SentinelOne Inc

NYSE:S

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon and thank you for standing by. Welcome to the Sprint Fiscal Fourth Quarter 2017 Conference Call. During today's conference call, all participants will be in a listen-only mode. Following the opening remarks, the conference will be opened for questions.

I would now like to turn the call over to Mr. Jud Henry, Vice President of Investor Relations. Please go ahead, sir.

[Jud Henry, Vice President-Investor Relations]

Good afternoon, and welcome to Sprint's fiscal 2017 year end conference call. Joining me on the call today are Sprint's Executive Chairman, Marcelo Claure; and our President and CEO, Michel Combes; as well as our CTO, Dr. John Saw.

Before we get underway, 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 today, we will be discussing forward-looking information which involves a number of risks and uncertainties that may cause actual results to vary 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. Before I turn the call over to Marcelo, I would like to highlight a couple of new disclosures this quarter as we continue to deliver transparency and evolve our business in the marketplace and with the latest accounting standards.

First of all, we are changing the presentation of the income statement to break out leasing components as they become material. We have provided all of this information historically as supplemental disclosures, but we'll now break them out on the basic financials.

Equipment revenue will now be broken into two lines on the income statement to separate lease revenue, stated as equipment rentals from revenue from equipment sales under other purchase methods. We'll also on lease devices, which was previously included under net on the income statement, will now be broken out separately as a line called cost of equipment rentals.

In addition, we're making changes to the cash flow statement. We will now reflect the cost of all lease devices added to PP&E as CapEx, previously only lease devices in our indirect channels were recorded as CapEx, while direct channel leases reflected as a change in inventory.

Lastly, I want to highlight that our results for the fourth quarter and future quarters include the introduction of a program to reward tenured prepaid customers with access to postpaid offers under their respective brands. Given the changing dynamics that we see in the marketplace with prepaid customers having more options for unlimited data plan across the postpaid carriers, we want to provide select prepaid customers that opportunity while staying with the brand they love.

As a result, we had approximately 44,000 net migrations from prepaid to non-Sprint branded postpaid during the fourth quarter. In addition, we recognized a base adjustment of 167,000 between prepaid and postpaid.

I will now turn the call over to Marcelo to provide you an update on our transformation.

[Marcelo Claure, Executive Chairman]

Thank you, Jud, and good afternoon, everyone. There has been so much exciting news this week, I would like to take a moment to discuss those with you. First, we announced a transformative transaction to combine with T-Mobile. This combination will accelerate the U.S. position and our leadership opportunity to rapidly bring the first and best nationwide 5G network to market with the breadth and depth needed to fuel a giant wave of innovation and disruption throughout the entire marketplace including rural America.

Couple this with the pro consumer strategy wireless and beyond, and the result we'll see U.S. consumers and businesses, getting immediate benefit from integration and ultimately, be served with an incredible set of amazing and innovative service offerings at lower prices in areas well beyond the traditional wireless business.

Let me just reiterate this point. This lower prices are due to a significant reduction in cost per bit with 5G, which will be a competitive advantage for the new company. The combined company will put America first and force the competition to invest and do better for consumers, while accelerating the creation of jobs and supporting business opportunities for the U.S. economy.

Let me reinforce that we expect the new company to be a net creator of jobs from day one. The transaction is expected to create a normal shareholder value through significant cost synergies with an NPV of $43 billion through a single network, rationalized distribution and SG&A efficiencies. Ultimately, planning to deliver over $6 billion of annual run rate for synergies.

Now turning to Slide 5. We announced this afternoon that I will be taking on the role of Executive Chairman of Sprint and Michel Combes will assume the role of Chief Executive Officer. Let me be clear that while I'm shifting my focus, I'm not leaving.

The main reason for effect in this change now is to collaborate with John Legere on securing regulatory approval over the next nine to 18 months. That is the most important goal to optimize in shareholder value. This is going to give me the capacity to focus on securing regulatory approval without compromising the day-to-day operations.

Michel will focus day-to-day on executing our standalone plan. However, I'm still responsible for deliverance of Sprint's operating performance and financial results to SoftBank. In addition, I plan to work with SoftBank Group companies and portfolio companies to introduce them to Sprint as a combined company, to deliver new business models.

SoftBank have made great investment, that will require great 5G network in the U.S., including autonomous cars, robotics and artificial intelligence among others. The organization is ready for this leadership changes. We have a clear plan that we're executing and the team has built operating momentum to the first four years of our turnaround.

We have a world-class management team that I trust. Michel is a proven successful telecom leader with 25 years of experience, both in the U.S. and globally. Since joining Sprint, Michel had been a great ally to me and he has quickly won the respect of the Sprint team, while driving the team to deliver results. We expect this change to take effect in the next 30 days or so, once we have a new CFO in place, and that process is now underway.

In addition, SoftBank Group announced that I had been appointed as Chief Executive Officer of SoftBank Group International and Chief Operating Officer of SoftBank Group Corp. In my new management role of SoftBank, my main responsibility will be to optimize synergies across Group companies and how they can work with Sprint and ultimately, the new company.

