(part 2 of 2)
Nextel is putting it all together: strong top-line growth along with
operating and capital efficiencies. The result is consistent and
impressive net income and free cash flow growth, which results in
increased financial flexibility. The second catalyst is expanding
our product and service differentiation. During the first quarter,
Nextel completed Phase 1 of Nationwide Direct Connect and initiated
Phase 2 deployment of the service. Phase 1, which is now complete,
enables all Nextel customers to use Direct Connect in their home
market or while on the road. We are deploying Phase 2 on a market-by-
market basis, and we expect to complete the commercial rollout of
Nationwide Direct connect by August of '03 this year.
During the first quarter, Nextel also introduced priority access for
Direct Connect and a new military spec (ph) handset. These
developments will increase our differentiation in the all-important
public safety and government segments, an opportunity that we
believe is approximately 12 million workers and growing. In
addition, Nextel has four new iDEN handsets in the wings which are
slated for introduction in the third and fourth quarters. These
handsets contain the four kilobit vocoder, offer significantly
longer battery life, contain assisted GPS capabilities, and sport
innovative designs.
The final catalyst for Nextel is commonly called the spectrum swap,
which is a simplified term for the FCC's objective to address public
safety, CMRS, interference in the 800-megahertz band. The FCC has
asked for and received two rounds of comments on the consensus plan,
and we are looking forward to a favorable resolution which we
believe will provide the long-term solution for resolving
interference and increase Nextel's contiguous spectrum position to
26-megahertz nationwide.
We feel very positive about this proceeding, and we expect to see an
FCC rule-making in the coming months. Given these catalysts, I am
excited about the outlook for the company throughout 2003. I also
believe that industry-wide results will validate our vision of an
increasingly wireless world. Few industries have ever experienced
this type of sustained growth, and I am encouraged that many
wireless operators are taking the right steps to make this business
substantially more profitable. That concludes our commentary, and we
will now be happy to take your questions.
OPERATOR: To ask a question, please press a 1 followed by a 4 on
your touch-tone phone. If for any reason you need to retract your
question, please press a 1, followed by a 3. All questions will be
taken in the order they are received.
And our first question today will come from Mr. Tom Watts of SG
Cowen. Go ahead, please.
Mr.Watts, you may want to check the mute feature on your phone. We
are unable to hear you.
TOM WATTS, SG COWEN: Okay. How's that?
OPERATOR: We can hear you now sir.
TOM WATTS: Yeah. Congratulations. A quick question on the numbers.
Customer retention costs seem to be up this quarter to about 65
million by our estimates. Is this part of your improved customer-
touch program? And where do you see these numbers going forward?
UNIDENTIFIED: The touchpoint strategy that we have today, we have
invested more money to make sure that we are addressing every
touchpoint that is inclusive across everything that we do in care as
well as collections. We also have some costs included for boost,
where we are providing activation services and also support services
for re-boosting of boost as well as activation.
In terms of our investment for this year, we are and will invest in
customer retention this year, as I stated earlier, as that is one of
the three critical areas that we're focusing on for the year.
TOM WATTS: And second, do you see any expansion of the boost
coverage area? Is that a potential nationwide rollout, and how might
that affect performance?
UNIDENTIFIED: Well, as we said in the last couple of calls, any
decision to roll out boost is not going to be made before mid-year
of this year. We have a number of criteria that we really have to
meet. We have said all along that the most important thing is that
we make sure that the brand is relevant to our target, that the
minute -- the costs or the price per minute that we get is a higher
margin minute, that we have a lower cost for CGA, and we have a
lower cost to serve. We're making progress in a lot of those areas,
and we feel good about them, but in order to feel and understand
exactly what the churn impact will be, we have to give this a bit
more time to see it, and we will not be making a decision before mid-
year or later.
TOM WATTS: Okay. And then just a final question. Are there any
updates in the testing or successor to the iDEN technology, when
you'll have that decision, and is Motorola's acquisition of
Winphoria affect that at all?
