24/7 Wall St. Interview With Dan Hesse, CEO Sprint Nextel (S)

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24/7 Wall St. sat down with Dan Hesse, CEO of Sprint Nextel (NYSE:S) to talk about the company’s current subscriber growth issues, the firm’s WiMax roll-out, and the future of broadband telecommunications.

The interview:

24/7 Wall St: It’s obvious that Wall Street’s perception of Sprint has changed  markedly in just the last week, and obviously you all have watched that.  Are there one or two things that you think have changed in terms of perception in the direction of what’s going on in the company that were not as easily visible before?
 
Hesse:  Well I can’t speak for why the shares have gone up in the past week.  What I will say is that I hope that investors have seen continued improvement at Sprint in terms of the customer experience.  We’ve reported seven consecutive quarters of improved customer satisfaction, improved first-call resolution, improved customer satisfaction at retail, improved network performance, so an overall improved overall customer experience.  And the past quarter, the 3rd quarter, we saw the largest sequential improvement in gross adds, which is the industry vernacular for new customers, since we’ve been keeping records, which is over 5 years.   So perhaps these are being noticed by the Street.  In addition, as you know, we recently bought down another $1 billion of Sprint debt, which perhaps is viewed as increasing confidence in our ability to generate free cash flow and improve the balance sheet. 
 
24/7 Wall St:  One of the things that I’ve seen in writing, and I wanted to get your reaction to this, there’s certainly a perception that you make more money per customer than your major competitors in terms of the data that people use from their phones to the people they’re talking to or doing business with.  Is that a fair perception?
 
Hesse:  We have a higher average revenue per user that is attributed to data.  And Sprint has been effective at attracting customers that want to use their phone for more than just voice.  So we have very simple pricing plans, like Simply Everything which we introduced in the 1st quarter of 2008, and our Everything data plans have recently been enhanced by adding Any Mobile Any Time to them so that the data-centric customer who’s looking for a great 3G network, as you know we have the most dependable 3G network, we have the first 4G network, and we have very good rate plans for those data and text-centric customers that we tend to attract.  And as a result our ARPU, or average revenue per user, that is attributable to data for our CDMA customer base.  We have two networks.  We have a CDMA and we have an iDEN network.   But the customers that go to the CDMA network are very heavy data users so we do have the highest average revenue per user among those customers in the industry. 
 
24/7 Wall St:  I suspect that if we asked 99 out of 100 analysts and institutional investors what they think will be the tipping point for Sprint, it will be when you start to add subscribers the way that AT&T (NYSE:T) and Verizon Wireless NYSE:VZ)(NYSE:VOD) have.  Do you have a feel for when that may start to happen or what the triggers are for that?
 
Hesse:  Our focus is on increasing revenue and getting to the point where our revenues as a company grow.  We have post-paid wireless customers, pre-paid wireless customers, wholesale wireless customers, and then we also have a wireline division.  We have made a lot of progress in growing our pre-paid customer base this year in 2009.  As a matter of fact in the first three quarters of 2009 we’ve added 2.1 million net adds, or net new subscribers in pre-paid, which is more new customers than any U.S. pre-paid provider added on all of 2008.  On the post-paid side, we are still lose losing customers, but at an improving rate.  We’re losing fewer customers than we have in previous quarters, which we believe is attributable to the fact that we’ve improved customer service and network quality immensely.  We do have a goal of getting to total subscriber growth.  We want our customers to choose what is the best rate plan or service for them.  For some customers, they prefer prepaid which means there is no contract.  And some customers prefer post-paid, where they get a subsidized phone and in exchange they sign a 2-year contract.  We want the customer to make that choice.  And I think that the Street sometimes can tend to over-emphasize one area over another.   We tend to take a more balanced view.  So the appropriate way of looking at our turnaround is total revenue.   And that is still declining, but we do have clear goals to get that moving in a positive direction.  
 
24/7 Wall St:  so just as a quick follow-up, the notion that adding a 1 or 1.5 million net total subscribers every quarter is an incredibly important benchmark for you or any or your competitors is somewhat overstated? 
 
Hesse:  No I think the way look at it is that you have to walk before you run.  For us the goal is to grow revenues.  And whether that comes from post-paid subscribers of pre-paid subscribers isn’t the issue a much as just growing the revenue stream.  So we do have a goal to grow and obviously the more the revenues or the more new subscribers you’re adding the better.  Your question may have been is there a particular number of subscribers that you’ll guide to as a goal going forward.  And our number one goal is to get to revenue growth.   And later on perhaps we’ll have goals around the particular number of subscribers that we’re growing.  But right now our pre-paid business is growing subscribers in a very healthy way.  We need to get where the combination of our pre-paid business, post-paid business, our wholesale customer base, as well as our wire line business are working together to growth the overall revenue stream?
 
24/7 Wall St: You’re currently building out your WiMax network with your partner Clearwire (NASDAQ:CLWR).  At what point will you be able to aggressively offer that service in the top 20 markets, be able to really market it throughout that area?
 
