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Sprint Corporation (S) Q4 2018 Earnings Call Transcript

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Sprint Corporation (NYSE: S)
Q4 2018 Earnings Call
May. 7, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and thank you for standing by. Welcome to the Sprint Fiscal Fourth Quarter 2018 Conference Call. (Operator Instructions) I would now like to turn the call over to Mr. Jud Henry, Senior Vice President of Corporate Finance and Treasurer. Please go ahead, sir.

Jud Henry -- Vice President of Corporate Finance and Treasurer

Welcome to Sprint's Fourth Quarter and Full Year 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 under way, 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 afternoon, we will be discussing forward-looking information which 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. Like last quarter, we have included reconciliations and qualitative disclosures in 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. Please note that starting in our first fiscal quarter of 2019, we plan to discontinue reporting average billings per user, or ABPU, and average billings per account, or ABPA, which were metrics that were developed to provide transparency during transition from subsidy to device financing rate plans but are no longer relevant. We will, instead, focus on average revenue per account consistent with our strategy to grow revenue at the account level. I will now I'll turn the call over to Michel to provide you an update on our results.

Michel Combes -- Chief Executive Officer and President

Thank you, Jud. Our fiscal '18 results on Slide 4 demonstrates our focus on executing our strategy. Of course, we also continue working toward government approval of our merger with T-Mobile. First, we stabilized wireless service revenue year-over-year. We delivered adjusted EBITDA at the high-end of our fiscal year guidance. We delivered postpaid net additions for the fourth consecutive year, driven by growth in data devices. We continued our digital transformation, increasing our digital sales and the implementation of Artificial Intelligence. In addition, we increased our network CapEx spend by 50% year-over-year, and our network continued to improve as we have more LTE coverage and faster download speeds year-over-year. In short, we delivered on our guidance for fiscal '18, but many of the underlying phenomenal challenges remain.

Turning to Slide 5. We continued to make good progress in our Next-Gen Network deployments to provide customers a Network Built for Unlimited. First, we upgraded thousands of our existing macro sites to add LTE on 800, 1.9 or 2.5 to sites that previously lacked those bands. We now have 2.5 deployed on approximately 80% of our macro sites compared to less than 60% a year ago. In addition, we have added 800 megahertz to thousands of sites, primarily in the Southwest market as we completed additional rebanding, which will provide additional coverage for our customers. In addition, we now have approximately 30,000 small cells on air compared to about 5,000 at this time last year.

This ramp in small cells includes more than doubling the number of mini macro sites on air year-over-year and the rollout of strand mounts, which are delivering improvements in coverage, capacity and time on LTE to improve the customer experience in specific locations. Our Massive MIMO deployment continues to build momentum, delivering improvements in LTE performance and providing the building block for our mobile 5G launch in the coming weeks. We now have approximately 1,500 Massive MIMO sites commercially on air in a few markets where we are seeing promising early results. We're also preparing to commercially launch our mobile 5G network later this quarter in 9 cities.

Our Massive MIMO radios are software upgradable to 5G NR, as you know, allowing us to utilize our spectrum for both LTE and 5G simultaneously, while we enhance capacity even further with 5G and begin to ship out new 5G use cases. Commercial service is expected to launch starting in the next couple of weeks with Chicago, Atlanta, Dallas and Kansas City, among the first cities to offer commercial 5G services. With Houston, Los Angeles, New York City, Phoenix and Washington, D.C. also planned to launch by the end of June. The total initial 5G coverage footprints across all 9 cities is expected to be more than a 1,000 square miles. We have also announced standard based 5G devices from LG, HTC and Samsung that will be available soon. The other carriers are not standing still, investing significantly more capital into both the LTE and 5G networks.

In reference, we are making the best of the limited financial and low band spectrum resources that we have. Nevertheless, we are hopeful to complete our merger with T-Mobile, which will allow the combined company toward a breadth and depth of spectrum to provide a truly consistent nationalwide 5G experience. As a stand-alone company, we lack the scale to keep pace with the bigger carriers, AT&T and Verizon, in sustained capital investments. And with that additional low band spectrum, we will face challenges to provide customers with consistency of coverage comparable to that of the 2 big carriers. Turning to Slide 6. We continued our Unlimited for All approach to deliver retail net additions for the second consecutive year. Our postpaid net additions were 710,000 in fiscal '18 and 169,000 in the fiscal fourth quarter.

