(Part 1 of 2)
Q1 2003 Nextel Communications Earnings Conference Call - Final
April 23, 2003 1:11pm
OPERATOR: Thank you, and good morning all. Welcome to Nextel's 2003
first-quarter financial results conference call. At this time, all
lines are in a listen-only mode. You will have the opportunity to
ask questions at the end of today's presentation. Instructions for
asking questions will be provided at a later time. Thank you all for
your attention. We would like to turn the time over to our host
today, Mr. Paul Blalock, Nextel's Vice President of Investor
Relations.
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PAUL BLALOCK, VICE PRESIDENT OF INVESTOR RELATIONS, NEXTEL
COMMUNICATIONS: Thank you. Good morning, all, and welcome to
Nextel's first-quarter 2003 conference call. This call is being
recorded and will be available for playback in the U.S. until
Monday, April 28th by calling 1-800-839-0860. Callers from outside
the U.S. will need to dial 402-220-1490, and the pass code is 1484.
The conference call is also available for replay on two websites:
Nextel.com and streetevents.com.
As a way of introduction, some of the issues discussed today, such
as our 2003 guidance, will be forward-looking and, as such, should
be taken in the context of the risks and uncertainties outlined in
the SEC filings of Nextel Communications, including Nextel's annual
report on Form 10-K for the year ended December 31, 2002. During
this call, Nextel will be discussing some financial metrics which do
not conform to generally accepted accounting principles, or GAAP,
such as EBITDA and free cash flow. For a reconciliation of these
numbers to GAAP, please access Nextel's investor relations link
under the "about Nextel" tab at Nextel.com.
On the call today are Tim Donahue, Nextel's President and Chief
Executive Officer, Tom Kelly, Nextel's Executive Vice President and
Chief Operating Officer, and Paul Saleh, Nextel's Executive Vice
President and Chief Financial Officer. Also available for your
questions is to March Casey (ph), Nextel's Vice President of
Technology Strategy. I'd now like to introduce Tim Donahue, Nextel's
President and Chief Executive Officer.
TIM DONAHUE, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NEXTEL
COMMUNICATIONS: Thank you, and good morning to all of you. Nextel is
off to a terrific start in 2003, as we delivered another strong
operating and financial quarter. Our accomplishments include: Net
income of 208 million, or 21 cents per share; free cash flow of 201
million, a best-ever achievement for Nextel; increasing our EBITDA
margin to 41%, the best among the national wireless carriers,
through strong revenue growth and effective cost management;
slashing bad debt expense to 56 million, or 2.4% of revenues, the
lowest ratio we've had in three years; continuing to capture a
greater share of high-value wireless customers among the national
carriers. We garnered approximately 17% share of net adds in the
first quarter. No other wireless carrier consistently delivers the
quantity and the quality of subscribers that Nextel does,
strengthening the balance sheet by eliminating 4%, or $568 million
in principal value of our long-term debt and preferred stock
obligations. Over the past 12 months, we have retired $3.8 billion,
or 21%, of these future obligations. And most importantly, Nextel
decreased the customer churn rate to 1.9%, the lowest level in four
years. This is the result of countless hours of planning and
execution from our sales -- sales force, activation and fulfillment
employees, and customer care, and, of course, the collections
organization.
No one is more grateful than I am for the lower churn because it is
a significant driver of higher value for our business. This first --
these first-quarter results show that Nextel continues to lead the
wireless industry not only in products and services, but in
shareholder value as well. I'll make additional comments at the end
of the call before we take your questions, but let me just say that
I'm very pleased with the results, and I am confident that Nextel
will meet or exceed our guidance in 2003.
Now I will hand the call over to Tom Kelly, Nextel's Chief Operating
Officer, to discuss Nextel's proven ability to balance subscriber
growth with subscriber quality.
TOM KELLY, EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER,
NEXTEL COMMUNICATIONS: Thank you, Tim, and good morning. Nextel's
first-quarter results demonstrate that we are executing successfully
against our smart growth strategy. We reported an impressive 41%
EBITDA margin and over 200 million of free cash flow in the first
quarter. Through our smart growth strategy, we are focusing on three
major areas in 2003: Customer retention, distribution and sales, and
focused capital investment.
