-offs.

Furthermore, we're optimizing and expanding our retail distribution to lower the average cost per transaction, increase our brand presence and better serve our customers. This includes converting several hundreds of the best performing RadioShack stores to full Sprint retail stores over the next few months, which we expect to deliver more total productivity than we experienced from the 1,300 RadioShack stores under the store within a store model that was discontinued at the end of this fiscal year. We will continue to add more Sprint and Boost stores this year while also updating existing stores to be more productive and be more appealing.

This has been an amazing year as we have demonstrated that having an award-winning network is not tied to how many billions of dollars you spend. Our LTE Plus Network continues to improve and perform at best-ever levels, and we're delivering on our goal of unlocking the value of our large spectrum holding by densifying and optimizing our network to provide customers with the best experience. When we asked consumers what is the most important aspect of the wireless experience, they respond that network reliability and consistently high voice quality had the greatest impact on their daily lives, and that's where Sprint's network continues to deliver.

Drive test From Nielsen show that Sprint network reliability has continued to be best-in-class and within less than 1% of AT&T and Verizon. In addition, independent mobile analytics firm RootMetrics awarded Sprint over 30% more first place Metropolitan Area RootScore Awards in the 76 markets measured so far in the first half of 2017 compared to the year-ago testing period.

Thinking of the customer experience, you may have seen in the media that J.D. Power, the leader in the independent industry benchmark studies, now ranks Sprint second out of all national carriers for wireless network quality, ahead of AT&T and T-Mobile, in all geographic regions of the U.S. in its latest wireless network quality performance study. This is very compelling because it is based on actual customers' feedback based on their experience with our vastly improved network. Our densification programs continue to build momentum as we now have thousands of permits in hand, and we're ramping up construction in many markets.

In addition, as you're well aware, Sprint has already deployed 3 channel carrier aggregation in over 100 markets. The best part of our carrier aggregation deployment is how seamless it is, thanks to the fact that we utilize radios and antennas capable of multiple carriers when we originally deployed our 2.5 and as a result, generally, we do not need to go back to the tower each time that we light up another 20 megahertz channel over 2.5. This increased depth of 2.5 has allowed us to shift the majority of royalty traffic onto this superhighway, which also provides a halo benefit to the customer experience by relieving capacity on the 800 and 1.9 LTE layers. Furthermore, Sprint was the first carrier to demonstrate gigabit plus LTE in the public venue with our demonstration in New Orleans in March.

Now I'd like to turn the call over to my Chairman, Masa, to share with you how Sprint expects to make our network even greater in the future.

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Masayoshi Son, Sprint Corporation - Chairman, Chairman of Softbank Group Corp and CEO of Softbank Group Corp [4]

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Thank you, Marcelo. This is Masa. Marcelo is my boss. I have to report to Marcelo how I run the network operations, so I'm happy to tell you about the great progress we've made.

So look at Page 8. Many people still may have the Sprint network is not as good as anybody else. Many people think that we are #4. The reality is a little different. We are #2 in voice performance nationwide. We used to be #4, but now we catch up and became #2 nationwide. But also on the left-hand side over this page, you'll see most Metro we actually became #1 in voice alone. This is the progress we've made. Not just at voice but we are going to be #1 or #2 also on the data, data with LTE performance.

So Page 9 says why we are going to be #1 or #2 in most markets in data also is because we have spectrum. We have innovation. These are the 2 reasons why we are going to make great progress.

Page 10. As you can see, we have such a huge asset of 2.5 gigahertz spectrum with high-power UE. So we expect going forward with our deployment of the new network, the almost 90% of the total traffic capacity goal through our 2.5 and with our high power UE, we are becoming good enough as much as the 1.9 coverage, and 800 megahertz will cover all the spill over of the coverage. That's where we have this strength in 2.5.

So what is high power UE? Page 11 says it used to be 2.5 does not cover long-enough distance, big enough penetrations inside the buildings. But by increasing the power in the handset unit with the new standard we create, agreed this year by all the major key players of the handset, key players of the components, we have established a new standard and that is a high-power UE. With this new standard and technology, our 2.5 signal goes inside the building and the bigger distance coverage as good as the mid-band. That's the great improvement of our capability.

So with that spectrum and new standard, now we have on top of that a new innovation as a tool. On Page 12, 5 major new tools that we have invented: one is called mini macro; second , air pole; strand mount; Magic Box; and femto. These are the new tools that we invented and we created uniquely. Let me explain how it works.

On Page 13, on the left-hand side, you'll see macro towers. Of course, this is macro tower as good as our competitors with 800 megahertz, 1.9 and 2.5. And on 2.5, we have carrier aggregations and so on to increase the capacity and the speed. But on top of that, in order to increase the better coverage in the in-building and increase also the capacity of the network, we are putting all these tools throughout the towns.