This is a result of executing our strategy to grow our relationship with customers for data devices such as tablets, watches and the successful launch of our Sprint Drive connected card product, which was partially offset by losses in phones. Total postpaid gross adds were up slightly year-over-year for both the full year and the fourth quarter, as we increase sales of data devices. Postpaid phone gross adds went down year-over-year, as Sprint was less promotional in our service plans compared to a year ago, with approximately 30% fewer postpaid phone gross adds on discounted promotional service plans year-over-year. Meanwhile, competitor offers were more aggressive with retro device offers from AT&T and Verizon. We would expect postpaid gross adds to be slightly lower sequentially in the first quarter given seasonality and continued competitive environment. Postpaid phone churn was up year-over-year for both the full year and the fourth quarter, as we had foreshadowed previously, as customers are running off introductory promotions have been the primary driver of the year-over-year increase in churn.

Postpaid phone churn is expected to remain up year-over-year in the first quarter of fiscal '19, although we do expect improvement sequentially due primarily to seasonality similar to last year. We believe that the investments we are making in our network and customer experience may improve churn and help to lessen the protection gap that impacts gross adds today, but it takes time to shift perception and structural headwinds keep our churn higher than peers. For Sprint to continue on a multiyear capital program to our Next-Gen Network to improve LTE and prepare for 5G, it's important to be able to deliver service revenue growth and free cash flow over time.

In addition to selling additional data devices to customers, we are also executing our strategy to grow revenue, from smartphones, by providing customers the option to upgrade to our feature-rich Unlimited Plus and Unlimited Premium plans. This higher loading on feature-rich plans and the 30% reduction in discounted promotional lines, as I mentioned earlier, has delivered more than 15% increase in postpaid phone, monthly recurring charges on new account gross adds coming to Sprint in fiscal '18 compared to last year. However the loss of postpaid phone customers for last 3 quarters, and expected losses in the first quarter of fiscal '19, will put pressure on postpaid service revenue in fiscal '19.

We continued to believe that optimizing the balance of gross adds, churn and ARPU is expected to deliver a better financial outcome over the long term. We have slowed the decline in our total number of postpaid accounts year-over-year, while growing the number of lines per accounts. However, AT&T and Verizon continue with the aggressive promotional activity we have recently seen, it may slow our path to reduce churn and drive new account gross adds away from Sprint, which will make it difficult to maintain wireless service revenue in fiscal '19. In addition, our business segment continued to grow in fiscal '18, with total gross adds up year-over-year and lower churn delivering postpaid net additions from businesses. While we have seen some success in the business space, it has been on a relatively small-scale related to the dominance that AT&T and Verizon has today. That is why we're excited about the opportunity to finally have the scale to truly disrupt the business segment through our merger with T-Mobile.

Turning to prepaid. We faced pressures throughout the fiscal year, including in the fourth quarter, from industry decisions continuing to shift to postpaid and aggressive offers from bigger competitors in the market. Boost delivered net adds of nearly 600,000 before migrations to postpaid in fiscal '18. However, this start in Boost was offset by losses from our other prepaid brands and migrations to postpaid. Turning to Slide 7. We continue to drive digital transformation of our company, as I have highlighted in recent quarters. Because we lack the scale of the biggest wireless carriers, we must be more innovative by leveraging digital capabilities and employing advanced analytics, Artificial Intelligence and intelligent automation in our operations to further optimize our cost structure.

Our digital transformation is based on 3 main pillars: 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 hence app functions. From a digital sales perspective, postpaid gross adds in digital channels increased approximately 60% year-over-year in both the fiscal fourth quarter and for the full fiscal year. Additionally, we exited the year with nearly 20% of postpaid upgrades occurring in digital channels. Likewise, we are ramping our rollout of a cutting-edge intelligent customer experience, leveraging AI and analytics. We are seeing growth in digital customer engagements through chat.

And on top of that, we have ramped to 30% of chats being handled by virtual agents, and the experience continues to show improving SPS or customer satisfaction. This is complementary to our overall customer experience and the automation of the 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 click-through rates up year-over-year, while cost per click is down significantly. This digital transformation and data-driven culture is expected to contribute to the evolution of our customer experience and potential cost reductions in the future.