TIM DONAHUE: This is Tim. In terms of -- if you're talking about
testing of 6:1 in the new software for the network, it's going
great. As I said in my comments, it's in the lab. We feel very good
about it. It's rolling out on time. There are no issues there. As a
matter of fact, iDEN is really scaling extraordinarily well for us
these days. It is a very efficient technology, and with the new
enhancements that we have in the field in terms of frequency
planning, directed retry, and some other products, we feel very,
very good about the network. And our customers are telling us that
they -- from their perspective, the network has never operated
better -- one of the reasons, by the way, why you have 1.9% churn.
Let me talk about Motorola and Winphoria. I have to take Motorola at
its word, and I have had several conversations with senior leaders
at Motorola about the Winphoria acquisition, and it is my belief --
and this has been verified by Motorola, I think they have said it
publicly that -- that acquisition was designed primarily to get them
a soft switching platform for the future, which they think they're
going to need. And while it is true that Winphoria obviously makes a
push-to-talk part, the acquisition of Winphoria by Motorola has not
in any way changed our view of the push-to-talk products that are
supposedly coming to market. And our view, of course, is that they
can't stand up to our product because they are a latent product, and
our customers just will not tolerate the latency that we see and we
know that are inherent in those products. So Motorola, again, is
looking, I think, for more of a switching platform than anything
else, and we're going to continue to move ahead and be a leader in
Direct Connect, as I talked about with Nationwide rolling out and
now with priority access on Direct Connect that the government has
been asking for. So I feel real good about our position in that
space.
TOM WATTS: Great. Thanks very much.
OPERATOR: Thank you. Our next question comes from Mr. Luiz Carvalho
of Morgan Stanley. Go ahead, please.
LUIZ CARVALHO, MORGAN STANLEY: Good morning, everybody. Great job.
Great quarter. I have two questions. One is a clarification. Could
you just give us the MOU number for the quarter? That would be
great. But more importantly, from a question point of view is
wireless number portability, a lot of talk of course, and I would
like to get your views of the impact of wireless number portability
on the market and the impact on Nextel. Thank you. And once again,
congrats.
UNIDENTIFIED: You're welcome. Thanks a lot.
In term of MOUs, our average MOUs for the month were 650 per
subscriber. With regard to wireless number portability, you know,
from everything -- first of all, right now we have no reason to
believe that it's not going to happen, based on the government dates
that have been specified and the decisions that have been made. So
we will be fully prepared to have -- to implement wireless number
portability on time, as well as everyone else, I'm assuming.
By the same token, with regard to impact, there have been a lot of
speculation about a much higher churn level that every carrier will
experience. We have no doubt that it will actually increase churn.
However, we feel very confident in a world where churn increases,
given our ability and our past performance of taking customers from
competition. We will be a net winner with wireless number
portability. So while we see churn going up, we see Nextel also
being a net winner.
LUIZ CARVALHO: How much up do you think churn will go?
UNIDENTIFIED: I cannot speculate on that, I really can't. It will be
higher, but I don't think anybody knows, until we see how the
various carriers respond to wireless number portability. That is a
huge variable. There's a lot of range of actions people can take,
from aggressively trying to attract customers to aggressively trying
to defend, and given that we have no knowledge of where they will be
with that, it's hard to predict it.
LUIZ CARVALHO: Thanks.
OPERATOR: Thank you. Our next question comes from Ned Zachar of
Thomas Weisel Partners. Go ahead.
NED ZACHAR, THOMAS WEISEL PARTNERS: Thomas Weisel. Thank you. These
are good numbers. It's a good start, so well done. Question on ARPU.
Could you -- is there any -- in the ARPU number of $67, is there any
effects from some of the reason we have heavy fourth-quarter
promotions that flowed through into the first quarter as opposed to
just seasonality. That's question number one. And with regard --
actually, why don't you start with that, if that's okay?
