We're doing some interesting work with broadband and all of you have probably read or heard that we have a test going on with an OFDM technology, a 4G technology in Raleigh North Carolina, 125 sites and it is the Flarion technology. We're doing it for two reasons.
One, the question for us is where do we go from here? Sort of what's your network migration? Where are you evolving to? Of course all the usual suspects are around and some of the CDMA for example is a hell of a good technology and we're talking to the CDMA folks. But we're taking a look at some of these new technologies because they are disruptive and they're fast and they're efficient. Barry can give you a tutorial on our view of what we think cost has to be in order to successfully compete in the broadband market. But to us, looking at a Flarion technology that we think could be disruptive and be the fastest, largest pipe out there, has some appeal to us. But we don't know, as I stand here today, one, if it will stand up under the load. Two, what's the customer take going to be and how much are they willing to pay for it. It is for that reason that we're spending time, effort, and resource down in Raleigh to figure that out. We just started the tests from the network perspective. It's operating pretty well and Barry is putting a hell of a load on it. From the customer perspective, we're just getting started.
March 17, 2004 Wednesday
Nextel Communications at Merrill Lynch Global Communications Investor Conference - Final
DAVE JANAZO, MERRILL LYNCH: Good morning and welcome. My name is Dave Janazo. I am with Merrill Lynch Equity Research. I'm pleased to introduce Tim Donahue, President and CEO of Nextel. Welcome Tim.
TIMOTHY DONAHUE, PRESIDENT & CEO, NEXTEL COMMUNICATIONS: Thank you David. Good morning all. Thanks for attending. Thanks to Merrill for the invite and most importantly, a happy St. Patrick's Day. The only thing standing between me and green beer is you, so I'll try to be quick.
I want to spend some time talking about 2003 results and giving you some insights into 2004. We in the wireless industry, it is my view we're leading the US telecommunications industry in both growth and profitability. I think if you take a look at what has happened in the competitive bidding for the AT&T Wireless Network and the dollars that were paid for it, it seems to me anyway that it continues to re-emphasize the value of the wireless franchise. Of course we like that and as probably the last remaining independent wireless player in this country, we continue to look at enhancing value for the shareholders.
We have as you know made our business on sustainable differentiation in the market place through services, products, our ability to care for our customers and our network, and it is our intent to continue that trend.
If you take a look at the metrics, or our performance over the last 8-10 quarters, it has been gratifying and we have every intent to continue the type of performance that you've seen in the past from us. As I have been saying for the last couple of weeks we intend to meet, or exceed, the guidance that we have given in terms of our 2004 numbers and there is nothing from my perspective that's going to roadblock us from getting there.
Finally I'll talk a little bit about what I call disciplined investments in 2004. Investments in the network, especially the expansion to the network, investments in our brand - Nextel done - and investments in our new NASCAR sponsorship, which is turning into a fabulous partnership between Nextel, the fans, owners, drivers and NASCAR folks themselves. It has been great for us.
I want to start by showing you a slide on communications across the country and the pie chart breaks down revenue by segment. As you can see wireless revenue, which is shown in yellow, has grown to $97b in 2003. That now represents 29% of all telecom revenue and the annual growth rate of wireless service revenue was 10% in 2003. The bar chart on the right is interesting. If you take a look at that it will show you that wireless subscribers reached 157 million by the end of 2003, were about to go by wired access line and of course we're more than double in terms of lines the size of cable television and internet households.
If you also consider the penetration in this country, it is approximately 56%. If you look around the rest of the world at 70% and 80% penetration in some cases, you can see (at least from our perspective) that there is still an enormous amount of growth opportunity on the wireless side in the US.
More importantly, as the carriers continue to improve their network, both from a quality capacity and reach perspective, and as wireless becomes more and more a part of the fabric of what you do, it's part of your everyday life. Networks like Nextel understand and appreciate that. I think that wireless is on the brink of really exploding and I think - I'll talk a little bit more about both on the voice side and the data side - but from our perspective we see nothing but significant upside, especially if the industry continues to consolidate.