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

Andrew Davies -- Chief Financial Officer

Thank you, Michel. As Jud mentioned in his opening remarks and consistent with our practice for the last 3 quarters, I'm going to discuss results based on prior revenue recognition standards for better comparability, unless otherwise noted. Let's begin with revenue on Slide 8. Consolidated net operating revenues were $33.1 billion for fiscal 2018, and $8.3 billion for the fourth quarter, an increase of $659 million and $216 million year-over-year, respectively. Wireless service revenue of $22.5 billion stabilized in fiscal 2018 as it was essentially flat year-over-year mostly due to growth in our retail customer base and a slowing decline in postpaid ARPU.

For the fourth quarter, wireless service revenue of $5.6 billion was up slightly from the prior year. However, as Michel mentioned earlier, the pressure we are currently seeing in retail customer growth will make it difficult to continue this trend of year-over-year growth for wireless service revenues. While we have now reported an entire year under the new revenue standard, I would like to remind you that the impacts of this change will extend to fiscal 2019 even when comparing two results under the new standard. For example, the negative impact of prepaid service revenue will actually be bigger in fiscal 2019 than it was in 2018.

As a result of this accounting impact and other operational trends, reported wireless service revenue will likely be down approximately $150 million to $200 million year-over-year in the fiscal first quarter of 2019, with the accounting impact being the primary driver. Postpaid ARPU of $44.54 for the year declined 3% year-over-year, the smallest decline in 5 years and was impacted by our strategy of driving more data devices, which generate additional service revenue for the company but to put some pressure on ARPU due to generally having lower monthly charges. For the fourth quarter, postpaid ARPU was $43.99 was down 1% year-over-year, primarily due to the same factors that drove the full year decline. Postpaid phone ARPU in the quarter was essentially flat year-over-year as base customers rolling off promotions and other pricing actions were offset by the impact of other promotional discounts. Prepaid service revenue for the full year and fourth quarter of $4 billion and $1 billion, respectively, were both at flat year-over-year as our prepaid ARPU remained stable and we saw customer growth within our Boost brand.

Let's now turn to cost and EBITDA, on Slide 9. We continued to execute on our cost transformation in fiscal 2018 and achieved both our gross and net cost reduction targets for the year. Excluding the impact from the new revenue recognition standard on merger-related costs that were included within SG&A expenses, we delivered approximately $1.2 billion of combined year-over-year gross reductions in cost of services and SG&A in fiscal 2018, and net reductions of approximately $330 million after reinvestments in network and other operational initiatives. While we continue to look for opportunities to improve operational and cost efficiencies in fiscal 2019, these improvements are expected to be largely offset by incremental costs associated with network and customer experience initiatives.

Cost of services of $6.7 billion for the year were down approximately $60 million year-over-year, as lower wireline network expenses were partially offset by incremental expenses associated with our increased network investments. For the quarter, cost of services of $1.7 billion were flat year-over-year, but the incremental OpEx associated with our increased investments and our decision to expand LTE coverage through roaming agreements, will likely lead to a year-over-year increase in both the fiscal first quarter and full year of 2019. SG&A expenses were $8.2 billion for the full year and $2.1 billion for the quarter. When adjusting for merger costs, which are not included in adjusted EBITDA, SG&A was down year-over-year by approximately $270 million on a full year basis and approximately $40 million in the fourth quarter. While more efficient marketing spend was a driver of both declines, a quarterly decline was additionally impacted by lower selling expenses but also higher bad debt expenses associated with an increase in installment billing cycles. As we move into fiscal first quarter of 2019, we will be facing a year-over-year headwind in SG&A expenses from the new revenue recognition standards impact on the opposition of commission expenses. Adjusted EBITDA of $11.9 billion for fiscal 2018 came in toward the high end of our guidance and improved by $846 million year-over-year. While, for the fourth quarter, adjusted EBITDA was $3 billion, an improvement of $183 million year-over-year.