The focus on customer retention as measured by the monthly churn
rate is the most important determinant of returns in the wireless
business. In order to improve customer retention, Nextel is
implementing a comprehensive customer touchpoint strategy which will
enable us to identify and address the major dissatisfiers for each
point in the customer life cycle, from sales and full fulfillment to
activation, billing, collection, and customer-care activities. The
goal of this strategy is to resolve customer issues and increase
customer satisfaction at every turn. Our early progress is
demonstrated in a 20 basis point reduction in churn during the first
quarter to approximately 1.9%.
Second, Nextel is evolving our sales, distribution and marketing
organizations to match the increasingly sophisticated wireless
communications demands of our corporate, government, and general
business customers. We have followed through on this strategy by
creating a direct link between our direct sales force and the
product and data applications group. We have also changed the
compensation plans of our sales force to reward them for increases
in revenue and gross adds, rather than the traditional gross add
compensation plans. We believe that by using these and this enhanced
approach, it will allow Nextel to expand our account penetration and
increase our penetration within existing accounts while growing our
share of total wireless spending.
Third, capital efficiencies have been a significant element of
Nextel's drive to generate free cash flow. We have been able to
generate capital efficiencies while maintaining high network quality
as determined by our subscriber surveys and our own internal network
performance metrics. Our network metrics today are the best they
have ever been. This requires a relentless discipline on the capital
investment process, and in 2003, we have plans to continue building
our network, enhancing the Nextel service within the current
footprint and extending the reach of our network to the most
promising geographical areas, where new and existing subscribers are
most likely to use our service. We continue to target capital
spending of 1.8 billion or less for the year.
Nextel's smart growth strategy is enabling our company to capture a
high share of the most valuable wireless customers. In the first
quarter, Nextel added 480,000 new subscribers, bringing our total
subscriber base to approximately 11.1 million. This subscriber
number does not include any subscribers under our boost mobile
trial. Based upon subscriber estimates from the six national
wireless carriers, we estimate that Nextel captured at least 17% of
net adds during the quarter, significantly higher than our share of
total wireless subscribers of 10%.
In addition to impressive share gains, Nextel continues to attract
high-quality customers as measured by the monthly churn rate and
ARPU contribution. We are systematically driving down churn through
our touchpoint strategy, and we are seeing significant improvement
in increased billing and provisioning accuracy, faster recent
resolution of customer issues, and continued optimization of
customer care outsourcing. The early returns of this strategy are
impressive, as Nextel's churn declined to approximately 1.9% during
the first quarter, the lowest point in four years. Average revenue
per user, or ARPU, declined during the quarter to $67 per month,
from $68 one year ago and $69 in the fourth quarter due to typical
first-quarter seasonality, growth in the government segment, and
competitive pricing for wireless services.
Since 1999, Nextel has historically experienced a slight decline in
ARPU during the first quarter of the year, and then increasing in
the second and third quarters as the result of greater overage
revenue. Based on our minutes-of- use trend from March and April, we
expect to experience a similar trend this year, resulting in a
sequential lift in ARPU during the second quarter, and an average
ARPU of more than $67 for the year. Lifetime revenue per subscriber
increased from approximately $3,300 in the fourth quarter to more
than $3,500 in the first quarter, one of the highest levels in
Nextel's history.
Nextel's target markets - enterprise, government, general business,
and high-value individuals - continue to deliver good growth and
excellent lifetime values. Enterprise and government subscribers
grew to 2.3 million in the first quarter. These accounts maintain
higher than average customer retention rates, even though minutes-of-
use and ARPU are somewhat lower than the company average. As a
result, enterprise and government subscribers are our most
profitable segment. Noteworthy customer wins during the quarter
included the United States post office, Marquette University, Katy
Independent School District in Houston, and the Borgess Medical
Center in Michigan. Nextel experienced moderate growth within
Nextel's general business segment, ending with 5.8 million
subscribers. These small and medium businesses continued to generate
higher-than-average ARPU, solid and improving customer retention
rates, and they serve as a significant source of add-on business.
The networking power of direct connect continued to drive Nextel's
strong growth among high-value individual purchasers, reaching 3
million subscribers. These subscribers look like our business
customers, as demonstrated by higher-than-average usage and ARPU and
comparable churn rates. They simply choose to purchase individually
versus through a company. In addition, these subscribers can be
acquired at a significantly lower acquisition cost through our
retail stores, web, and telesales channels.
Before moving on to a discussion of distribution channels, I'd like
to give you an update on boost mobile, our lifestyle-based brand
that targets the youth market in California and Nevada.