On the next slide we talk about Direct Connect, which as you know has been a hallmark of our company and a great differentiator for us. Direct Connect is now available to 250 million tops across the country. That includes us and our partner. As you all know our Direct Connect is instant. It is less than a second in terms of setting up a call and the Direct Connect look-alikes that have been introduced to the market, we have not felt them at all. As a matter of fact, it is our view that in one particular case a Direct Connect product that was introduced was such a poor product that it actually heightened the awareness of Direct Connect and good Direct Connects and it has frankly helped us. It is also our view that if you take a look at the technical hurdles against GSM or CDMA networks to get a Direct Connect product to perform like the Nextel product, you've got at least a two to three year period of time before they're going to get close. I think some of the early rollouts of the Direct Connect product, as disappointing as they have been, substantiates that statement.
We now have 90% of our customer base using Direct Connect and 40% of our customer base is now using nationwide. It has been more successful than we had anticipated. The fact that it is truly instantaneous from Honolulu to New York is frankly remarkable. We're getting a lot of pickup, especially with our business customers on a region basis Boston to Washington as an example. So we are very, very pleased with Direct Connect.
You also know that we're taking Direct Connect beyond the border. We're about to sign a deal with our friends in Canada. We're signing a deal with our friends in Nextel International (NII Holdings). An interesting story, we opened up the border between Mexico and California Baja. We just were stunned with the amount of traffic that went across the border. A lot of the traffic came from our Boost product, which I'm going to talk about in just a minute, which is our Prepaid product. Boost has been so successful and we've seen such usage on Direct Connect in just really one State - California. We have California and Nevada. We're going to roll that out in more States. But we've raised the rates on Boost. When was the last time you heard a wireless carrier talk about raising rates? And so we raised our Direct Connect rate from $1.00 a day to $1.50 a day. We're also going to be putting a surcharge on any calls that are coming across the border because the volume has been just remarkable for us.
We have over 6 billion Direct Connect calls per month now and that number for the first time in a couple of years we're seeing the Direct Connect usage actually growing more than we saw our Interconnect usage. So it gives you some insight into the power of this wonderful new product that we have put into the market place.
Now under future enhancements you can see we're going to open up, as I said with [Schindler] and the NII folks. We're going to be in Brazil, Argentina, Peru and Mexico, and we expect to have that done by midyear. We're getting the circuits in place now. We're putting the final touches on the negotiations and we think that that's going to be another significant lift for us.
In addition to that we rolled out a new product called Nexmail, which creates a wave file through for delivery to any IP address. It's a pretty neat product. We're just getting it to market, but we think it has got legs.
We're going to have a product that we're going to roll out that is a off net network push to talk product that Motorola has developed for us. It doesn't rely on the network. It simply goes handset to handset and we think again we've got a lot of calls for this kind of product from our customers, especially those who move outside of coverage. We think it is going to be again another value added.
I want to turn to the next slide and I want to talk a little bit about the network and the performance of the network. From my perspective in the for what it is worth column, if you do not maintain a high quality network in today's wireless world, you will lose your business. It is my view that one of the reasons that some of the carriers have gotten themselves in trouble is because they did not pay enough attention to the network and what you have to do to keep a high quality network in place. It is a mandate inside Nextel that we do everything we can to continue to improve our network, both from a capacity side and I'm going to talk in just a bit about the coverage side.
So we're now covering 250 million [paths] with partner. As you can we've built 17,000 and we now have 17,500 cell sites. We're planning on building another 2,200 cell sites in 2004. Our Capex, as you know, we have said is going to be approximately $2.2b. $600m of the $2.2b is going to go into expanding the footprint in the network. If there is one thing that our customer is saying to us about our network it is please can we have more footprint and so we're going to be working very hard to expand the footprint. If you take a look at the competition out there, the last remaining hurdle for this company in terms of becoming the player, in my view, is expanding our footprint and we're going to do that.