Given the aforementioned expectations in terms of revenue and costs for the first quarter of fiscal 2018, we expect adjusted EBITDA to be $400 million to $500 million lower year-over-year for fiscal first quarter, with a noncash impact to revenue and commission expenses under the new revenue standard being practiced. Turning to Slide 10. Operating loss was $460 million for the year compared to operating income of $2.7 billion in fiscal 2017. This includes a preliminary $2 billion noncash charge as part of our goodwill impairment testing. Excluding the dilutive impact of this noncash impairment and the further approximately $350 million of merger-related costs in fiscal 2018, and the beneficial impact of approximately $800 million for spectrum gains and litigation settlements in fiscal 2017,

operating income would have been relatively flat year-over-year. For the fourth quarter, operating loss of $1.9 billion included several nonrecurring items, with the most material item being the preliminary $2 billion noncash impairment charge that I've just mentioned as well as $304 million related to a loss and asset dispositions and $130 million related to merger costs. Regarding the impairment. It was part of our annual evaluation of long life and indefinite lived assets under U.S. GAAP. While we delivered solid financials again in fiscal 2018, our hurdle rate has increased as the book value of our equity has grown by about $9 billion in the last 6 quarters, due primarily to noncash items, including tax reform on the adoption of the new revenue standard. This noncash accounting charge is not expected to impact liquidity, cash flows, compliance with debt covenants or any future operations. Net loss of $2.6 billion in fiscal 2018 compared to net income of $7.4 billion in the prior year. This includes the preliminary $2 billion impact from noncash impairment charge this year on the $7.1 billion noncash benefit from tax reform included in last year's results.

For the fourth quarter, the net loss of $2.3 billion compares to net income of $69 million in the prior year quarter of the current quarter included a preliminary $2 billion noncash impairment charge that I just discussed. Turning to Slide 11, on CapEx and free cash flow. Network cash capital expenditures for the full year and fourth quarter of $5 billion and $1.1 billion, respectively, were both up approximately 50% year-over-year as we continue to execute on our Next-Gen Network plan. With our continued deployment of Massive MIMO, and the commercial launch of mobile 5G coming soon, we do not expect material changes to our current level of capital spending in the near term, with cash CapEx in fiscal first quarter expected to be similar to the fiscal third quarter of 2018. Fiscal year 2018 net cash provided by operating activities of $10.4 billion improved by $367 million year-over-year and our fourth quarter results of $2.8 billion improved by $194 million year-over-year.

Adjusted free cash flow of negative $914 million was within our guidance range and declined year-over-year as a result of higher network investments. For the fourth quarter, adjusted free cash flow of negative $539 million was approximately $300 million lower than the year-ago period, due to higher network CapEx and lowering net proceeds of financings related to devices and receivables. We continue to have an adequate liquidity position with approximately $10 billion of general purpose availability, including $7 billion of cash, cash equivalents and short-term investments. In summary, I'm pleased with the team's ability to deliver our fiscal 2018 financial plan. While we had given some color today on our expectations going forward, we are not going to provide any full year guidance for fiscal 2019 at this time, as we are in the late stages of our T-Mobile merger process.

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

Jud Henry -- Vice President of Corporate Finance and Treasurer

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

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Philip Cusick of JPMorgan Security Incorporation. your line is open.

Philip Cusick -- JPMorgan Security Incorporation -- Analyst

Hi guys, thanks.You've told regulators that your phone base has been buoyed by 3 add-a-line per for years. How do you track what's a legitimate user versus not? And how many of those are low or no usage devices? And how is that trended over the last few years? And what's the pace of them coming off of their free line period over the next year?

Michel Combes -- Chief Executive Officer and President

Thank you, Philip for the question, which serves -- will allow me to clarify some misunderstandings around our "free lines". Free line in this context are referencing the way we market to customers, but doesn't necessarily mean that these customers are paying $0 for their service. If I take an example, our lines 3 to 5 promotions are only free when customers sign up for our Unlimited Basic plan and are on auto pay. And as you know as well, we have actually a good success with customers taking our Unlimited Plus and Premium plans where customers still get an introductory discount, but they still pay for the service.

So just to be clear on what to, let's say, when people are speaking about free lines. While we have been less promotional this year, we have not been able to remove these promotions due to AT&T and Verizon promotional activity, and until we see more significant improvements in the network and customer experience. You probably remember that mentioned different occasions in the previous quarters that the intent was to be able on the mid, long run to remove those promotions.