In addition, I'll continue to be responsible for SoftBank's ongoing investment in Sprint and the combined Sprint T-Mobile company. I look forward to continue to work with the Sprint board and management team on our turnaround, and planning integration with T-Mobile. Both Softbank and Sprint are fully committed to deliver an American consumer with the world's best and fastest 5G network, and together with T-Mobile, we intend to fulfill that vision.

Next, let's step back and look at our turnaround over the last four years that have led to our best ever financial results in fiscal 2017 on Slide 6. We have taken out nearly $6 billion across cost of service and SG&A. We reported our highest adjusted EBITDA in 11 years. We have reversed our operating losses for across three straight years of operating income as well as returning the company to generating net income for the first time in 11 years, and we have reversed with negative cash flow trend to deliver two consecutive years of positive adjusted free cash flow. It is because of this, that we have positioned Sprint to have great strategic options, which led to a merger with T-Mobile at a price per shareholders.

Next I'm excited to share with you fiscal 2017 results, achieving another milestone in our turnaround on Slide 7. I'm particularly proud of our employees for delivering these results in the phase of the many distractions are noticing the media around potential strategic opportunities for Sprint during the course of the year. I'm happy to report that we have the best financial results in company history in fiscal 2017 with our highest ever net income and operating income. This improved profitability was propelled by the transformation in our cost structure as fiscal 2017 marked the fourth year in a row of at least $1 billion of net reductions to cost of services on SG&A.

Furthermore, we delivered positive adjusted free cash flow for the second year in a row, despite a nearly 7% increase in network CapEx. At the same time, we balanced growth and profitability to deliver highest retail phone net additions in five years in fiscal 2017. In addition, our network continued to improve as demonstrated by Ookla Speedtest data, which shows Sprint's network was the most improved of any national carrier in fiscal 2017, in terms average download speeds.

Turning to Slide 8, fiscal 2017 was another remarkable year of customer growth as we delivered postpaid phone net adds in all three of our customer groups of consumer postpaid, business and prepaid. All postpaid phone net adds in fiscal 2017 were 606,000, which marks the third consecutive year of growth with nearly two million phone net adds in the last three years.

In the fiscal fourth quarter of 2017, we had 55,000 postpaid phone net adds, consistently growing our phone base for the 11th consecutive quarter. The full year and fourth quarter results included 44,000 net migration from prepaid to non-Sprint branded postpaid as John mentioned earlier. We beat it hopefully again this quarter and we have now delivered more postpaid phone net adds than AT&T in 13 of the last 14 quarters, and more than the rise of for second over the last nine quarters.

This achievement was based on our highest postpaid phone gross add in six years. Postpaid phone churn was 1.62% for the year. We recognize that our churn is higher than our peers, but we're confident that fiscal 2018 will be the peak of our churn rate and that it will improve year-over-year in 2019 and beyond, as we work to deliver a fast and reliable network, improved customer experience and we simplify our service and device offers. All postpaid phone churn in fiscal fourth quarter was 1.68%, our respect to remain relatively flat as we move into our first fiscal quarter of 2018.

It is important to remember that while there's some incremental churn in fiscal 2018, we sort of introductory price and promotions expire, we also expect that bigger benefit to revenue as customers begin paying more each month, which is accretive to ARPU and service revenue going forward. Likewise, while leasing creates some incremental churn, the overall economics of leasing are accretive to the business, giving us comfort that running the business at a higher churn rate.

Another of our postpaid success was returning to postpaid phone growth with business customers and continuing to build momentum, attracting 43,000 new logo of last year, with phone gross adds up 32% year-over-year and the lowest churn in over five years. Our small and medium business has delivered positive phone net-adds for the last seven consecutive quarters, and our enterprise group has had positive phone net adds for three consecutive quarters and our interest for phone churn improved almost a full percentage point year-on-year.

Now let us discuss about prepaid, this has been amazing story, where we returned to growth with 363,000 net adds, that's a remarkable improvement of 1.4 million compared to losses of over 1 million, one year earlier, and positive, for the first time in three years. We think the addition in fiscal fourth quarter of 170,000, were up year-over-year before migrations to postpaid. We have the highest prepaid share of gross adds in two years this quarter. Meanwhile, prepaid churn in fiscal 2017 was 4.58%, which was the lowest in three years that has improved year-over-year for seven consecutive quarters.

Turning to Slide 9. We recognize that to be truly a great company, we have to have a great product, which for us, is our network. While our network is much improved, we believe that our next-generation network will truly differentiate Sprint over the next couple of years due to the strong spectrum asset that will allow us to deliver gigabit download speeds and position Sprint to have an LTE network with competitive coverage and be the network leader in speed and capacity.

By building a strong foundation in LTE, we then pave the way for a robust 5G network to take the customer experience to a whole new level. We built good momentum in our next-gen network deployment in fiscal 2017 and expect to accelerate in fiscal 2018. First, we upgraded thousands of our existing macro sites in fiscal 2017 to an LTE on 800, 1.9 and 2.5 sites are like those brands. Previously, as we work in tri-band in nearly all of our existing sites with all three spectrum brands to provide great coverage and capacity across the footprint.