We're going to have 26 megahertz of spectrum. We have 26 megahertz today. For those of you who are interested, it is our belief that the consensus plan that is currently in front of the FCC is going to come to a decision in either the April or May timeframe. If I were to put money on it I would probably say it is May. We are very encouraged by recent events. There is an order that is being circulated now. A draft order is being circulated now on the 8th floor. There has been no other plan that has been submitted to the FCC that resolves the problem and the problem is interference and public safety. There has been a lot of harping by the rest of the industry in terms of this gain, supposed gain, which Nextel is going to get as a result of the consensus plan. Just let me say that public safety has been very vocal in terms of what they believe is right for [tops and fire] people across the country and so it is my hope and expectation that we will have a positive resolution to the consensus plan in the May timeframe.
In terms of the network and the capacity that we're putting through the network, we switched 101 billion minutes in 2003 and if you take a look at some of the top tier performers through JD Powers, you can see that we are one notch below Verizon. So I feel very good about the network. I feel very good about our customers' reaction to the network and we are, as a company, going to continue to expand the footprint of the network so that we can continue to stay competitive, especially with our business partners. I would also like to say that in terms of our six-to-one strategy, which is going to double the capacity of our network, the first iteration we were not happy with. There were certain calls where the quality was not up to our standards. We have been working very hard with Motorola to fix those problems. We feel very good that we're getting very close. We're now in beta. It is my anticipation that six-to-one will roll out sometime mid-year this year. The last six weeks or so, Barry West, who is our CTO to my left on the dais, has done just a great job of pushing through new software enhancements so that six-to-one becomes a reality for us.
On the next slide we talk about handsets. If you look at this we break handsets down into three different categories - specialty, core and what we call application. Now virtually all the handsets that we have now are GPS capable and most of them are running Java, which a lot of our business customers use for their Aps. On the upper right hand corner we show the 7510, which is the new Blueberry. It is our second iteration from RIM. It is a better device, longer battery life, more feature rich and it is selling extremely well for us, especially again amongst our business customers. It has a color screen. It has Java and it also has a speakerphone.
Our phones, we're gaining more functionality. We're shedding size, we're shedding weight and we're shedding costs. We're single source to Motorola. Everybody understands that we're also their largest customer across the world. I will tell you that the relationship with Motorola is a strong relationship, most especially on the infrastructure and the handset side. They are going to be delivering to us 12 new handsets this year and coming in the second quarter is our new 830, which will be our smallest and sleekest phone. It's not pictured up there. We also have our 860 coming out in Q3, which is our first camera phone. We have a 325 that is going to be coming out again in the third quarter and that's going to be our off network Direct Connect product that I spoke about earlier in the presentation.
We're also very excited about the Smartphone, which is on the right hand side, which is an iDEN GSM phone equipped with a Microsoft Smartphone operating system and an integrated camera. We think that's going to be a bit hit with the customer base.
Now on the next slide we talk about our Touchpoint Strategy, which is basically how do you take care of your customer. As you know, in 2002 our churn was about 2.1%. We ratcheted churn down to 1.6% in 2003 and it is our hope and expectation that we're going to continue to maintain churn rates in and around the 1.6% area.
Now one of the reasons that we've been so successful at this is what we call Touchpoint and all it means is that in any number of different areas, when customers interface with you, you talk to them and you find out if they have issues. If you can get to them early enough and resolve their issues, they will stay with you. It's really basically that simple. We've outsourced customer care, which is probably one of the smartest things we've ever done as a company for two reasons. One, for the economics of it. It is just a whole lot cheaper for us to do it through IBM and TeleTech.
Two, because they have core competencies that we didn't have in this business and while, as I said to you on any number of different occasions, we had a bumpy road for the first three to six months, it is now working wonderfully well for us, reducing our costs by somewhere between 15% and 25%.
So we have been recognized now by our customers and again JD Powers, who has come out and said that Nextel is number one in terms of the ability to care for your customer. Churn is so important as you all know. I mean I don't have to tell you if you can ratchet churn down by a tenth of a point, two-tenths of a point, it means so much to delivering your subscriber accounts and of course your profitability. So we're going to continue to focus on enhancing the Touchpoint Strategy, proactively talking to the customers and holding churn to some of the industry's lowest levels.