Page 14, we show the example of how our Magic Box will work. Unlike femtocell or typical small cell inside the building, those small cell covers just the indoor. But our new invention is that this Magic Box covers not just the indoor from the inside the building but also it will cover outdoor into the network. This is our invention. And because we have 2.5 spectrum, we can make this happen, and we have a new technology called UltraSON, a great name UltraSON. That is a self-organizing network. With this new technology, the populated dense number of magic box does not interfere each other, and we cover indoor but also outdoor over the network.

How does it get placed? Page 15, you'll see the image of the Magic Boxes by the window. So we put this box to cover indoor but also outdoor. This box can be connected through the fixed line broadband with WiFi or if the household or building does not have those WiFi connectivity, we get the backhaul from our macro tower's wireless. That's a great innovation and does not need any installation. It's fully automated.

In Page 16, we show the example. So let's say in the Metro, we put the one box inside one building on the left-hand side, and then it will shoot our signals to the adjacent buildings in all the neighborhood.

Page 17 is another example. We cover all the neighborhood. The Magic Box, not just for indoor, all the neighborhood, so you get connected in your garage, the garden and street nearby and the household nearby.

So all of these tools and innovations with our 2.5 spectrum, we can differentiate ourself and create the best network, and we have started testing this deployment very recently into 6 clusters: New York, San Francisco, Chicago, Denver, Indianapolis and Houston. As you can see on this Page 18, overall performance with independent neutral party to check by P3, this is an independent party to check the network quality. And we get overall #1 in New York, San Francisco, Chicago, Denver, Indianapolis. In Houston, we are not #1 yet, but this is definitely started with all these 6 markets faster. But not just overall, but you see in more detail with web browsing, download and YouTube apps and so on. We are very proud about this result.

So you see more detail with Page 19. This is the example of New York City in Manhattan Midtown. And you see on the right-hand side, result of download speeds with Ookla and not just the speed but all the coverage and total performance by P3 check, this is New York. And San Francisco, test area is this on the left-hand side. You see the download speed and overall performance, again, we are #1. Chicago, #1 also, and so on.

As a result, I'm proud to say and confidently I would say, as we have already achieved #1 or #2, the voice quality of the network, we will be #1 or #2 also on LTE data coverage and the speed and the performance. So you will see and my commitment that you will see the result happening over the next 18 months, 20 months. By the end of next year, we will be #1 or #2 in most of the markets throughout the United States. But importantly, as management, I would say we don't just waste the CapEx. We don't waste the money. We will make this happen with the lowest CapEx compared to anybody else. As you have seen in the last 12 months, we spent the lowest CapEx among our competitors but we still achieved a great improvement in the network with the voice #1, #2, and data network is coming along very quickly. And we are confident and happy to say with all these early test market, deployment is progressing fantastically, and I will you give you the result.

Thank you very much.

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Tarek A. Robbiati, Sprint Corporation - CFO [5]

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Thank you, Masa. Moving to revenue on Slide 23 and solid digit net operating revenues of $33.3 billion for the year grew year-over-year for the first time in the last 3 years. This important milestone of returning to top line growth is the culmination of 3 consecutive quarters of year-over-year improvement, including wireless operating revenue growing 7% in the fourth quarter.

Wireless service revenue of nearly $24 billion also stabilized as we exited fiscal 2016 and had the lowest year-over-year decline in the last 3 years. Postpaid service revenue was essentially flat sequentially in the fourth quarter when normalizing for the change to record revenues associated with our device insurance program on a net basis beginning in the fourth quarter as we had foreshadowed for you last quarter. Similarly, prepaid service revenue was relatively flat sequentially as that business returned to volume growth in the fourth quarter.

As a reminder, Sprint changed the terms of its vendor agreement for our device insurance program at the beginning of January, which is expected to result in a net savings to the income statement. However, under the terms of the new agreement, Sprint expects to book the insurance program revenue on a net basis and no associated costs compared to the prior program, where we recorded the gross revenue from the customers as revenue and the associated expenses in cost of service. As a result, we expect that our reported service revenue will be lower by approximately $200 million per quarter as reflected in the fourth quarter and representing the new revenue baseline, while we would expect an even greater reduction in the associated expense.

Postpaid phone average billings per user was up slightly year-over-year in fiscal year '16. For the fourth quarter, our postpaid phone average billings per user was relatively flat sequentially when normalizing for the change in recognition for device insurance revenues, which had a roughly $2.50 impact in the quarter. 76% of postpaid device sales were financed for the full fiscal year, with fully 2% being leased compared to 51% of sales being leased in fiscal year 2016. We exited fiscal 2016 with 82% of postpaid sales being financed in the fourth quarter, which includes 86% of postpaid phone sales being financed.