We have successfully transitioned our macro deployment to focus on upgrades to deploy more of 2.5 spectrum to our customers. Permitting, which secure hurdle in any carrier macro deployment is currently ahead of plan and building a strong momentum for deployment this year. We now have two of our deployed on roughly 60% of our macro sites and expect to complete the substantial majority for tri-band upgrades by the end of fiscal 2018.

In addition, we have deployed thousands of traditional outdoor small cells with various vendors as well as thousands of strand mount of small cells incorporation with our cable partners. In fiscal fourth quarter alone, we deployed more outdoors small cells than the previous two years combined. Also, we launched the Sprint Magic Boxes exactly one year ago, and have really deployed more than 200,000 Magic Boxes to businesses and consumers in approximate 200 cities across the country, making this one of the largest small cell deployments in the U.S., and I would plan to deploy more than 1 million Magic Boxes over the next two years.

Customers with the Magic Box are enjoying significant improvements in indoor and outdoor coverage, as well an average increase in average download speeds of more than 200%. We're very proud with the Magic Box, we won the 2018 Global Mobile Award or Globo, for best mobile technology breakthrough in rural Congress. We're also well underway going now 256-QAM and 4x4 MIMO nationwide to improve the efficiency of our spectrum and drive even faster data speeds.

This technology combined with three channel carrier aggregation, the 60 megahertz of 2.5 gigahertz spectrum will enable us to provide consumers with gigabit plus LTE service in more than 100 of the largest markets in the country. This network improvements, particularly the finest footprint of spectrum are both macro and small cells is delivering performance improvement as seen in Ookla's Speedtest Intelligence data. For example, Sprint saw 36% increase in national average download speeds year-over-year. This is the largest increase of any national carrier. Furthermore, Sprint is number one for fastest average download speed in over 100 cities, more than twice as many cities as last year and more than AT&T for the third consecutive quarter.

Going forward, we're excited to implement our new roaming agreement with T-Mobile as part of our merger agreement to provide additional coverage for our customers. With this agreement, Sprint customers will have access to the Sprint and the T-Mobile network. This agreement is effective immediately and should be implemented in the next 60 to 90 days. Meaning our Sprint customers will have access to the best of Sprint and the best of T-Mobile.

Now let me tell you about the other element of our next-gen network plan that we're super excited about and that is the rollout of Massive MIMO. It leverages our rich team of 5 gigahertz spectrum and create strategic advances for Sprint. Massive MIMO involves deployment of a new integrated unit that will have 128 and 10 elements with 64 transmitters and 64 receivers. And deliver capacity increase of up to 10 times in LTE relative to current LTE systems, while also increasing coverage and cell edge performance.

More importantly, because only Sprint uses TDD spectrum versus our competitors who use spectrum, many of our customers will be able to instantly take advantage of the significant performance enhancement on their existing devices. Whereas Massive MIMO on our competitors FTD spectrum will require new devices for their customers. We are now in full launch of our Massive MIMO program. We have formed dedicated cross organizational teams, initiated testing and committed over $0.5 billion in purchase order with our suppliers.

We are deploying innovative 5G technology such as Massive MIMO as we referred to launch the 1st 5G mobile networks in the first half of 2019 as shown on Slide 10. Massive MIMO radios are software upgradable to 5G NR, allowed us to fully utilize spectrum for both LTE and 5G simultaneously. While we have capacity further with 5G and support the new 5G use cases. 2.5 gigahertz is a switch for 5G, and our midband frequency spectrum provides an ideal balance of coverage, capacity on a speed to develop mobile 5G.

As a result, Sprint is the only carrier that doesn't have to compromise what 5G can deliver because we can utilize the super wide channels of more than 100 megahertz while still delivering mid-band coverage characteristics. With more than 160 megahertz of 2.5 gigahertz spectrum available in the top 100 U.S. markets, this gives Sprint the largest nationwide block of sub 6 gigahertz 5G spectrum available. Sprint's priority is mobile 5G, and we expect to provide commentary services and devices for the first half of 2019.

Furthermore, on Slide 11, we're optimizing and expanding our smart distribution to lower the average cost per transaction, increased our brand presence and better serve our customers. We opened our 500 new Sprint company-owned stores in fiscal 2017. In addition, we opened nearly 800 new Boost stores last year and completely remodeling another 500 stores with the largest format and furnishings, which are proven to deliver greater productivity on a same-store basis. We plan to add 100s more Sprint and Boost stores throughout this year, while also updating more featured stores to be more productive and approaching.

And we continue to enhance our additional capabilities and I'm proud to say that our postpaid sales in our data channels were up roughly 30% year-over-year in fiscal 2017. This now continues to be a key pillar for transformation process to create a great relation and experience for customers to activate new services of the device that perform various account function seamlessly as it’s convenient.

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

[Michel Combes, President and Chief Executive Officer]

Thank you, Marcelo. Moving to revenue on Slide 12. Consolidated net operating revenues were $32.4 billion for fiscal 2017 and $8.1 billion for fourth quarter. Wireless service revenue was $22.6 billion in fiscal 2017, which declined 5% year-over-year and it was lower decline in the last four years as our revenue trend continues to stabilize.

For example, in the fourth quarter, our wireless service revenue of $5.6 million were relatively flat sequentially. We continue to expect these trends to deliver year-over-year growth in quarterly wireless service revenues by the end of fiscal 2018, excluding the impact of revenue recognition changes.