But for the time being, we've been able to reduce the intensity of those promotions, but not complete to remove them, for the reasons that I have just highlighted. When we're seeing some trend, I guess I gave -- in my introductory remarks, let's say, a flavor of the reduction by saying that we have reduced more or less these number of lines by 30%. While we're seeing some incremental churn pressure, the after churn -- step after the promotional period ends, so it has helped our wireless service revenue trends. So as you know, those, let's say, those promotions grade our churn, but nevertheless, up to now, are proven to be beneficial from a revenue perspective. Once again, that's not something that should remain for the long run, but I mean, we have delivered what we are supposed to deliver to start to reduce this intensity and will continue.

Philip Cusick -- JPMorgan Security Incorporation -- Analyst

Maybe if I can ask a different issue, same subject. You've mentioned these lines are down 30%. How should we think about the pacing of them coming off of that discounted contract over the next year? Is there a slowing from here? Or is there sort of bubble coming?

Michel Combes -- Chief Executive Officer and President

I'm not sure I understood your question. Can you just repeat it?

Philip Cusick -- JPMorgan Security Incorporation -- Analyst

I was just going to say how should we think about the pace of those promotions coming off of their promotion period over the next year? Are we in sort of the slowing down period of this customers coming off of this aggressive promotions? You said that we're down -- the number of lines in that promotion are down 30% already.

Michel Combes -- Chief Executive Officer and President

So you can expect that, of course, let's say, they will turn out promotions -- all our promotions are for the next coming quarters, so they will churn out of the promotions in the next coming quarters as we are entering less customers and those promotions, we'll have less customers exiting from those promotions moving forward, so which means that you should expect an improvement of our churn moving forward. That's what we are looking for. The only point is that we have to face it in a proper manner in order to make sure that we continue to be attractive in the marketplace until we have fixed some of our -- or improved some of our basics issues, which are network-related and customer experience related. So that's a kind of, let's say, balance in between our ability to improve our basics and our ability then to remove progressively these aggressive promotions, and that's what we are managing carefully.

Philip Cusick -- JPMorgan Security Incorporation -- Analyst

Okay, thank you.

Operator

Okay. Our next question comes from the line of Matthew Niknam of Deutsche Bank. Your line is open.

Matthew Niknam -- Deutsche Bank -- Analyst

Hey, guys. Thank you for taking my questions. Just two, if I could. One, maybe to follow up a little bit on the last question. Competitively, any updates you can share what you saw during the quarter? How that's trended into fiscal 1Q? Have things getting worse at all? And then, secondly, on the adjusted EBITDA, I know that was an annual guidance provided, but it sound like the $400 million to $500 million in headwinds that you're expecting in fiscal 1Q, is that a good proxy for cost year-over-year headwinds that can recur in the following quarters? And I'm trying to get a sense of if your service revenues stay flattish and you've got this $400 million to $500 million headwind each quarter, is that a good way to think about it to say EBITDA is going to be down $1.5 billion to $2 billion next year?

Michel Combes -- Chief Executive Officer and President

Sure. I will let Andrew take the second question having in mind as we have said, we are not giving guidance for the full year. So we just have given you, let's say, for indications in order for you to be able to forecast at first quarter, and will come back on due course depending on what will be the outcome of the situation in which we are. On your first question, competitive environment. I guess we have seen all of the players, regardless of their size and current position making really aggressive offers to go after new customers and maintain their existing customer base. That's what we have seen in Q4, and that's what we continue to see in Q1. So we continue to see very aggressive device promotions from the Verizon, AT&T, and the recent promotions have had much less restrictions than in the past.

For example, no DIRECTV requirements or no trade-in requirements. So which means that those promotions are much more aggressive than what we have seen in the past. AT&T was particularly aggressive last quarter, and it's continuing to be so into this quarter as they ran a BOGO with no restrictions and increased quite significantly their advertising spend. And also the 2 large cable companies continue also to take share of postpaid gross adds. So all in all, quite a, let's say, a very competitive environment within which we are trying, let's say, to remove some of our own promotions as I have just explained in order to be, let's say, to be in a better position moving forward. And I have alluded to by removing 30% of those, let's say, between "3 lines", I mean, we have been able also to grow our gross adds MRC, so which is in the middle run, something which positive for the company. But once again, we have adjust all those criterias, meaning, number of gross adds, loading MRC, churn moving forward, in order to find the right balance, and that's what we are moving through right now.