I would note that the remaining mix of device activations primarily represents bring your own device transactions or customers electing to pay full price for their device as we have basically eliminated the traditional subsidy option for all consumer channels. At the end of the quarter, we had 74% of our postpaid phone base on unsubsidized plan, with 65% currently having an active device financing commitment as of the end of the quarter. Prepaid ARPU of $28.01 in fiscal year '16 increased by 1% year-over-year.

Regarding our expenses on Slide 24, we executed our second consecutive year of significant cost transformation in fiscal year 2016. We realized $2.1 billion in net reductions in operating expenses year-over-year in fiscal year 2016 across cost of services and selling, general and administrative expenses. This brings our cumulative reductions across these 2 categories to almost $3.5 billion or an 18% reduction in just 2 years. As you may recall from our guidance earlier in the year, we did incur over $230 million of onetime costs to achieve these run rate cost savings. As a result, our gross cost reduction in fiscal year '16 was actually $2.3 billion.

Cost of services for the year of $7.9 billion was down $1.6 billion year-over-year, driven by lower rents with a shutdown of the WiMAX network, lower labor expenses, lower roaming and backhaul expenses and lower wireline costs. Selling, general and administrative expenses were $8 billion in fiscal year 2016 and improved by nearly $500 million from a year ago, mostly driven by lower customer care and marketing expenses. Cost of products of $7.1 billion in the year increased by $1.3 billion from a year ago, mostly driven by the significant increase in the installment billing mix of sales from the prior year. We continue to have good momentum in our cost transformation as we head into fiscal year 2017, and we are already developing initiatives for additional expense reduction in 2018 and beyond.

Now turning to Slide 25. Our adjusted EBITDA of nearly $10 billion for the year was the highest in 9 years and improved by $1.8 billion or 22% compared to a year ago, primarily driven by the expense reductions and the growing operating revenues that I discussed. Operating income of $1.8 billion for fiscal year 2016 was the highest in 10 years and improved by a multiple of 6x from a year ago. Sprint's net loss in the year was $1.2 billion or $0.30 per share, improved by 40% compared to a net loss of $2 billion or $0.50 per share in the year-ago period.

Turning to Slide 26. Total cash capital expenditures were $3.9 billion in fiscal year 2016 compared to $7 billion in fiscal year 2015. Excluding capitalized device leases, cash capital expenditures were $2 billion in fiscal year '16 compared to $4.7 billion in the year-ago period, with a year-over-year decline driven by lower capital intensity as a result of software-driven deployments of capacity through carrier aggregation and surgical deployment of small cell. Net cash provided by operating activities was $4.2 billion from fiscal year 2016 compared to $3.9 billion a year ago. Adjusted free cash flow was $607 million for fiscal year '16 compared to a negative $1.4 billion last year.

Shifting focus to liquidity on Slide 27. We ended the fiscal year with total general purpose liquidity of $10.9 billion, including $8.3 billion of cash, cash equivalents and short-term investments. In addition, we still have $1.2 billion in undrawn availability under our network vendor financing facility that can be used to finance the purchases of 2.5 gigahertz network equipment. During the quarter, we replaced our $3.3 billion unsecured revolving bank credit facility with a new $6 billion secured credit facility consisting of a $4 billion 7-year term loan B; and a $2 billion, 4-year revolving bank credit facility. This represents the latest example of our strategy to diversify our sources of financing in order to lower our cost of capital and future interest expense.

When you combine this with our previously placed $3.5 billion of spectrum-backed notes, we have raised $7.5 billion in 2 transactions with 2 things in common: both have an effective interest rate in the mid-3% range; and both transactions were multiple times oversubscribed, demonstrating a renewed demand for Sprint paper as a result of our turnaround execution and improved balance sheet. Conversely, we have retired $3.3 billion of bonds that matured in the last 2 quarters, with coupons between 6% to 14.75%, which is a cost of debt 2x to 4x higher than the new money coming in.

Also as referenced in our 10-Q last quarter, we amended our off balance sheet receivable facility during the fourth quarter and that all baskets within that facility are now accounted for on balance sheet just as the lease receivables were previously. With that change, all of our financing is now on balance sheet and hopefully simplifies your understanding and tracking of all of our financing obligations. Having diversified our sources of funding and building liquidity, we are now delivering on the second phase, which is to materially reduce interest expense. The third phase is to materially delever the company and reduce our net debt to sustain free cash flow generation.