Postpaid phone average billings per user of $68.88 in fiscal 2017 were relatively flat year-over-year on a normalized basis. We expect underlying postpaid phone ARPU trends to moderate as we head into fiscal 2018 for now exit ARPU of $50.44 into the fourth quarter, excluding the impact from revenue recognition changes.

The stabilization is driven by a combination of best customers rolling off promotions and increasing their monthly spend with us, while we look to continue to increase acquisition ARPU with less promotional discounts on multi-lines as we grow for fiscal 2018.

At the end of the year, 18% of our postpaid phone base was on unsubsidized rate plans. This leaves only about 10% of our postpaid phone base to be transitioned to unsubsidized rate plans, assuming that penetration will level off around 90% due to business and other legacy plans. Meanwhile, our prepaid ARPU grew year-over-year to $37.67 in fiscal 2017.

Regarding our operating expenses on Slide 13, we continue to execute on our cost transformation in fiscal 2017 with four consecutive year of $1 billion or more of net reductions to cost of services and SG&A expenses, bringing our total reduction in the last four years to $6 billion as it has been highlighted by Marcelo. We realize $1.1 billion in net reductions in combined operating expenses year-over-year across cost of services and SG&A, when you adjust for the hurricane and other non-recurring impacts each year.

Cost of services of $6.8 billion in fiscal 2017 was down 13% year-over-year, driven by changes to our device insurance program as the program revenue and cost are accounted for and reported on net basis as well as lower network expenses.

SG&A expenses were $8.1 billion in fiscal 2017 and were relatively flat, compared to a year ago, as the year-over-year increases in sales and marketing expenses from increased retail distribution investment were mostly offset by lower bad debt and customer care expenses.

We remain focused on our cost transformation to deliver net cost reductions year-over-year in fiscal 2018. We continue to aggressively drive gross reductions across cost of services and SG&A, driven by several initiatives, including sales channel mix and compensation efficiencies, backhaul optimization, lower bad debt and more efficient marketing spending.

Net reductions in fiscal 2018 are likely to be less than $0.5 billion after strategic investments in growth platforms for the business, including our next-gen network to provide a great LTE experience, while building the foundation for 5G in 2019 as well as continuing to expand our retail distribution for both postpaid and prepaid. Our focus will be on optimizing our cost structure in order to invest in our network, in our value proposition and in our smart distribution.

Now turning to Slide 14. We delivered record profitability metrics in fiscal 2017 while simultaneously delivering the highest retail phone net adds in five years. This reinforces our strategy of balancing both growth and profitability through our relentless focus on cost reduction, operating efficiency and compelling value propositions.

Our adjusted EBITDA of $11.1 billion in fiscal 2017 was the highest in 11 years and improved by 11% compared to a year ago. Fourth quarter adjusted EBITDA of $2.8 billion were the highest for our fiscal fourth quarter in 12 years. Operating income of $2.7 billion in fiscal 2017 was the highest in company history and improved by 55% year-over-year. Operating income for the fourth quarter was $236 million, marking the ninth consecutive quarter of positive operating income.

Moving to Slide 15. Sprint reached another significant milestone in fiscal 2017, generating net income for the first time in 11 years, even after excluding the one-time impact of tax reform. Fiscal 2017 net income of $7.4 billion or $1.85 per share including $7.1 billion or $1.77 per share of one-time benefit from the enactment of tax reform during the year, this represents a significant improvement over the net loss of $1.2 billion or $0.30 per share in fiscal 2016. Net income for the fourth quarter was $69 million or $0.02 per share, compared to a net loss of $283 million or $0.07 per share in the year ago quarter.

Turning to Slide 16, total cash capital expenditures were $10.8 billion in fiscal 2017, compared to $6.9 billion a year-ago. As Jud noted in the opening, we are now including the cost of all lease devices added to PP&E in CapEx as opposed to just lease devices in indirect channels previously. Excluding capitalized device leases, cash capital expenditures were frequent beaten in fiscal 2017, up nearly 70% compared to the fiscal 2016, with year-over-year increase driven by the ramp up of our next-gen network initiative.

Network CapEx for the fourth quarter came in lower than what we had guided, but we did see momentum building for the quarter and our highest CapEx guidance for fiscal 2018. Some of the impact is just timing of activity that rent in the fourth quarter of 2017 and some of the cash payments will be reflected in the first quarter of 2018.

Additionally, we have seen rates favorability as many of the upgrades to existing macro sites that have been completed so far, are coming significantly less than we had been forecasting. Fiscal year 2017 net cash provided by operating activities of $10.1 billion, improved by $13.4 billion year-over-year primarily due to the modification of our accounts receivable facility in February 2017.

Adjusted free cash flow was $945 million for fiscal 2017, up 56% from $607 million in fiscal 2016, marking the second consecutive year of positive adjusted free cash flow. We also continue to strengthen our balance sheet as we raised $5.4 billion of capital in the fourth quarter of 2017 to prefund our capital development plan. This activity including issuing $3.9 billion in the second tranche of Spectrum backed notes until weighted average rate of 4.93%.