UNIDENTIFIED: Sure, there are some effects to ARPU based on what we
did in fourth quarter. As you recall, we had our break-through plans
that were put in place for November and December, and there are some
impacts from it. However, if you look at the trend basis over the
last several years, it's not a significant impact versus the typical
trending we've seen in overage. Those plans, as you will also
recall, were eliminated on February the 1st, and actually, even when
you look at migration, we've actually seen an increase -- a net
increase in access on migration since that period of time.
NED ZACHAR: Second question: Could you give us an update as far as
the customer mix is concerned, individuals versus government and
enterprise, et cetera, et cetera?
UNIDENTIFIED: Well, as I said in my comments earlier, we ended this
particular quarter with about 2 -- with 2.3 million government and
enterprise subscribers. Our general business, we ended at 5.8
million. And we ended with 3 million high-value individual
purchasers.
OPERATOR: Thank you. Our next question comes from Frank Governali of
Goldman Sachs. Go ahead, please.
ROB BARRY, GOLDMAN SACHS: It's Rob Barry (ph) for Frank. Just a
question on the churn, which was very impressive, by the way. Could
you talk about two things. One, you mentioned in the --
UNIDENTIFIED: Hello?
OPERATOR: One moment, please. Mr. Barry, we are unable to hear you.
If you would please check the mute on your phone?
UNIDENTIFIED: Go to the next question, operator.
OPERATOR: Thank you. Our next question comes from Colette Fleming of
UBS Warburg. Go ahead, please.
COLETTE FLEMING, UBS WARBURG: Yes. You made some comments about the
sequential lift you're expecting in 2Q ARPU. Last year, we saw about
a $3 lift, but I understand that that included some price increases,
and I guess I'm trying to get at what kind of lift would you
anticipate, because I don't really have a feel for the government
sector, where they go with overage. I don't know if it's -- if
there's more overage related to a second quarter, if they have
seasonality in that business versus something like the construction
industry, which I would think was hampered in the first quarter with
weather and maybe you could see good, you know, overage in the
second quarter. If you could just give us a feel for what kind of
sequential increase you would expect to see.
UNIDENTIFIED: Well, to begin with, even though government has some
impact, you -- I mean if you look at the size of the government
base, compared to the total base, it's still fairly small. What's
going to drive it really is going to be the general business
category, enterprise, as well as the high-value individual
purchasers. And looking at the trends that we've seen, we believe we
would see at least a dollar incremental lift in second quarter.
COLETTE FLEMING: Okay. Thanks.
OPERATOR: Thank you. Our next question comes from Jon (ph) Atkin of
RBC Capital Markets.
JON ATKIN, RBC CAPITAL MARKETS: I wonder if you can tell us where
you ended the quarter on churn and what type of churn trends we can
expect for the next couple of quarters prior to number portability,
and then on the 6:1 vocoder, how quickly do you anticipate
penetrating the base with 6:1 vocoder phones? And just on cell
sites, how many do you plan to deploy this year, and how many did
you deploy during the quarter?
UNIDENTIFIED: Okay. Let me get these all straight. In terms of
churn, we ended the quarter at 1.9%. We believe that over the course
of this year, we have an opportunity to continue to perform at
approximately 1.9 to 2%, and possibly improve that. Obviously, the
wildcard is what happens in fourth quarter with wireless number
portability. In terms of cell sites, we built 128 cell sites in the
first quarter, which I think gives us a total of about 16,429 or
some round number about there, and in terms of this year, we would
expect to construct approximately 1,500 cell sites.
JON ATKIN: And on the data side, are there any updated thoughts on
iDEN or any other technology that gives you a faster data
throughput?
UNIDENTIFIED: At this point in time, we are still very satisfied
with the data speeds that we're getting from our current technology,
as we stated in other calls. Our technology development group is
continuing to look at a variety of technologies and including some
testing to understand what they will deliver versus where we are.
Given the applications and the take-up of those in our current
network versus what we've seen with competition, we're right now
very clearly happy with what we have.
JON ATKIN: And then just on the phones, so the -- what is going to
be kind of the ramp of -- of penetration for the 6:1 vocoder phones,
and is the ramp of GPS equipped phones going to parallel that, or
would it be any different?