As we've been on a very successful year in fiscal year 2016, let's turn the page to our fiscal year 2017 guidance on Slide 28. We expect adjusted EBITDA to be $10.7 billion to $11.2 billion in fiscal year '17, primarily driven by a continuous focus on significant cost reduction. Given the improved profitability and momentum of the business today, we feel that we are in the right phase of our turnaround to invest a part of our gross expense reduction in 2017 back into growth platforms for the business including retail distribution, network densification, digitalization of sales and care and prepaid growth initiatives.

Operating income is expected to be between $2 billion to $2.5 billion in fiscal year 2017. We expect noncash gains from spectrum swaps in fiscal year 2017 similar to the $350 million we recognized in fiscal year '16. As you know, we exclude these noncash spectrum gains from our adjusted EBITDA, but it does still impact our reported operating income just as it did last year.

Regarding our guidance for cash capital expenditure, excluding leased devices, we expect spending to double year-over-year to approximately $3.5 billion to $4 billion as we ramp up our densification and utilize the expanded toolbox of the various cost-efficient coverage and capacity options. We expect network CapEx to remain around this level for the next 3 years but could potentially increase if we see the right opportunities to efficiently accelerate our network plan.

Lastly, we're not providing specific guidance on adjusted free cash flow for fiscal year 2017 at this time. However, we do expect adjusted free cash flow to decline year-over-year, primarily driven by the slope of acceleration in capital spending on the network and reinvestment in the business. In addition, we expect working capital headwinds from a higher mix of postpaid sales being financed in fiscal year 2017 with less working capital offsets as we transition away from the MLS structure, given that more recent sources of capital, such as Spectrum LeaseCo, are cheaper.

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

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Jud Henry, Sprint Corporation - VP and Head of IR [6]

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Thanks, Tarek. In just a moment, we'll begin the Q&A. Angel, 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 your first question comes from the line of Michael Rollins with Citigroup Investment.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [2]

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Two, if I could. First, I was wondering if you could talk about the subscriber performance before Verizon launched unlimited and then after and what kind of changes you observed in the competitive marketplace. And then, secondly, I was just curious if you could also discuss how Sprint looks at the opportunities to prioritize horizontal consolidation in the wireless category at this point versus the opportunities to play maybe into a more vertical strategy.

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Raul Marcelo Claure, Sprint Corporation - CEO, President and Director [3]

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It's Marcelo. Thanks for your question. Obviously the market has turned quite competitive since both Verizon, AT&T and even T-Mobile have basically simplified their offering and make this an unlimited world. I think we fared quite well last quarter as you can see from the results. I mean, we delivered postpaid handset net asset to 242,000 and that was, I think, 300,000 or 400,000 better than both AT&T and Verizon. So therefore, we've been able to do quite well. Now the market has turned more competitive. We continue to generate a significant amount of sales. From a gross add perspective, we're faring quite well. And we've always said that as long as we can communicate our value offering to consumers which is having a great network, having a great plan which is unlimited, what they like, having the best price, having the best way to own a device, I think we're going to be well and we're going to continue with adding positive net adds pretty much every single quarter for the last few years. So we feel quite well. As it relates to consolidation, there's still a lot of talk as you can imagine in terms of what sort of consolidations will happen and what role is Sprint going to play. What we always said since day one is we're focused in terms of creating a great company and turning around Sprint. And as you can imagine, I think we're in the right trajectory and we have a lot of options, I believe. And as Masa -- you will hear Masa say we're open to potentially doing new acquisition, we're open to potentially merging the company, we're open to potentially looking if you have interested buyers in the company. So what we've discussed with Masa is we're open to many different possibilities. Obviously, the one that's going to generate the maximum shareholder value is the one that will prevail. But make no mistake, I mean, the shape of the company where it is today, it allows us to be very patient. We're sitting on our best liquidity. We've delivered the best financial results of the last 10 years, so we can be very patient and then evaluate whatever opportunity comes our way.

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Operator [4]

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And your next question comes from the line of Jennifer Fritzsche with Wells Fargo.

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Jennifer Murtaugh Fritzsche, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [5]

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I wanted to see if I could hone a little bit into cost cutting. You've given more details in the past about how last year you were going to remove a significant amount of costs. You were successful in doing so. Tarek, how would you look into fiscal '17? Do you view that bogey? Is the low-hanging fruit gone? Where can we see that number go? Could it equal last year's performance, et cetera?