In addition, given the rising rates in the capital markets, we also tapped the high-yield markets opportunistically for 1.5 billion eight-year notes. As we've built on our strong results in fiscal 2017, let's turn the page to our fiscal 2018 guidance on Slide 17. We expect adjusted EBITDA of $11.3 billion to $11.8 billion, driven by stabilizing service revenues and continued focus on improving our cost structure.

This guidance excludes the impacts of the new revenue recognition spin-off that we are implementing with fiscal 2018results. We do not expect the new revenue recognition to have a material impact on operating revenue as lower service revenues earned and new accounting standards are largely offset in equipment revenue. We also expect the new standard to have a positive impact on SG&A, primarily related to the amortization of sales commission expenses, including these impacts from the new accounting standards, we expect adjusted EBITDA of 11.6 billion to 12.1 billion.

Similarly, we expect differentiation on leased devices in fiscal 2018 to be between 4.2 billion and 4.5 billion. Cash capital expenditures, excluding lease devices is expected to increase significantly year-over-year to be between $5 billion and $6 billion in fiscal 2018, as we deploy our next-gen network and prepaid for 5G in the first half of 2019. As a result of our increased capital program, we expect adjusted free cash flow to be negative by roughly $1 billion before rebounding in fiscal 2019 to around breakeven, even with a similar level of capital spending, $5 billion to $6 billion, as a result of operating cash flow improvements.

Thank you, and I will now turn the call back to Jud to begin the Q&A.

[Jud Henry, Vice President-Investor Relations]

Thanks, Michel. In just a moment, we will begin the Q&A. Please inform our participants on how to queue up for the question-and-answer session.

[Operator]

[Operating Instructions] And your first question comes from the line of Brett Feldman with Goldman Sachs.

[Brett Feldman, Goldman Sachs]

Thanks for taking the questions and Congrats to both Marcelo and Michel on your new roles, and I guess I'll start off with a question for Michel, as you think about that work ahead of you over the next 9 to 18 months as you discussed, as you sort of work through regulatory approvals, what are the sort of mission critical things you hope to complete at Sprint to make sure that the company is in the best position possible to quickly and efficiently integrate with T-Mobile?

[Michel Combes, President and Chief Executive Officer]

Good afternoon . Thank you for the question. So first of all, I get that, I’m innovative for the company, which has conducted a fantastic turnaround in the past four years under the leadership of Marcelo, so which means that we have a very strong platform and we have a strong management team in order to make it work in the coming months. When I look at the priorities, which are ours, but mine, but let as a priorities for the management team, the first one obviously is to continue the and just to make sure that we will deliver on all the targets, which are ours in this plan for 2018 and to be the first company to launch a 5G network by, let's say, the first half of next year so we would be the first one to have a real nationwide network nature.

Second, obviously, is to make sure that we prepare as much as we can, day one of the integration, meaning that there will be, for sure, an integration management, which will have to be organized in between the two companies. In order not to lose anytime as soon as we get clearance for these transaction, assuming that we get it. And third, supporting Marcelo, who is really going to lead the efforts in Washington from a regulatory point of view. We all know that it is the most critical issue for the months to come, and so the whole management will be there in order to support Marcelo and this show.

[Operator]

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

[Jonathan Chaplin, New Street]

Hi, thanks for taking the question. Just a quick one on the roaming agreement. My understanding is that this, the roaming agreement kicks in immediately. If so, and actually, if not, could you give us some thoughts around what do you think this might do to churn? I assume there's a fair amount of churn that is caused by subs that are in markets where your network isn't as strong as it could be. Thanks

[Marcelo Claure, Executive Chairman]

It's Marcelo. Thanks for the question. A couple of things that's really important is this agreement is a four-year term so this agreement will continue for the next four years. It's going to be implemented immediately. It takes anywhere between 60 to 90 days to basically connect our network to T-Mobile network. I think the main beneficiaries of this will be Sprint customers as now, if you're a Sprint customer, you're going to have access to the Sprint and to the T-Mobile LTE network, and we're excited to implement this roaming agreement as part of our merger agreement. This is mainly going to provide additional coverage for our customers.

Obviously, it's too early to tell the journey improvement that this will have, but logic tells you, if you are providing a better network experience, a network being – one of the main causes of churn, then we should look at this as net positive, but it's too – I will say way too early to quantify, and we're looking forward to – I've told John that we need to do this as soon as possible and I think in this process where with T-Mobile, we're working extremely collaborative in all fronts as you've seen it, there's a great desire for us to help and so this is going to be net positive for Sprint.

[Operator]

Your next question comes from the line of Philip Cusick with JPMorgan Securities.

[Philip Cusick, JPMorgan Securities]

Hey guys. One clarification and then a question for Michel. To be clear, the 44,000 prepaid to postpaid migrations, I think that was included in your 55,000 net add numbers? And the 167 base adjustment, is that the total number of postpaid today that are on non-Sprint brands? And then second for Michel, can you please give us an idea of what you expect handset depreciation to do this year? I'm trying to get that out to get closer to an apples-to-apples EBITDA number versus some other carriers.

[Michel Combes, President and Chief Executive Officer]

On your first question, in terms of customers of 44,000 are included in the 55,000, and base adjustment of 167,000 base adjustment made on the 1st January of 2018.