This is the second operating quarter for boost mobile, and I'm
pleased to announce that the number of subscriber acquisitions
accelerated, adding 40,000 subscribers for an ending balance of
approximately 60,000 subscribers. The financial impact of these
subscribers is not material to our results, but is included in the
income statement. Now for an update on Nextel's distribution mix and
subscriber acquisition cost. Approximately 52% of our gross adds
came through our direct channels, while 48% came through indirect.
Within the direct channels, we're continuing to invest in our retail
stores, web sales, and telesales operations because the cost to
acquire subscribers through these channels is significantly lower
than the company average. We opened 50 new retail stores, and
increased our outbound telemarketing activities in the quarter.
Approximately 29% of gross adds came through these channels in the
first quarter, up significantly from 19% of gross adds one year ago.
As the result of these investments, plus slightly higher handset
subsidies and marketing costs due to our branding of Nationwide
Direct Connect, CPGA increased slightly on a sequential basis to
$450. In summary, Nextel's early 2003 results demonstrate that our
smart growth strategy is returning tremendous value to our
shareholders. I am very proud of our results, and I am looking
forward to strong operating and financial performance throughout
2003.
I will now hand the call over to Paul Saleh, Nextel's Chief
Financial Officer.
PAUL SALEH, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER,
NEXTEL COMMUNICATIONS: Thank you, Tom. Nextel is off to a strong
start in 2003, and we're clearly building on our track record of
execution.
Income available to common stockholders for the first quarter was
$208 million, or 21 cents per share, a significant improvement over
the loss which we reported in the first quarter of last year.
We are benefiting from solid top-line growth combined with greater
operating efficiencies. During the first quarter of 2003, Nextel
delivered service revenues of approximately $2.2 billion, a year-
over-year increase of 21%, driven by new subscriber additions.
ARPU for the quarter was $67, the highest among national carriers.
And as indicated in our 10 K filing, ARPU now includes service and
repair revenues and termination fees collected.
The impact of this change was approximately 50 cents in the first
quarter, and it would not have changed our reported ARPU number. On
a sequential basis, ARPU declined by $2 as a result of the typical
seasonal trend in overage. In addition, ARPU reflects the growth of
the government segment, which typically generates lower ARPU, but
has the highest lifetime value of any segment in our business.
I expect a sequential lift in ARPU for the second quarter, and for
ARPU to average more than $67 for the full year of 2003.
Nextel continued to scale its operating costs in the quarter. On a
year-over-year basis, the cost of service has grown only 5%, while
revenues have grown 21% and minutes-of-use have grown 35%.
We also are driving greater efficiencies in billing and customer
care by leveraging the capabilities of our new billing system and
the resources of our outsourcing partners. We're also implementing
better internal controls and processes.
During the quarter, Nextel was able to slash its bad debt ratio to
2.4% of total revenue, compared with 4.8% of revenue in the first
quarter of 2002. On an annual basis, this represents a $200 million
benefit to EBITDA.
In addition, Nextel's day sales outstanding is down now to 38 days
in the first quarter, a reduction of 7 days on a sequential basis.
Nextel is realizing the efficiencies of our new collections system,
increased compliance with our credit policies, and solid front-end
screening tools. These achievements are driving down our operating
costs per user to a record low of $23 in the first quarter, down
from $24 in the fourth quarter of 2002 and $27 from one year ago.
Our consistent subscriber growth, strong ARPU, combined with our
operating cost discipline is enabling the company to deliver 41%
EBITDA margins, an 11-point improvement over the prior year. This is
the fourth consecutive quarter that the company posted EBITDA
margins of 40% or higher. Nextel's EBITDA increased to a record $906
million during the quarter, and we are on track to deliver an annual
EBITDA of $3.8 billion or more in 2003.
Capital expenditures were $305 million for the first quarter, as a
result of typical seasonality in the build plan. We're very focused
on our capital investment plan, and we are benefiting from tools and
technology enhancements which we implemented last year to increase
capacity (ph). We're also taking measures to reduce the cost of site
acquisition and construction.
For the full year, we still expect our capital expenditures to be at
$1.8 billion or less, which means that cap-ex will be more heavily
loaded toward the latter part of the year.
Our strategies are part of a comprehensive approach to drive greater
free cash flow. In the first quarter, Nextel generated $201 million
of free cash flow. The components of free cash flow are shown on
Page 3 of the attachments to our press release, and they consist of
EBITDA of $906 million, capital expenditures of $305 million,
payments for licenses, acquisitions and other investments of $214
million, changes in working capital of $15 million, net interest
payments of $156 million, and mandatory preferred stock dividends of
$15 million.
