Sprint Nextel's CEO Discusses Q2 2011 Results - Earnings Call Transcript

Sprint Nextel (S)

Q2 2011 Earnings Call

July 28, 2011 8:00 am ET


Steven Elfman - President of Network Operations & Wholesale

Joseph Euteneuer - Chief Financial Officer

Daniel Hesse - Chief Executive Officer, President, Director and Chairman of Executive Committee

Yijing Brentano - Vice President Investor Relations


John Hodulik - UBS Investment Bank

Philip Cusick - JP Morgan Chase & Co

Jonathan Chaplin - Crédit Suisse AG

Timothy Horan - Oppenheimer & Co. Inc.

Simon Flannery - Morgan Stanley

Michael Rollins - Citigroup Inc

David Barden

Brett Feldman - Deutsche Bank AG

Jason Armstrong - Goldman Sachs Group Inc.



Good morning, my name is Brenda, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Sprint Second Quarter 2011 Earnings Conference Call. [Operator Instructions] Thank you. Ms. Yijing Brentano, Vice President of Investor Relations. Ma'am, you may begin.

Yijing Brentano

Thank you, Brenda. Good morning, and welcome to Sprint Nextel Second Quarter 2011 Earnings Call. Thanks for joining us this morning.

For the format of the call, Dan Hesse, our CEO, will discuss operational performance in the quarter; and then our CFO, Joe Euteneuer, will cover the financial aspects of the quarter. Before we get underway, let me remind you that our release and the presentation slides that accompany this call are both available on the Investor Relations page of the Sprint website.

Slide 2 is our cautionary statement. I want to point out that in our remarks this morning, we will be discussing forward-looking information, which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. We provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review, including Part I, Item 1A Risk Factors of our annual report on Form 10-K and when filed, Part II, Item 1A Risk Factors of our quarterly report on Form 10-Q for the quarter ended June 30, 2011.

Turning to Slide 3. Throughout our call, we will refer to several non-GAAP metrics. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures for the second quarter can be found in the attachments to our earnings release, and also at the end of today's presentation, which are available on our website at www.sprint.com/investors.

Next, I would like to cover our loss per share results. Basic and diluted loss per common share for the second quarter were $0.28 compared to $0.15 in the first quarter and $0.25 in the year ago period. The current period loss per share includes $0.20 in equity losses of unconsolidated investments and other. Net of the effect have increased the valuation allowance. Loss per share increased sequentially due to higher equity losses in unconsolidated investments and other, as well as higher net tax expense. We recorded a net tax expense of $99 million in 2Q '11, including a $52 million expense, resulting from cumulative effects on changes in Michigan's corporate income tax law enacted in the second quarter.

For the full year 2011, we now expect our net tax expense to be approximately $200 million to $250 million, which is higher than our previously communicated expectation of $200 million, due to the Michigan charge I just discussed. Also, please keep in mind that Clearwire second quarter 2011 results from operations have not yet been finalized. As a result, the amount reflected for Sprint's share of Clearwire's results of operations for the quarter ended June 30, 2011, is an estimate, and based upon the finalization of Clearwire's results may need to be revised if our estimates materially differs from Clearwire's actual results. Changes in our estimate, if any, would affect the carrying value of our investment in Clearwire, net loss and basic and diluted loss per common share, but would have no effect on Sprint's operating income, OIBDA, adjusted OIBDA or consolidated statement of cash flows.

The carrying value of Sprint's investment in Clearwire as of June 30, 2011, was approximately $2.1 billion. Clearwire's stock price is subject to significant volatility, and currently their estimated value based on their quoted first share value is below Sprint's per share carrying value. Although we have determined that the excess of our book value over the estimated fair value of our investment is the result of a temporary decline, there is significant risk that the estimated value of our investment in Clearwire does not improve. And accordingly, we could face significant non-cash charges up to the full amount of our net carrying value. Similar to the first quarter, we recognize the capitalized interest of approximately $100 million related to certain previously unutilized spectrum licenses, which we intend to deploy as part of Network Vision. We continue to expect full year capitalized interest related to these spectrum licenses to be approximately $400 million.

As we discussed on our last earnings call, the successful testing and deployment of Network Vision is expected to result in accelerated depreciation expense, primarily associated with iDEN-related assets due to changes in our estimates of the remaining useful life of certain long-lived assets, and the expected timing of asset retirement obligations. As of June 30, 2011, the remaining net carrying value of iDEN-related assets was approximately $4 billion, with a composite estimate useful life of 4.5 years, resulting in depreciation expense of approximately $800 million annually.

Successful completion of Network Vision earlier than the end of 2015 would result in an acceleration of these depreciation costs. Assuming the completion of successful testing of push-to-talk and finalization of a migration plan for push-to-talk customers, accelerated depreciation could begin in late 2011 or early 2012.

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