[Jud Henry, Vice President-Investor Relations]

Can you repeat your second question, Phil?

[Philip Cusick, JPMorgan Securities]

Okay, can you give me an idea of what you expect handset depreciation to do this year, I'm trying to get that out to get closer to an apples-to-apples EBITDA comparison.

[Jud Henry, Vice President-Investor Relations]

Yes, that was in Michel's remarks. We said 4.2 to 4.5.

[Michel Combes, President and Chief Executive Officer]

4.2 to 4.5, yes.

[Philip Cusick, JPMorgan Securities]

Thanks very much.

[Operator]

Your next question comes from Michael Rollins. [Citigroup]. Sir, your line is open.

[Michael Rollins, Citigroup]

Hi, thanks for taking the question. Was curious if you could talk a little bit more about the leasing impacts on churn, and if the leases has been now shrunk to 18 months, and you have more of those customers coming up each month or quarter that are on this shorter lease, how do you look at that in terms of the impact it could have?

[Marcelo Claure, Executive Chairman]

So since day one, we said that I mean, the best way to look at our leasing business, it is a highly profitable business. And what we look is the additional prospect that our leasing business generates and that is compared to the additional churn level that the actual costs that's generated by the higher churn, and we basically test that on a monthly basis. And it is the additional profit you get from leasing is substantially much larger than the churn that it generates, but we're not going to share how many basis points are because of leasing, but that is something that we made a decision to run the business a little harder in churn, and that's something – that decision has been made because it is more profitable for us to do it that way.

[Operator]

Thank you. Your next question comes from the line of John Hodulik with UBS.

[John Hodulik, UBS]

Sure. Two quick questions please. First – getting back to the roaming agreement. First of all, could you just clarify, are you guys still roaming onto the Verizon network? And will this new agreement with T-Mobile allow you to sort of completely move off of that network in terms of interest in route system roaming, that's number one. And then number two, big step-up in CapEx that we're all sort of ready for the $5 billion to $6 billion, is there a way considering the deal with T-Mobile, is there a way you guys can sort of shift that spending so that it’s sort of useful for you guys as a standalone basis? But maybe not redundant where the deal get approved and you guys just combine network? Is there a different way you're thinking of that spend now that you guys have signed the deal? Thanks.

[Marcelo Claure, Executive Chairman]

So from a roaming perspective, it is no secret that we roam with Verizon, with AT&T and with the multitude of different partners that we have. The new roaming agreement with T-Mobile, it is very attractive from an economics perspective in comparison to roaming rates that we've been paid – that we've been charged by Verizon and AT&T. I cannot tell you what those guys charge us, but it is, I mean, as close to armed robbery if you can, because I mean, they've been – it's terrible the way they've been charging because they were the only choice that we have. So this is definitely something very positive for Sprint because it gives our customers access to a network at substantially better economic rate. Now obviously, this is going to – this depends on the capacity and coverage of T-Mobile, but this is definitely a net positive – it definitely a net positive for Sprint.

Assimilation to network spend in anticipation of the potential approval, that is something that we're absolutely not make sense. We're going to continue to have the level of CapEx guidance that we have given it, and we're going to go full force. We are going to operate 100% as a standalone company and that is why you're seeing that we're going to continue with the plan that we have spoken about and that is we're continuing to expand the coverage of our network. We are upgrading our sites. We are deploying small cells. We are deploying hundreds of thousands of Magic Boxes. We're launching Massive MIMO in anticipation of 5G, and we plan to light up our 5G in our – for the first quarter, second quarter of 2019. So we will operate 100% independently and T-Mobile is operating, from what I understand, they're spending 100% independently.

Now, what makes this incredibly special is the fact that they are deploying their 5G network on 600 megahertz and we're deploying ours on 2.5, meaning this is 100% complementary and upon merger approval, it is quite easy in terms of basic you put these two networks together, and we're going to be able to enjoy the breadth and the coverage of TMUS 6 – our customers who want to enjoy the breadth and the coverage of TMUS 600 megahertz with the depth of our 2.5 in the series that we are along, that we have – decided we're going to light up first. So even for us, it's two completely separate plans, and we will continue to treat them separately. I think the fact that we're not building in the same bands, it is definitely positive as integration and the disruption of synergies is limited because there are two different brands.

John, I don't know if you have anything to add.

[John Saw, Chief Technology Officer]

No, I think you said it right. A lot of what we're doing today is building towards 5G future, that is also what we need for the combined company as well and there's a lot of synergy.

[Operator]

Your next question comes from the line of Simon Flannery with Morgan Stanley.

[Simon Flannery, Morgan Stanley]

Great. Thanks very much. I wonder if you could just talk about the outlook for service revenues in 2018. Obviously, we've got some 606 changes there, but you've got ARPU stabilizing. So when do you think you can turn positive on service revenues? And then Marcelo, any feedback from some of your meetings in Washington over the last day or two? Thanks.

[Michel Combes, President and Chief Executive Officer]

So on the service revenue first, and then I will turn to Marcelo. As you have seen, our service – wireless service revenue of $5.6 billion in the fiscal Q4 was flat sequentially and down 3% year-over-year. So for the fourth consecutive quarter, we are roughly on $5.6 billion, so which means that revenue is stabilizing quarter-over-quarter. Prepaid wireless service revenue grew year-over-year for the second consecutive quarter.