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Tarek A. Robbiati, Sprint Corporation - CFO [6]

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As you can see, we've achieved a pretty substantial amount of cost reductions in fiscal year '16. We've reduced our cost of service and SG&A for a total amount of $2.1 billion. And over the past 2 years, we achieved $3.4 billion of cost reduction, fairly split between these 2 buckets. As we continue to transform the business, we continue to look at ways to optimize our cost structure in fiscal year '17. We feel that there are still a fair bit of upside from cost reductions, but we have to balance this with the need to reinvest some of the savings back into the business for future growth. We're not providing specific guidance on gross and net reductions at this stage with fiscal year '17. But look at our track record over the past 2 years, it speaks for itself from our perspective. In terms of telling you a little bit more in a pointed way where to look for, we're going to be optimizing channel mix and distribution. We're going to continue to improve the digital experience so our customers can transact more online with us, which reduces cost in care. And we'll also continue to reduce the cost of the service in the network with backhaul and roaming optimization initiatives to reduce the cost for bid for our company.

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Jennifer Murtaugh Fritzsche, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [7]

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And one more, if I may, just on spectrum. With the auction results now behind you, Marcel, you spent a lot of time talking on the network. And as you look at how the 600 megahertz auction fared, I guess, is there any -- regrets is probably too strong a word, but any view of not having enough low-band spectrum? Are you happy with the 2.5 and the other assets you have?

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Raul Marcelo Claure, Sprint Corporation - CEO, President and Director [8]

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Right. So we've been pretty constrained in every time we show you that we have the most spectrum of any wireless carrier in the United States, and we have more spectrum, I think, than most of the wireless carriers around the world. When we look at what is coming, where 5G is going and based on the latest 3GPP standard, we are certain that we have the right spectrum, right? I mean, having the vast amount of 2.5 spectrum, as we call, the new low-band of 5G, I think we're very, very well positioned in terms of continuing to densify our network. We don't need any more low-band spectrum. We have sufficient national coverage with the low-band spectrum that we have, and we did a lot of studying before we decided not to participate in the auction. So even though prices came wherever they came, we feel that we made the right decision. And we're focused right now in terms of continuing to densify our network and continue to provide our customers with a better experience. So we feel quite good in terms of that we made the right decision. We'd rather invest our money in densifying our network and optimizing our network rather than buying new spectrum that really is not going to be available until 2019 or 2020.

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Operator [9]

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And your next question comes from the line of Phil Cusick with JPMorgan.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [10]

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With prepaid and postpaid both stabilizing, can you see your way to growing service revenue on a sequential basis? I would think this quarter and in quarters going forward. And then second, Masa, how do you see the regulatory environment for industry consolidation?

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Tarek A. Robbiati, Sprint Corporation - CFO [11]

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Let me take the first question, and we'll direct the second question as Masa comes online. Our wireless operating revenue were up nearly 5% year-over-year in fiscal year '16. And when you really look at our wireless services revenue, the decline continues to slow. The decline in fiscal year in the fourth quarter of fiscal year '16 was of 3.5% roughly year-over-year. But when you look at normalizing for the changes related to the device insurance program, we were very close to being flat sequentially after this normalization. And the decline is mostly related to customer shifts to plan offered with device financing and also lower prepaid revenues. As the postpaid customer base continues to grow, we could see also with the influence of prepaid that we are inches away from the point where service revenue could be growing. The exact order of inflection is not obvious to determine. It is somewhat dependent on the device financing mix. But when you really look at the underlying trend, the fact that our prepaid customer started to grow again, we feel pretty good about services revenue moving forward.

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Jud Henry, Sprint Corporation - VP and Head of IR [12]

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Thanks, Tarek. Phil, can you repeat your second question?

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [13]

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Masa, how do you see the regulatory environment in the U.S. for industry consolidation?

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Raul Marcelo Claure, Sprint Corporation - CEO, President and Director [14]

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I believe that Masa might have dropped. We're in a different location. He's in San Francisco, and we're here. So until he comes back, I'll take it from here. As we said from the beginning, we'd like to avoid commenting in terms of any rumors as it relates to speculation and others, any rumors as it relates to potential transactions or speculation. Now I think the new government had made it very clear that they believe in regulating a lot less, and I think people will be open in terms of potential new transactions. Obviously, we've been watching what is going on with AT&T and others, and I think right now it's too early to tell. I think we're not brave enough to forecast what will be the result of any potential transaction. So we're like everybody else trying to -- looking at different options that are sitting in front of us and then some will have a regulatory risk, some will have low regulatory risk and that is part of our entire -- when we're looking at any transaction, we take that into consideration. Now I guess President Trump has made it very clear that he's looking to attract jobs into United States. And anything that you look at any deployment of 5G networks and the potential use cases, I mean, tells you that there's -- that this is going to be a tremendous area of growth for the future of the U.S. and then you have to put that in terms of what would happen in terms of consolidation, whether there would be more jobs created or not. But I mean, right now, we'll say it's too early to tell.