NASCAR. A wonderful, wonderful, wonderful opportunity for the company. It is a 10-year relationship. We now have four races or so under our belt and we're building this foundation to support NASCAR. During the first three race weekends NASCAR was the most watched sport on TV. Daytona, for all of you that follow share, Daytona had a 12.4% share. This is remarkable. There are 75 million NASCAR fans. We are penetrated at 5%. Our typical penetration, as I will show you in a moment, is 10%. We have an enormous, enormous opportunity here.
The other thing that most people don't understand is that the demographics of the NASCAR fan are much better than you would think and they're taking that sport and they're moving up market with it. They're also expanding the geography. Where it was such a northeast centric sport, you now have huge interest in places like California and Texas, as an example. So we couldn't be more pleased. We've produced 30,000 of these NASCAR Cup Series phones, the 10 top drivers in the series phones. Just let me say that the take on it has been very, very strong.
It gives us an opportunity to continue to enhance our brand and we have worked very hard across all the tracks to bring bulletproof coverage to the tracks. We're going to be putting out data applications in the next 12 months that are NASCAR related - follow your favorite driver, your favorite race. One of the coolest things we're going to do is you can sit in your house (I hope) in 2005, you can have a Nextel handset, you can plug in your headset, watch the race on television and listen to Dale Earnhardt Junior talk to his pit through the Nextel network.
Now for any of you that know and understand NASCAR, this is a big thing for the NASCAR fans. If you go to any of these races, they all have their headsets on. They're listening to the pits talk to the drivers. So what we're doing is we're taking our technology and bringing it into a sport that really is trying to get to the next level. It is probably the smartest branding/sports partnership we've ever done and we don't need advice when it comes to sports partnerships. We've been doing them for a long time and it has proved very successful for us. But this to us is a home run.
Just as an example, at Daytona we had 50,000 Nextel customers in the stands. I think the attendance there was somewhere around 220,000, 230,000 people and we handled the calls without a problem.
Share. Interesting chart. The point is if you take a look at how we're doing against market share, we're taking share in subscribers, in service revenue and most importantly and impressively, in OIBDA. The fourth quarter we had strong subscriber and revenue growth. We increased our share to more than 10% of total subs. You can see 13.2% of total revenue and look at OIBDA. It is now approaching 19%. Our margin in the fourth quarter was 44%. The highest margin by far of anyone in the industry. We are dedicated, committed, and maniacal about maintaining our margins and pushing our margins forward. Once again, as I've been saying in the last couple of weeks, we expect to deliver the margins that we said we would deliver to you in 2004.
I think it is a testimony to one, a great network, two, a differentiated product and three, a customer base that really appreciates the products, the quality of the products and the services that it brings, and is willing to pay $60-$70 a month, which they are continuing to do.
In terms of other performance, here is how we stack up against the rest of the game. If you start on the left hand side and you look at ARPU. $70. The closest folk to us are Sprint at $62 and you can see where Verizon and [Singular] was at $49.
We led the industry in customer retention - I talked about it already - at 1.5% and you see our friends at AT&T Wireless topping the charts at 3.3%, only to get worse in my view.
On the bottom chart you can see that Nextel's OIBDA per subscriber was $31. That is 60% higher than anybody, than the closest competitor. 60% higher.
Lifetime revenue of the Nextel customer now is up to $4,700. That's also 60% greater than anybody else in the industry.
Now in terms of cash and EPS growth, you can take a look at OIBDA. It grew nearly $1.2b by the fourth quarter. We generated more OIBDA in the fourth quarter than Singular, AT&T Wireless, Sprint or T-Mobile. Our net income is benefiting from higher operating margins, lower interest costs. As you can see we reached $640m. Our quarterly EPS went from $0.21 in the first quarter of 2003 to now $0.48 in the fourth quarter and more importantly, look at free cash flow. Free cash flow $1.3b for the year and $346m for the fourth quarter. So I would say we're doing a pretty good job of converting the incremental revenues to the bottom line in the company.