If you look at the year in total, our wireless service revenue was down by 5% year-over-year, which is the lowest decline in the last four years. Look, let's say, moving forward, we expect year-over-year growth in quarterly wireless service revenue by the end of 2018, excluding the impact of revenue recognition changes and that will be driven by the postpaid phone ARPU, which will moderate from the $50.44 rate, let's say, which should stabilize and the continued growth in retail phone customers at more stable rates drive improved revenue trends.

[Marcelo Claure, Executive Chairman]

Thank you, Michel. So Washington – I just got back from Washington today and we spent the last two days in Washington with John Legere, and the T-Mobile team and some of the members of the Sprint team. And we had a chance to go visit the SEC and go visit the DOJ, and basically go present the merits of a merger. I think we were – it is very early as you're aware. This is going to be a long journey, but overall, I would say that we are – I'm happy in the fact that we have been received with an open mind and they have said, both agencies or the first people that we met in the agencies, they both said that they're going to analyze our case with open mind. There's no preconceived notions, and like both John and myself have said, we feel extremely positive.

We have studied a lot in terms of what are the type of mergers that get approved. I think we were able to expose our case and explained that a why in – 5G is basically the foundation of what we're doing and why the combination for 600 and 2.5 spectrum will allow us to build what we believe will be the world's best 5G network and why, when you build the network with the type of capacity we plan to build, and capacity being a function or basic capacity being the main driver of pricing, why we're able to make commitments that we're going to be able to offer a better product and better prices.

We also were able to explain our job story and why we think this is a tremendous growth story and also explain the type of CapEx that we plan to invest post merger. So I think it's the first phase, and we look forward to continuing this journey together. I think the two teams work very well together, and we're both aligned to put our best foot forward in terms of getting this transaction approved.

[Operator]

Your next question comes from the line of Jennifer Fritzsche with Wells Fargo.

[Jennifer Fritzsche, Wells Fargo]

Great. Thank you for taking the questions. Two if I may. Can you talk a little bit, I know this was brought up on the call Sunday, but Sprint sized on the upcoming millimeter wave spectrum, I did see in the merger agreement that both companies are asking for the rights to participate, but what are your thoughts as to how that spectrum fits with what you have now? And then second, if I may, can you comment on the working capital burn and how you see that, what you see that line item looking like this year? Thank you.

[Michel Combes, President and Chief Executive Officer]

So as it relates to millimeter wave, I'm going to let John talk a little more, but in general terms, what everybody needs to be aware is we plan to continue to operate 100% as standalone and a millimeter wave spectrum is an important part of our strategy going forward, and I'm going to let John also explain why we think millimeter wave is a big part of our strategy.

[John Saw, Chief Technology Officer]

Thank you. Millimeter wave, it provides a lot of bandwidth so it comes – it can provide therefore, a lot of capacity and it complements our 2.5 gigahertz sub-6 5G solution really well, in areas where you need a lot of capacity, in hot zones and hotspots. I think it's very hard to build a 5G network on millimeter wave alone because that would drive a lot of CapEx and a lot of sites, but we view millimeter wave as something that we can add on as an overlay to 2.5 for hot zone purposes and hotspot purposes, and those are very useful for their application.

[Michel Combes, President and Chief Executive Officer]

For the working capital question, we should see an improvement in working capital year-over-year coming mainly from device working capital improvements, which is a result of – let's say, maturation of our base that more customers on lease, so more lease revenue and so lease cash coming in the company. So that's what you should expect year-over-year.

[Operator]

Your next question comes from the line of Amir Rozwadowski with Barclays.

[Amir Rozwadowski, Barclays]

Thank you very much for taking the questions and good afternoon, folks. Two, if I may. First, I just wanted to clarify, Michel, you had mentioned that you do expect sort of $1 billion of cash burn this year to breakeven next year. Is that correct of how we should think about things?

[Michel Combes, President and Chief Executive Officer]

Yes, it's correct. What we expect is that next year, with a same level of investments from a CapEx point of view, the improvements of the operations will allow us to let's say, come back to a deal with type of, let's say, cash for 2019.

[Amir Rozwadowski, Barclays]

That's very helpful. And then, if we can sort of decouple sort of your expectations from the big picture of how to think about the trajectory there, of the business, is that largely being driven by continued growth in service revenue on the premise of stabilized to improving ARPU levels? Or is that largely sort of reduced churn? Just trying to understand sort of the big picture of how you get there in terms of that improvement.

[Michel Combes, President and Chief Executive Officer]

For 2018, what I said is that, let's say, is backloaded in the year so we should see an inflation in terms of service revenue with the growth year-on-year, let's say, in the last quarter of the year, which will be the result of two things, stabilization of ARPU on one side as I've already mentioned and a slight increase of our customer base driven by the positive net adds that we have been able to flow in the base and that will continue to flow quarter after quarter.

[Amir Rozwadowski, Barclays]

Perfect. Thank you very much for the color.

[Operator]

Your next question comes from the line of Scott Goldman with Jefferies.