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [15]

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If I could follow up with Tarek just on revenues. Since you mentioned it, can you expand on the used handset program that drove equipment revenue this quarter? What is this? And is it a onetimer or a recurring?

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Tarek A. Robbiati, Sprint Corporation - CFO [16]

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I'm sorry, Phil, could you repeat your question?

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Philip A. Cusick, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [17]

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The used handset program that drove equipment revenue this quarter, what was that? And is it a onetimer? Or was that recurring?

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Raul Marcelo Claure, Sprint Corporation - CEO, President and Director [18]

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So let me -- we'll take this one. We'll take this one in conjunction with...

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Masayoshi Son, Sprint Corporation - Chairman, Chairman of Softbank Group Corp and CEO of Softbank Group Corp [19]

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Hello, this is Masa. Hello?

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Raul Marcelo Claure, Sprint Corporation - CEO, President and Director [20]

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Masa, let me take this, Masa, and then there's a question about consolidation. And so as it relates to our used phone equipment, what we've done is we are a leasing company. And as you are aware, we launched a program called iPhone Forever. In and out the different parts of the year, we've launched a product called Galaxy Forever. And therefore, we are going to get several millions of phones back, and what we do is we refurbish those devices and then we put them back in the market. We put some into our prepaid brands. We put some others in the auction market. So you can expect on an ongoing basis that we are going to have some additional revenue as it relates to selling used equipment. I mean that is just part of our business. It is part of any leasing company, and we've been doing leasing now for the next 2.5 years. Masa, now that you're on the line, the question that you missed was, how do you feel about the regulatory environment in the United States now?

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Masayoshi Son, Sprint Corporation - Chairman, Chairman of Softbank Group Corp and CEO of Softbank Group Corp [21]

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Well, I cannot speak for the government. I'm just hoping that the government is much more open to any kind of possibilities.

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Operator [22]

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And your next question comes from the line of John Hodulik with UBS.

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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 [23]

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While we have Masa on the phone, question for you. Could you just talk a little bit about potential partners for Sprint as you look out over the next few years, whether within the wireless industry, maybe cable industry or sort of outside more in the tech industry? Where does sort of wireless fit in as you sort of look at the world going forward? And then maybe for Tarek, a clarification on the free cash flow comments. It sounds like given the headwinds on CapEx and working capital, that free cash flow is likely to dip sort of back into the red in fiscal '17 here. Is that a sort of a 1 or year-type thing? Or if you could sort of put some boundaries around that, do you see that returning back to -- is that true, first of all? And do you see it going back into the black, say, in the following year?

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Masayoshi Son, Sprint Corporation - Chairman, Chairman of Softbank Group Corp and CEO of Softbank Group Corp [24]

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Question to me. I think that there are all kinds of possibilities and all kinds of opportunities, and we are open to consider any optionalities.

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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 [25]

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Okay. Do you -- maybe, I guess, sort of the obvious follow-up in terms of the industry consolidation. Is that the most attractive potential option for you? And maybe if you could sort of comment on what the potential synergies would be if you were able to sort of engineer a move from 4 to 3 in the wireless industry here in the U.S.?

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Masayoshi Son, Sprint Corporation - Chairman, Chairman of Softbank Group Corp and CEO of Softbank Group Corp [26]

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Well, we are open to any kind of possibilities. And we can be self-sufficient, but we are not in a rush of anything. But if there are opportunities to consider many different optionalities, we would be very much open-minded. But as I said, we are self-sufficient, and so we are not in a rush.

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Jud Henry, Sprint Corporation - VP and Head of IR [27]

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And Tarek will take the second question.

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Tarek A. Robbiati, Sprint Corporation - CFO [28]

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Okay. So with respect to free cash flow, as I said a moment ago, we're not providing specific guidance for fiscal year '17 at this time. There are several factors that come into the equation, mainly the first one is that we are accelerating capital spending on the network. We are reinvesting in the business also in distribution and other parts of our business, and we do have working capital headwinds from a higher mix of postpaid sales being financed. Now also on top of that and you recall from prior earnings announcement that we are transitioning and optimizing how we finance customer receivables and devices away from the MLS structures that served that purpose back in fiscal year '16. These structures gave us a fair bit of cash advance that we were optimizing for cash, not optimizing for cost of capital. We're moving away from this. We have plenty of liquidity on our balance sheets as we've demonstrated to you today. We are now entering into a new phase where we intend to lower the cost of debt related to how we finance customer receivables and devices in fiscal year '17. So all in all, we do not expect our free cash flow, adjusted free cash flow for '17 be at the same level of fiscal year '16, the $600 million that we realized in fiscal year '16. But we feel good about the trade-offs, and we're want to make sure that we equip the business for growth for the future.