I talked earlier in my comments about disciplined investment. We made some decisions on investing to move the business forward. Obviously NASCAR I've talked about. I've talked about expanding the network 2,200 sites, another $600m. It is so key to us. We're also going to expand Boost to seven new markets. I want to take a minute to talk about Boost.
Boost has been a successful, prepaid product that we have rolled out in California and in Nevada. It is a youth style, I mean a youth oriented brand. It has been incredibly well received in the Hispanic community and in the African American community, as well as with the youth. It is the number one selling prepaid product in all of California.
Now there are a couple of things about Boost that are interesting. One, the ARPU is much higher than anyone else in the industry. The churn is at the norm and what we call the re-boosting (the number of times that you go and sort of refill the tank or get more minutes of use) is probably the best in the industry.
We have a number of national chains that, because Boost has been so successful, are pushing us hard to introduce it across the rest of the country. We're going to go to seven markets first. We want to see if we can duplicate the performance of Boost in these other seven markets. We think that we probably can, but we don't know. Motorola is going to be delivering to us in the very near future a sub-$100 handset. It is going to help us with the equipment subsidy. We are continuing to ratchet down the acquisition cost of Boost. We are having interesting conversations with the national chains about a national rollout but at reasonable rates.
So we couldn't be happier with the Boost performance to date. It is clearly negative cash to date, as you would expect, but we think that it has got great potential in the future and you'll hear us give you more updates on Boost as we continue to roll it out across the rest of the country. I'm not satisfied yet that we have it running as well as it should. I'm not satisfied yet in terms of the cost of acquisition and we're working real hard on getting all that to the right place.
We're doing some interesting work with broadband and all of you have probably read or heard that we have a test going on with an OFDM technology, a 4G technology in Raleigh North Carolina, 125 sites and it is the Flarion technology. We're doing it for two reasons.
One, the question for us is where do we go from here? Sort of what's your network migration? Where are you evolving to? Of course all the usual suspects are around and some of the CDMA for example is a hell of a good technology and we're talking to the CDMA folks. But we're taking a look at some of these new technologies because they are disruptive and they're fast and they're efficient. Barry can give you a tutorial on our view of what we think cost has to be in order to successfully compete in the broadband market. But to us, looking at a Flarion technology that we think could be disruptive and be the fastest, largest pipe out there, has some appeal to us. But we don't know, as I stand here today, one, if it will stand up under the load. Two, what's the customer take going to be and how much are they willing to pay for it. It is for that reason that we're spending time, effort, and resource down in Raleigh to figure that out. We just started the tests from the network perspective. It's operating pretty well and Barry is putting a hell of a load on it. From the customer perspective, we're just getting started.
It is another investment that we will make, but we think it is an investment well spent because we're going to learn a lot and who knows where we go after iDEN. We just may leapfrog into some sort of 4G technology.
The issue with broadband to me isn't if any more. It's sort of when. As you take a look at what the capacity is of some of these big pipes and then you think about so many folks out there who would like to put content through those pipes, it becomes a rather compelling story. But it's early on. We don't know yet. We haven't made any final decisions. The point of the slide is we're going to invest to figure it out and we are going to see if it makes sense for the overall future of our company.
Guidance for 2004. We will deliver $4.9b in OIBDA, or more. We will deliver free cash flow of $1.6b or more. Earnings per share will be $2 in our view or more and as I said to you earlier on, we're going to spend about $2.2b in Capex. We will deliver 1.8 million subscribers or more and that does not include the Boost subscribers. I think right now on Boost we have over 400,000 subscribers, total subscribers in Boost. So you're going to see Boost continuing to gain a lot of momentum.
So we think we're going to have a very solid 2004. As I have said over the last couple of weeks, there is no reason from my perspective why we're not going to be able to meet, or exceed, this guidance. So it looks to us anyway, and it is early still, but it looks to us that we're going to have another strong 2004, another strong year. I also think it is going to be a pretty good year for the industry. I think that a couple of us are going to have some opportunities because of certain consolidation activities that will be going on that may be distracting to some carriers and maybe beneficial to others.
So with that I will say thank you very much. Thanks for your support as always and I look forward to another good year from Nextel.
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