Hesse:  Well, it takes a while to build a national 4G market.  Our target is to have 25 markets, not the top 25, but 25 markets covering 30 million people operating by then of this year, 2009.  And 80 markets, covering about 120 million people, which will cover most of the major markets by the end of next year, 2010.  This year we’ve already launched Chicago, Philadelphia, Portland, Dallas, Ft. Worth, Atlanta, Las Vegas, very major markets.  And of course there are very big markets planned for launching in 2010.  And as we get more markets build it becomes easier to market 4G because the national coverage gets better.   Because it does take a long time to build a national 4G footprint, very much like we did when we built 2G and when we built our 3G, we’ll offer dual-mode devices that operate on the existing large coverage network that we have in 3G.  We have a very large 3G network at Sprint, 14 times larger than T-Mobile’s for example.  So our devices will operate on 3G and also 4G so that if you happen to be in a market or location where 4G isn’t built out yet it will downshift, if you will, to 3G.  So we have begun marketing Sprint 4G services in the markets that indicated have already been launched this year, in 2009.  But you’ll be seeing much more market of 4G services in 2010 as we get more of a critical mass of markets.  And again by the end of 2010 our goal is to have 120 million what we call pops covered, which is equivalent to 120 million people that could get the service if they choose.    
 
24/7 Wall St: Your partner Clearwire obviously just got a new round of funding.  Is there any assumption that gets them to profitability or is the assumption that just in essence gets them more runway as you build our WiMax?
 
Hesse:  Well I’ll let Clearwire, which is a separate public company, talk about what the funding means.  It depends upon how rapidly Clearwire builds out the network.  The more rapidly they build out the network the more likely they are to need funding to build it out more aggressively before the revenue comes in from new customers.  So it is a corporate decision that Clearwire makes on whether time the funding of capex investment or market expansion with revenues coming in, which would mean they may not have to go out and get additional funding, or if in fact they intend to aggressively build out the network so that the cash or capital requirements go out before the revenues come in, which would mean they would need to raise additional capital.  But there is a significant likelihood that Clearwire would need to raise additional money, whether that be debt or equity, in the future.
 
24/7 Wall St:  how important in terms of picking up net new customers that WiMax is being deployed well ahead of the LTE technology that people like AT&T and Verizon will offer?
 
Hesse:  We think it’s quite important, because as opposed to any other new generations of wireless technology where it took a while for the market to develop, because the applications needed to developed.   3G is a good case and point.  3G technology was available really before a lot of the applications where there, and on the network side available before the devices for 3G were out on the markets place.  The beauty of 4G is that in a very short period of time data growth has exploded on the mobile networks.  A lot is being written about, for example, AT&T’s network not being able to handle the heavy data users on the iPhones.  So need for additional speed and capacity on the wireless networks is there, that’s number one.  So the applications don’t need to be developed; it’s not like we’re waiting for those to come.  Secondly, we’re not really waiting for the new 4G devices to come either.  Because with what we call a MyFi, we offer a 3G MyFi which is like a small wireless router that’s about the size of a thick credit card, the 3G versions.  And we have a 4G version that operates on 4G and 3G that’s larger, but the size will come down over time.  This means that anything that anything that I have has WiFi on it can be a 4G device.   So any of my 3G or 2G cell phones that have WiFi can operate at 4G as long as I have one of these mobile hot spots with me.  So can my MP3 player, or my iTouch, or my gaming device, or my camera, or my video camera, or my PC, or my netbook.  These can all be mobile 4G devices as long as they have WiFi on them because what these small routers do is they take that WiFi signal from all these devices that are out there on the market today that I’ve just described, and it goes WiFi to this mini-router and then 4G, or 3G depending on what’s available, out to the internet.  So the hot spot now is no longer the size of a WiFi hot spot, no longer the size of a coffee shop or your apartment, but it’s the size of the entire city.  So both the applications are there and the devices are there for 4G now.  So we can take real advantage of time-to-market advantage for 4G.  So we think it will make a very big difference to be first to market. 
 
24/7 Wall St:  Is WiMax, once it’s broadly distributed, a fast enough technology so that it will actually compete with wired broadband to the home.  So as an example could there be a set-top box that in essence operates wirelessly that allows for broadband and TV to come in the way they might with cable or fiber now? 
 
Hesse:  Well there are landline technologies that are capable of faster speeds than wireless 4G, like WiMax.  WiMax of course is theoretical capable of going at 40 megabits per second and is faster, but that in the real world with the number of users sharing bandwidth thing of something more in the range of 4 megabits per second, maybe 5 megabits per second, as being the kinds of speeds that customers might expect on 4G.  It will compete very effectively against, from a speed point of view, with DSL.  There are cable modem speeds, and as you mentioned fiber, that are capable of going faster than that.  The real question is from a price performance perspective, if I’m a customer and I have 4G service available at let’s say 4 megabits per second, that’s very fast for most applications.  Is it worth it to also buy a landline on top of that, because we believe that everybody will want to have and need to have that capability from a mobile point of view.   So the real question is “is it worth the extra money when I’m home to buy another subscription to another service to get what could go faster?”.  So the question is a good one.  There will be landline solutions available to everyone that’s within service range, because everybody can’t get high-speed cable modem service for example, or fiber service like a Fios or a U-Verse.  They may not have that available to them.  But those services are capable of even faster transmission speeds than wireless 4G.  
 
24/7 Wall St.:  Thank you.