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Operator [29]

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And your next question comes from the line of Amir Rozwadowski from Barclays.

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Amir Rozwadowski, Barclays PLC, Research Division - Director and Senior Research Analyst [30]

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I was wondering, there have been some reports that have suggested that you folks are examining potential options around ensuring your spectrum value is not underrepresented, which is a possible spinco or stuff along those lines. First and foremost, is that the case? And then secondly and probably more importantly, what do you believe is not understood about your spectrum and its value, not just for 4G networks but as well as for 5G networks?

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Raul Marcelo Claure, Sprint Corporation - CEO, President and Director [31]

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So as it relates to your first question, a potential spectrum spinco, as you can imagine, we're not going to comment on anything like that. There are all sort of speculations in terms of what we're doing with our spectrum and others, so we'll never comment on something like that. As it relates to our 2.5, I'm going to let John Saw, best he take that question.

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John C. B. Saw, Sprint Corporation - CTO [32]

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Amir, I think the 2.5 spectrum has long suffered under the stigma that high-band spectrum may not be available as low-band spectrum but that was based on some old thinking in the old days, like coverage matters more. In a data-centric world where capacity is more important than anything else, high-band spectrum thrives. And that's why you see the play for more and more high-band spectrum in the industry today, including the play for even higher band spectrum in 2.5 spectrum. In a matter of the last 2 years, the 2.5 spectrum has dramatically improved in terms of its usage. It is one of the world's largest global ecosystems today for LTE, where more than 600 million phones have been shipped globally with the 2.5 spectrum band in it. So in the rapid growth in that 2.5 spectrum, we don't believe that the valuation for this band has caught up with it. I think Tarek and team has done an awesome job when we did the Spectrum LeaseCo in terms of trying to put some value to that. We believe that the 2.5 spectrum, we have yet to see the best in the 2.5 spectrum yet. When you talk about 5G, when you have to deliver massive capacity and yet have good propagation characteristics that is better than millimeter ways, 2.5 is going to be hitting a sweet spot. So what we're building is a foundation, and we have done a good job putting that to good use the last 2 years. I think you have yet to see the best of 2.5 yet when we start rolling our 5G-type services in the gigabit range.

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Amir Rozwadowski, Barclays PLC, Research Division - Director and Senior Research Analyst [33]

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And just one follow-up, if I may. Tarek, forgive me if I'm paraphrasing, but I believe in the prior periods you mentioned that unlimited at current pricing levels is not really sustainable over the longer term. I was wondering if you could provide us with some color on your thought process here. Do you think that there's an opportunity for the industry to revisit pricing? And how should we think about Sprint's own pricing strategy going forward from here?

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Tarek A. Robbiati, Sprint Corporation - CFO [34]

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Yes, it's a great question. I think when I said that unlimited is not sustainable, I qualified it by saying absent a ability to change price. Of course, as you cap your revenue and your capacity utilization increases due to usage doubling every 18 months that we witnessed in our industry, that sort of combination of trends is not sustainable, but we always have the option to increase prices. So I think over time you would see that the peace of mind that an unlimited pricing provides to customers will be effectively valued, and we see scope for price increases over time.

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Raul Marcelo Claure, Sprint Corporation - CEO, President and Director [35]

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Let me add one more thing. Since we have moved to unlimited, our average billings per user have constantly been increasing. So therefore, when you look at our previous pricing, which we were doing 50% off or cut your bill in half for price, now we've moved to one rate plan, which is Unlimited Freedom, our average billing per user has increased and will continue to increase. So as long as we can keep that trajectory and as data usage continues to increase and we're able to get the right price from our customers, we're going to continue to see an increase in our revenue. So that's why unlimited is a good thing for Sprint. And secondly, unlimited is exactly the game that we want to play now when you have the quantity of 2.5 spectrum. I don't know how other carriers are going to do it as it relates to the spectrum that they have. We've been -- in the past, I don't know if you remember, certain carriers have serious problems in market like New York City once they have unlimited. So the 2 large major carriers went out of their way for 4 years to basically kick every customer out of their network that had unlimited. That was because there were suffering from capacity issues. To us, it is a complete opposite. I mean, we like unlimited because it's right off our sweet spot. When you're holding over 200 megahertz of spectrum, you want to play the unlimited game because capacity is basically our competitive advantage.

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Masayoshi Son, Sprint Corporation - Chairman, Chairman of Softbank Group Corp and CEO of Softbank Group Corp [36]

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Let me add a little bit on top of that. So I welcome the unlimited war because other carriers don't have the spectrum, not only that, the other carriers don't have 2.5. So what we can do is with the 2.5, as I had presented, we have millions of cell sites. When you have the spectrum and millions of cell sites, that increase the capacity dramatically. So no other carrier can keep up with the capacity war. And we have the spectrum and 2.5 enable us to do these small cells in a dramatical deployment. This is unheard of. This is a revolutionary network. So the other carriers, please come to this capacity war.