[Scott Goldman, Jefferies]

Hey guys, thanks for the taking the question. I guess one housekeeping and one question. On the housekeeping side, Michel, maybe you could just help quantify for us what the impact for revenue recognition will be around the shift from service revenue over to equipment revenue, to help understand what the impact will be going forward there. And then maybe for Marcelo. Marcelo, in the past, you've talked about the opportunity to maybe increase prices, narrow the gap you have with your peers on unlimited pricing. Obviously, the strategy for the combined NewCo may be a little bit different around pricing. How do you reconcile? How do you approach pricing this year?

[Michel Combes, President and Chief Executive Officer]

So on the revenue recognition standard, we don't expect a material impact on operating revenue as lower service revenue will be likely offset by equipment sales revenue so we should have, let's say, kind of shift in between service revenue and equipment sales revenue, but at the end, operating revenue should be, let's say, very – no material impact on those. As, so we should see an improvement, which is mostly due to timing of recognition for our sales commission expenses as these cost will be capitalized and expensed over time instead of immediately expensed as it is the case today. And we expect an impact of 200 to 500 for, let's say, for next year, 200 million to 500 million impact for next year.

[Marcelo Claure, Executive Chairman]

Great. As it relates to pricing, one thing we got to do is we've got to basically divide into the commitments that we're making in the future. I mean, that is pretty clear of building a super high capacity 5G network and as we said, capacity is a function of price and our function is a – price is a function of capacity. So that is one area. As it relates to the way we run Sprint, we will continue to run our business the same way we've done it right now. I mean, we have been the price leader. I will continue to be the price leader and obviously, that has yield results when you can put in a release that you have the best financial results in the history of the company, that means we are – we're generating the financial results that we can.

So at this point in time, we're going to continue to be the price leader, we've always been, and we're more excited than ever to be able to finish this transaction to even make this even bigger and better because as I said, the more capacities that you have, then your marginal cost to produce an extra bit of data then reduces dramatically, and that's where we can make the commitments that we will continue to be the absolute price leader while offering the best products.

[Operator]

Your next question comes from the line of Jeff Kvaal with Nomura Instinet.

[Jeff Kvaal, Nomura Instinet]

Yes, thank you all very much and congratulations on both of your appointments. I would like to ask a clarification and a question, I think on a clarification side. Could you please help us, Michel, with the impact to EBITDA of the accounting standard changes?

[Michel Combes, President and Chief Executive Officer]

Yes. Just – I just mentioned that, let's say, the impact would come mainly from the timing of recognition for our sales commission expenses, first will be capitalized and expensed time, instead of immediately expensed and what I've said is that you should expect an impact of $200 million to $500 million next year.

[Jeff Kvaal, Nomura Instinet]

Okay, all right. Great. And then secondly, I am wondering about the promotional plan a little bit and Marcelo, you are obviously committed to remaining as a price leader at the same time, it sounds as though you were willing to be a little bit less aggressive with your introductory offers and I'm wondering how you are balancing that.

[Marcelo Claure, Executive Chairman]

I mean, we look at the market on a monthly basis, and it depends on the competitive pressure of others. I mean, however, as you know, from the time we've taken the helm on Sprint, we haven't had a in terms of being very aggressive from cut your bill in half 50% off – four lines for 100, so we've been true to the strategy that we've had and the last one has worked quite well and that is bring customers paying for lines one and two, offer a couple of free lines to customers. They like our service and then after a year, we start charging for lines three and four and now, we have started basically charging customers for that and everything is going according to plan.

So we have a strategy that we set out since day one, and that is we have to change the perception, the quality of our network is substantially better in the perception so the strategies that we've take is one, we're aggressive on pricing. We let customers test our product and then we increase their bill just a little bit, but always even after their increase, we continue to be the price leader against our competitors, and that's working, and that's going to continue to work, and that's pretty much the same strategy that the combined companies will have. I will say, however, with a much bigger advantage with the capacity of the combined company will have

[Jud Henry, Vice President-Investor Relations]

Thanks, Marcelo. That's all the time we have for questions. But before we end the call, I'd like to turn it back to Marcelo for some closing comments. If you have any additional questions following the call, please contact the Sprint Investor Relations team. Marcelo?

[Marcelo Claure, Executive Chairman]

Thank you. I want to thank, everyone, for joining us today and for your support of Sprint. Our fiscal 2017 results demonstrate, I would say another milestone in our five-year turnaround plan. We delivered customer growth. We delivered profitability and improved network performance and we've done all of those at the same time. We've delivered the highest retail phone net adds in five years. We continue to grow our postpaid customer business and prepaid customer base. We have improved profitability. We've delivered net income for the first time in 11 years. We have our highest operating income in company's history and we have our highest adjusted EBITDA in 11 years.

In addition, at the same time, we're aggressively executing our next-generation network and what that next-generation network is going to do, is going to deliver LTE or 4G parity, while deliver the first mobile 5G network. We continue to expand our physical and digital distribution. We are going to continue to always enhance our value proposition and continues to transform our cost structure. I'm so proud of what we have accomplished as a team so far in our turnaround, and I look forward to sharing more of our transformation success and our future goals.

Thank you, and have a great evening.