Our strong cash flow position enabled Nextel to proactively retire
more debt in the first quarter and to continue to strengthen our
balance sheet.
In the first quarter of 2003, Nextel retired $568 million in debt
and preferred stock obligations as detailed on Page 4 of today's
attachments.
In exchange for these securities, Nextel used $570 million in cash.
These exchanges resulted in a 7 million accounting loss, which is
reflected on the first quarter income statement. Over the past 12
months, the company has retired approximately $3.8 billion in debt
and preferred obligations. As a result of De-leveraging activities
and our strong operating performance, our credit profile continues
to improve. Total debt and preferred stock to annualize EBITDA has
been reduced to 3.5 times compared with 7.3 times in the prior year,
and we've also maintained a very strong liquidity position. At the
end of the first quarter, Nextel had nearly $2.3 billion in cash and
about $1.3 billion in our committed and undrawn credit facility for
a total available liquidity of approximately $3.6 billion.
In late March, Nextel filed a $5 billion universal shelf
registration with the Securities and Exchange Commission. This shelf
gives us flexibility to access the capital markets
opportunistically. Nearly all of our capital structure becomes
callable in the next two years. This shelf will provide Nextel with
the means to refinance our balance sheet at the appropriate time and
in the most cost-effective manner.
In summary, Nextel posted strong results in the first quarter of
2003. We're realizing the benefits of our operational and financial
strategies, and we have solid plans to build on this progress and
sustain our momentum. We're confident that we will deliver on our
2003 expectations of adding 1.7 million or more new high-value
subscribers, delivering $3.8 billion or better of EBITDA, reporting
earnings per share of at least 75 cents, generating free cash flow
of $500 million or more, and remain disciplined on our capital
expenditures of $1.8 billion or less. Now I'll hand the call back to
Tim for his closing remarks.
TIM DONAHUE: Thank you, Paul. I think that all of you would agree
that we're off to a pretty good start. Our business strategy for '03
is rooted in the same smart growth strategy that worked so well for
us in '02. We will continue to balance our ability to attract high-
value subscribers who appreciate Nextel's differentiation, while
maintaining the type of cost discipline which improves operating
margins. We will maintain our leadership in the wireless marketplace
by being first to market with mobile productivity solutions, being
different whenever we can from the competition, and being better at
selling, delivering, and supporting these services.
Now that we have provided a detailed update on our business, I'd
like to provide my own view on three catalysts for Nextel. These
catalysts include consistent execution, expanding our product and
service differentiation, and the spectrum swap.
Nextel has demonstrated a strong track record of consistent
execution, the most important catalyst of all. Over the past two
years, we have demonstrated a remarkable ability to deliver the
right balance of subscriber growth and quality. Nextel's
consistently added between 475,000 and 500,000 high-quality
customers per quarter. Our focus on quality customers is driving
strong top-line revenue growth of approximately 20% over the past
year. We are clearly off to a good start to 2003, and I see nothing
on the horizon that will knock Nextel off its industry leadership
position, including push-to-talk wannabes.
Our valuable new services, such as Nationwide Direct Connect,
priority access for direct connect, along with a continued
introduction of wireless data applications will enhance our revenue
growth. At the same time, we will continue to leverage all of our
operating efficiencies that we launched in '02, including scaling
our network costs, outsourcing customer care and IT services, and
investing in our low-cost distribution channels.
In addition, I'd like to highlight two new initiatives which offer
significant potential for additional cost savings. The first is
customer life cycle management. We are actively working with all
customer-facing functions to improve our response times while
enhancing the customer experience and lowering the high cost of
involuntary churn. The second initiative is strategic sourcing.
Nextel has made a commitment to improve our supply chain management
practices through better strategic sourcing which will more
effectively leverage Nextel's purchasing power. We expect to realize
significant cost savings from this effort in '03. Consistent
execution also requires a disciplined approach to capital
expenditures. We are deriving capital efficiencies through a
combination of technology improvements, better planning tools, and
increased spectrum utilization. In fact, Nextel is clearly hitting
the sweet spot in the iDEN cost curve. During '03, our iDEN network
will expand to capacity boost with the deployment of the 6:1 vocoder
which motor roller delivered to us in March, right on time with the
milestone that we laid out for you during our December webcast.
We are preparing to deploy the 6:1 software in Florida, and the
final two milestones remain on schedule for August and September of
this year.
So as I sit here today, I have every confidence that we will meet
our timeline for this important technology development and rollout. |