Andrew Davies -- Chief Financial Officer

Thank you, Michel. Thanks for the question, Matthew. So we consciously avoided giving guide any forward strong guidance on a full year basis here. We're just thinking in the context of things that it's appropriate to talk about Q1 and give some more qualitative color around that. So we expect to be -- adjusted EBITDA to be somewhere in the range of $400 million to $500 million down year-over-year for the quarter. Quite a lot being noncash, driven by the impact of the 606 revenue recognition standard, which affects wireless service revenues to start with, which would be likely down $150 million to $200 million year-on-year, with a good 2/3 of that being just the accounting impact. The other accounting impact is in the gradual buildup of amortization of commission expenses over time, particularly with regards to our prepaid business.

And then lastly, there are some conscious headwinds that we've created through network investment, and that's both the impact of having a larger footprint year-on-year consistent with our Next-Gen Network program and also some among conscious decisions that we take into -- on an interim basis, expand our LTE coverage through larger roaming agreements with a couple of the larger competitors that we have. So that's kind of where we are for Q1. And I'm not going to say that you should just extrapolate those headwinds over the next 4 quarters. That would be inappropriate for me to say so.

Operator

Your next question comes from the line of Brett Feldman of Goldman Sachs and Company Incorporation. Your line is open.

Brett Feldman -- Goldman Sachs and Company Incorporation -- Analyst

Thanks for taking the question and just two around free cash flow. First, it looks like fairly significant use of cash related to repayment of proceeds from device financings in the quarter. I'm wondering if you can give us some context as to how that line is going to trend going forward. Is it going to continue to be a use of cash as you pay down existing facilities? Or is it going oscillate quarter-to-quarter? And then I know you're introducing any new guidance for this fiscal year, but you had previously said that you expected cash flow to be breakeven. It doesn't sound like your view on capital spending has changed from where it had been before. Is there anything else in terms of major free cash flow drivers that might be different from what they were when you originally anticipated to could get to a breakeven number in this fiscal year?

Michel Combes -- Chief Executive Officer and President

Andrew?

Andrew Davies -- Chief Financial Officer

Thank you, Brett. I understand the questions. So first of all, on the use of cash and the quarter and what we think about it going forward. So to your point, we did have quite a sizable net repayment of receivable facilities in the quarter. I think within our $10 billion of total liquidity that we have available at the end of 4Q, roughly $0.75 billion of that is on receivables facilities. And going forward, it's not about focusing on an adjusted free cash flow metric per se. It's about just managing the overall equity position that we have us the company going forward and with $10 billion, we've got good liquidity right now, but it's something we're going to keep -- we're going to have a keep an eye on. And with regards to other large forms of cash flow movement for fiscal year '19, we see -- to your question, we see no other major deviations or changes from what we've previously been assuming on our guidance. So we have -- we continue with that a high-ish level of CapEx for the next 12 months or so, roughly $5 billion on an annual basis. But there are no other major changes that I expect cash flow projections.

Brett Feldman -- Goldman Sachs and Company Incorporation -- Analyst

Thank you.

Operator

Your next question comes from the line of Michael Rollins of Citigroup Investment Research. Your line is open.

Michael Rollins -- Citigroup Investment Research -- Analyst

Hi, thanks for taking the question. I was curious if you could delve a little bit more strategy on device rentals and how you look at the rental devices versus just selling them outright and what kind of impact that would have on the operations. And if I could just add another question to that topic. It looks like if you take the P&L data, it looks like the net margin, if you take the equipment rental revenue less the cost and depreciation, it looks like it's gotten significantly more positive year-over-year and quarter-over-quarter. Is this just a more profitable business in terms of margin contribution when you look at it all-in? Or is there some temporary factors our work because saying the change in your latest fiscal quarter?