UNIDENTIFIED: Well, every 6:1 phone that we will introduce will be
GPS capable, so as we begin the ramp, which will begin in fourth
quarter this year, we will start having phones coming out. The first
one will be available, I believe, in August of this year, and we
will be introducing new models at a rate of about one per month
through about the first four months.
So you will see the ramp begin to take off at that point in time,
but the real ramp that you will begin to see, both because of the
churn, upgrade programs, et cetera, as well as new gross adds, the
most significant piece will start taking place in first and second
quarter of '04.
JON ATKIN: Great. Thank you very much.
OPERATOR: Thank you. Our next question comes from Rob Barry of
Goldman Sachs. Go ahead, please.
ROB BARRY: Okay. Thanks. Is that better? Can you -- is the line
working now?
UNIDENTIFIED: It is.
ROB BARRY: Okay. Great. Sorry about that. Forgive me if the question
has already been asked in my absence. A question about the churn and
one where you see it trending for the rest of the year, and also if
you could just give a little more detail on the touchpoint strategy?
You mentioned that you were targeting customers and trying to
address specific key problems that they had. Can you talk about what
some of the main issues have been with the customers and how you've
been targeting them? Thanks.
UNIDENTIFIED: Okay. We ended the quarter at approximately 1.9%
churn, and we expect to perform at about that same level for the
balance of the year. The wildcard is wireless number portability in
fourth quarter, which we talked about a little early.
As far as the touchpoint strategy is concerned, the real focus of
that strategy is the fact that customer care is where problems
reside. The point is, how do you solve the problem before it gets
there. So the whole touchpoint strategy is how we go back and look
at all of our processes in terms of how every functional touchpoint
that we have either creates a satisfying experience or a
dissatisfying with the customer, identifying what those are, and
working with each functional area of our business at every
touchpoint to be sure that we're removing those dissatisfiers. It
also means taking a much stronger look at our customer and life
cycle management, both in everything from the welcome call that
brings them in all the way to how we interact with them based on
understanding their propensity of usage, ARPUs, et cetera, to
understand when and where we need to contact them, how to contact
them, and with what offers to retain them.
So it's really a very complete, thorough strategy that looks at the
customer from the day we get them to the day we lose them, to
understand the touchpoints and importance of them, and understand
what we can do at every point in order to satisfy them.
ROB BARRY: Would you mind just giving a little color on what some of
the main dissatisfiers have been?
UNIDENTIFIED: Well, I mean for us, going through a -- last year in
particular, a conversion of both the billing system as well as the
outsourcing of our customer care operation, we went through a
service period. So the first step was making sure that our service
levels were appropriate in all of our call centers, and today
they're frankly the best -- our service -- our service levels are
the best that we've ever had.
Another issue has been billing issues. In the past with the older
billing system that we had, we had a lot of issues that we had to
deal with in terms of multiple databases, the ability to access
customer information, report on it accurately, et cetera.
Today with our new billing system and a single database of record,
we have the opportunity for lots of people who have to impact the
customer to be able to access the same data on the same customer in
real-time, and to be able to provide good answers.
Also, with the churn model and also the collection model that we
have, we now have an opportunity to respond more quickly and with
much greater accuracy to questions on billing and then provide an
actual first-call resolution on those. So the three things that I
mentioned earlier, both in terms of the activation process, the
accuracy of the billing process, the ability to respond on the first
call and resolve a problem, the ability to reduce call transfers --
all of those things are all contributing to our ability to better
serve the customer.
ROB BARRY: Great. Thank you.
OPERATOR: Thank you. Our next question comes from Cannon Carr of
CIBC World Markets. Go ahead, please.
CANNON CARR, CIBC WORLD MARKETS: Hey, everyone. Just a couple of
questions. On -- looking at the handset subsidies again, you
mentioned they'd gone up a little bit on the acquisitions side, and
also if my math is right, it looks like the average handset subsidy
is about 136 over gross adds, you know, which is up substantially,
you know, just -- or it continued to trend up. Where does that
ultimately end up, and maybe could you comment a little bit just on
the replacement rate you're seeing each quarter as well?