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Operator [37]

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And our next question comes from the line of Amy Yong with Macquarie.

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Amy Yong, Macquarie Research - Analyst [38]

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Two questions. So first on the comment that the network should be #1 and #2 in some markets, what kind of improvements do you think we should expect to see, either churn, ARPU, perhaps market share? If you could help us think through some of the tangible benefits of that, that would be great. And my second question is, I know it's early days on HPUE, but what's been the sort of initial customer feedback on that particular handset?

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Raul Marcelo Claure, Sprint Corporation - CEO, President and Director [39]

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Thank you. So I'll take it from the network and I want to understand -- I want everybody to understand what our strategy has been. So if you listen to the earnings presentation, the network part that Masa made, what we've done is we developed a pretty amazing toolbox that allows us the rapid deployment of the network. So what we've done is we've selected 6 clusters in the U.S. in different market like New York, San Francisco and others, and we basically tested in those clusters what would our network look in comparison to our competitors. And we've hired third-party companies to basically come and do the testing. And in each of those clusters our network, once we've been able to deploy our mini macros or small cells, or better known as Magic Box, then we automatically move to #1 in every single one of those clusters. So now the next phase is grab those clusters and replicate a cluster into a bigger market until you're able to achieve an undisputable #1 in terms of speed, in terms of coverage, in terms of capacity, which are the things that matter. Now once you've been able to achieve that, then the world looks a little bit different, then you don't have to discount as much as we'd have to discount in the past. Now you've seen that we've had to discount a lot less in the course of this last quarter, where we don't need for our build to 50% of competitors. We're getting close to what AT&T, Verizon and T-Mobile charge and therefore, you can expect an increase in ARPU going forward as our network continues to achieve #1 in different markets. So we feel quite good. This is not just a technological experiment. We've actually deployed in pretty large clusters, and we have the tests that validate that our network becomes #1 in every single one of those clusters, once we deploy our technology. And the good thing is this is really fast to deploy due to the fact that's predicated on our small cells. Now your second question was what have we seen on HPUE. I'm going to let John Saw answer that, and Masa can jump in he's still there. Go ahead, John.

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

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I think it's still early to gauge customer perception of HPUE. We do know that from the test that was done in the lab, the 30% coverage extension that we were hoping to see, we are seeing that in the lab. I think the customer will -- what they will experience is probably higher capacity and better speeds on 2.5 and staying on 2.5 a lot longer before their phones have to fall back to 1.9. But we will have to wait and see as we have -- as we get more and more phones out there with HPUE. But testing in the labs so far looks very encouraging.

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Jud Henry, Sprint Corporation - VP and Head of IR [41]

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So that's all the time we have for questions today. But before we wrap up, I'd like to turn the call back to Marcelo for a few closing comments.

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Raul Marcelo Claure, Sprint Corporation - CEO, President and Director [42]

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Thank you, and I want to thank everyone for joining us today and for your support of Sprint. Our fiscal 2016 results demonstrate the strong momentum we have built over the first half of our 5-year turnaround plan. We have returned the business to revenue growth, and we've taken out $3.5 billion of cost in just 2 years to deliver our highest adjusted EBITDA in 9 years and our highest operating income in 10 years. We delivered 930,000 postpaid phone net adds last year and returned our prepaid business to growth as we exited the year. In addition, we continue to improve the network by executing our densification and optimization plans in a very capital-efficient manner. We look forward to deploying our unique toolbox, including the Magic Box, across the country to make our network even better. We're excited to carry our momentum forward to deliver more shareholder value in 2017, 2018 and beyond.

Lastly, I want to spend a moment to tell you about an important initiative that myself and Tarek and Sprint organization is passionate about. Last year, we announced a 1 million project and the reason why we did that is because there are 5 million families with school-age children in this country who cannot afford Internet access at home. That puts those students at a major disadvantage in doing their schoolwork and competing to get a first shot at graduating high school and being successful in life. Over the next 5 years, we're going to give away 1 million low-income high school students a free device and a free wireless service so they can learn to study at home. This initiative is cost neutral to Sprint as we're raising money from our different partners and others to pay for it. I'm pleased to say that we made enormous progress on this important cost. At the beginning of 2017-2018 school year, the first 200,000 students in 800 schools across America will begin participating in this program. You can learn more and contribute to this effort by going to our website, www.sprint.com/1millionproject.

Thank you, and have a great day.