Michel Combes -- Chief Executive Officer and President

Thank you, Michael. I will take the first question of the question, and I will turn to Andrew for the second part. A lot has changed in the marketplace since we launched our leading program in 2014. We were, let's say, as you'll remember the front runner in the space. As customers are now keeping their device longer, we've been trialing whether it make sense to continue our leading program. Regardless, we plan to provide whatever financing options makes the most sense for our customers. Whether that is financing, different ways to do that, whether it's leasing or ID. And let's say -- or BYOD. So we trial different offers all the time, and we'll let you know if and when we make any changes and our go-to-market strategy. But it's fair that, let's say, we need to assess the market on a permanent basis in order to make sure a, are relevant for the customers; and b, we optimize the P&L for the company. And so that, maybe Andrew you can answer on these P&L the strategy.

Andrew Davies -- Chief Financial Officer

Yes. So I think, Mike, on the P&L aspect, I think you what you might be noticing is a little bit of a timing disconnect in the sense that, that so -- it's the equivalent of -- it's the outset equivalent of Mercedes-Benz versus the Chevrolet, right, in that we establish residual values for devices as we go along. And we've got good history and data on that because, obviously, we've run the risk logistics processes and the auction processes as well. So we depreciate devices down to residual values over the first 18 months. And a customer contract and thereafter, if a customer keeps the device, we depreciate them to 0.

So basically, as more expensive devices have come to markets in the last 6 to 12 months, what you end up having is a bigger mix of devices which have residual values at that are a higher percentage of our original SRP than we have previously. And so that manifests itself in a slightly lower depreciation profile over time, but then, consequently, we then end up -- when the devices come back to us through a reverse cycle, we end up making less margin at all the auctions as well. So it always weighs out at the end of the day, but you do it through a bit of a timing issue when you have a heavy mix of relatively high SRP devices.

Operator

Your next question comes from the line of Simon Flannery of Morgan Stanley. your line is open.

Landon Park -- Morgan Stanley -- Analyst

Thank you.This is Landon Park on for Simon. I was just wondering if you could run through your expectations for the network build after the 2.5 gigahertz is fully deployed? And maybe can you also run through expected second half launches on the 5G side, and how you're approaching additional markets?

Michel Combes -- Chief Executive Officer and President

Yes. So maybe John, you can update.

John C. B. Saw -- CTO

Yes. As you know, our 2.5 build has achieved 80% of our total sites compared to just 60% a year ago. I think the path forward is to continue to invest in 2.5, but in a different form factor. Massive MIMO technology has shown to perform really well in the field so far, and I can see it's continuing to invest in Massive MIMO technology, we're rolling out more and more 2.5. As I have mentioned in the past, with Massive MIMO and with the spectrum depth that we have in 2.5, we can simultaneously support both LTE and 5G, so it's like kill 2 birds with 1 stone. So I can see us moving forward to continue to invest in Massive MIMO. We have not announced any other 5G markets beyond the 9 metro areas that we're covering in the 9 markets. And we don't expect to announce any until at a later date. In the meantime, the team is busy getting ready to roll out to our first markets in the next few weeks.

Landon Park -- Morgan Stanley -- Analyst

Thank you.

Operator

Your next question comes from the line of Jonathan Chaplin of New Street. Your line is open.

Jonathan Chaplin -- New Street -- Analyst

Thanks, Michel, just a small follow-up for you. With 30% lower customers on free service subscriptions, why wouldn't we assume a much bigger increase in ARPU year-over-year?

Michel Combes -- Chief Executive Officer and President

Sorry. So what I said is yes, that we have seen a quite significant uplift of the MRC of our gross adds. Meaning, that we have added 30% reduction in the discounted promotional line, as I've already mentioned. And which has -- and 15% increase in postpaid monthly recurring charge on new account gross adds coming to Sprint. So we have the benefit of it for the new customers moving to Sprint. Then, of course, we have the different types of impacts, and so I don't know if you are referring to the bay or whether you're referring to let's say the gross adds up so that's how the way works. And I tried to -- so I mean, the postpaid phone ARPU is relatively flat sequentially and year-over-year because this is driven by a big customers rolling off promotions and increasing their monthly spend with us along with all the pricing actions which offset the impact of other promotional discounts that we have continued to give on services that also handsets.

Operator

Your next question comes from the line of Jeffrey Kvaal of Nomura Instinet. Your line is open.

Jeffrey Kvaal -- Nomura Instinet -- Analyst

Yes. I want to ask a tricky question in a polite way. I'd like to think, the headlines that we've gotten out of the regulator-ish stories have suggested some concern on the part of Sprint, talking about a sustainable path. And then, I guess, I was hoping that to you would either put that into context for us or help us kind of digest that in a way that historical happened?