UNIDENTIFIED: Okay. Let me just address first the number that you
raised. Actually, our subsidies is below 100. I think what you have
in the number that you pulled out, you're including upgrades and
some of the costs of boost handsets.
CANNON CARR: Yeah, that's right. Well, there's some boost in there,
and there's the replacement upgrade numbers as well.
UNIDENTIFIED: Right. And I think I'll refer you -- there is a page
on the CPGA, which, you know, you start there and you have to take
some -- you know, some costs out of the $140 million that's provided
in one of the attachments. As far as the -- also the handset, in the
quarter it was just a question also of mix. Our mix was not as
favorable because we ran out of some of the products in a certain
category. What was your other question?
CANNON CARR: Just the replacement rate as well as just for the
quarter.
UNIDENTIFIED: Replacement rate. Upgrade?
CANNON CARR: The upgrade rate.
UNIDENTIFIED: The upgrade is not inconsistent with what we've seen
in fourth quarter, third quarter, et cetera. It's basically flat.
CANNON CARR: So around -- I think it's like four or five percent.
UNIDENTIFIED: Right. Yeah.
CANNON CARR: Okay. And just one other question, too. What -- any
updated thoughts on how to use the shelf that you've filed?
UNIDENTIFIED: I think our shelf, as I mentioned in my remarks, is
just really geared to give us the flexibility over the next couple
of years to just really look at our balance sheet and look
opportunistically at ways potentially of refinancing our balance
sheet.
CANNON CARR: Okay. Great. Thank you.
UNIDENTIFIED: Thanks.
OPERATOR: Thank you. Our final question will be taken from Will
Power of Robert Baird. Go ahead, please.
WILL POWER, ROBERT BAIRD: Good morning. Thanks for taking the
question. A question on bad debt. Very nice improvement in the
quarter, and I wonder if you could touch on some of the key drivers
to that. I guess, it could be incorporated in the touchpoint
strategy as well.
And then as part of that, I think Paul indicated that on an
annualized basis, that could improve EBITDA by $200 million. Does
that imply, then, that you think you can maintain kind of a mid-2%
level for bad debt over the remainder of the year? Thanks
UNIDENTIFIED: Well, let me start with the last part. We expect --
we'd like to keep the bad debt at 2.5% or better even, so -- and a
lot of this is a result of a lot of the initiatives that we spoke
about all of last year. You remember we talked about better
screening tools, and I think the other thing that we also mentioned
in prior calls is that the new Ensemble billing platform that we've
implemented is giving us a significant lift in the productivity of
our collection function, and as a result of that, they're doing a
whole lot more proactive calling for collection. And so as a result
of all of these things, you've seen our actually receivable balances
come down as a result of a lot of these initiatives. The quality of
our subscriber base is even higher, and as a result of that, you're
seeing that our bad debt, basically our aging, is improving
significantly, our days outstanding is at 38, and actually our
reserves is quite adequate, and our write-offs are down for the
quarter. They're pretty much in the line with the bad debt expense
that we've reported. So it's a combination of a lot of these
initiatives that we had put in place last year.
UNIDENTIFIED: I'd also add to that that the customer experience has
also improved significantly, too. While it is collections, and while
it is collecting money and trying to manage bad debt, the reality is
with the better tools, this has freed up not only more time for
calling but also more time for resolving problems on the phone as
opposed to just collecting money, which has also contributed to an
improvement in churn and also contributed to a reduction in non-
pays.
WILL POWER: Thank you.
OPERATOR: Thank you. Unfortunately, we are showing no further time
for questions. At this time, we will be turning the time over to Mr.
Blalock once again.
PAUL BLALOCK: Thank you very much for joining us today. That
concludes our call.
OPERATOR: Thank you. This concludes Nextel's financial call. Thank
you all for your participation. |