Michel Combes -- Chief Executive Officer and President

That's not a tricky question. I would say it's a fair question, and so thanks for raising. I think that as you are asking for context, the recent filing was intended to give the regulators additional insights into the challenges that we are facing in our ability to be on effective competitor absent the transaction. And it's fair to say that most of you are very familiar with the challenges that we are facing, which not always a case of everyone. So that's why we wanted to give this fair view. The filing is fully consistent with the information which has been provided in our prior posit filings including specific reasons for and benefits of the proposed merger.

So we just wanted to make sure the regulators clearly understood what both the competitive environment and the pace of 5G deployment would look like with and without the merger as they have to compare those 2 situations what would happen if the merger takes place or if the major doesn't take place. And while Sprint has made a lot of progress improving its network and financials over the last few years as you've seen once again in our report and also in changing of course of the business, with a -- it's a different question that you raised during this session, we still lack load spectrum. We still lack scale, and we still lack financial resources to relative to AT&T and Verizon. So that's fact and that's just what we wanted to update the regulators with.

Jeffrey Kvaal -- Nomura Instinet -- Analyst

Okay, Michel, that's fair. If I may follow-up for a second, there's the possibility that at some point over the next weeks or months that we wake up in the morning and the likelihood of a T-Mobile merger is -- comes down quite a bit. Given these concerns and comments that you have just expressed to us, what should we be then making of the prospects for the company looking out a few years from that?

Michel Combes -- Chief Executive Officer and President

So first of all, I would like to say that we remain optimistic that the government will see the compelling arguments in support of our merger. So with that, let's say, as the first comment that I would like to make, because we believe that the benefits are, let's say, really huge. If the merger doesn't go through, we expect to continue to make improvements to the business, including our Next-Gen Network deployments, as it has been mentioned by John. Also the digital transformation has been referred to by myself and Andrew, which will allow us to continue to reduce our cost and our way to operate the company and would like to reposition the company. Reposition the company in how we play in which battlefield will be ours. While Sprint has made a lot of progress improving network and financials as I have just mentioned, we still lack, let's say we still are facing the challenges that we have mentioned. So which means that we will have to reduce, of course, our promotional activities in the market. We'll have to narrow our geographic focus. So at the end of the day, that means that we'll be less of the nationalwide competitor to AT&T and Verizon. So that's fact-based and we'll have to reposition the company that way.

Operator

Your next question...

Jud Henry -- Vice President of Corporate Finance and Treasurer

That's all the time we have for questions today. 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 following the call, please contact the Sprint Investor Relations team. Michel?

Michel Combes -- Chief Executive Officer and President

Thank you, Jud. So I just want to thank everyone for joining us today and for supporting Sprint. While our underlying fundamental challenges remain as I just explained, our fiscal '18 results demonstrate continued execution of our plan to balance customer growth and profitability while improving network performance in the near term. So I'm proud of what has been achieved. We'll continue to deliver retail net adds for the second consecutive year. We improved profitability with our adjusted EBITDA at the high end of our guidance. In addition, we are executing our Next-Gen Network deployment to deliver a network built for unlimited, while building the foundation for our mobile 5G network that will launch commercially in 9 cities in the coming weeks. We continue to explore ways to enhance our value proposition and continue to transform our cost structure and customer experience with digital, artificial intelligence, analytics and automation. Thank you, and have a great end of day.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

Duration: 55 minutes

Call participants:

Jud Henry -- Vice President of Corporate Finance and Treasurer

Michel Combes -- Chief Executive Officer and President

Andrew Davies -- Chief Financial Officer

John C. B. Saw -- CTO

Philip Cusick -- JPMorgan Security Incorporation -- Analyst

Matthew Niknam -- Deutsche Bank -- Analyst

Brett Feldman -- Goldman Sachs and Company Incorporation -- Analyst

Michael Rollins -- Citigroup Investment Research -- Analyst

Landon Park -- Morgan Stanley -- Analyst

Jonathan Chaplin -- New Street -- Analyst

Jeffrey Kvaal -- Nomura Instinet -- Analyst

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