Sprint - Nextel 2007 Annual Report Download - page 49

• roaming fees paid to other carriers; and
• variable costs relating to payments to third parties for the use of their proprietary data applications,
such as ringers, games, music, TV and navigation by our customers.
Cost of services increased 7% in 2007 as compared to 2006 primarily due to increased costs relating to the
expansion of our network and increased minutes of use on our networks. Specifically, we experienced:
• an increase in roaming expenses, primarily with respect to subscribers of our CDMA services, due to
increased data and voice usage outside of our CDMA network; and
• an increase in cell site and switch-related operational costs, including increases in rent and fixed and
variable interconnection costs due to the increase in usage, number of cell sites and related equipment
in service.
Cost of services increased 49% in 2006 as compared to 2005, primarily due to increased costs resulting from
the Sprint-Nextel merger.
Service gross margin declined 2% in 2007 as compared to 2006 and increased 62% in 2006 as compared to
2005, due to the reasons described above. As a percentage of total service revenue, service gross margin
decreased slightly to 73% in 2007 from 75% in 2006 and 73% in 2005.
Equipment Revenue
We recognize equipment revenue when title to the handset or accessory passes to the dealer or end-user
customer. We reduce equipment revenue for certain payments to third-party dealers, which reimburse the dealer
for point of sale discounts that are offered to the end-user subscriber. Revenues from sales of handsets and
accessories decreased 18% in 2007 as compared to 2006, primarily due to a decrease in the average sales price of
handsets due to more aggressive acquisition and retention handset pricing, which was only slightly offset by an
increase in the number of handsets sold. Revenues from sales of handsets and accessories increased 49% in 2006
as compared to 2005, primarily due to additional handsets sold due to the Sprint-Nextel merger and the PCS
Affiliate and Nextel Partners acquisitions.
Cost of Products
We recognize the cost of handsets and accessories when title to the handset or accessory passes to the dealer
or end-user customer. Cost of handsets and accessories also includes order fulfillment related expenses and write-
downs of handset and related accessory inventory for shrinkage and obsolescence. The cost of handsets is
reduced by any rebates that we earn from the supplier. Handset and accessory costs increased 2% in 2007 as
compared to 2006 due to the increase in the number of handsets sold and an increase in the average cost of the
units sold as we continue to sell higher priced units with more functionality. Handset and accessory costs
increased 51% in 2006 as compared to 2005 primarily due to additional handsets sold due to the Sprint-Nextel
merger and the PCS Affiliate and Nextel Partners acquisitions.
Subsidy
Our marketing plans assume that handsets typically will be sold at prices below our cost, which is consistent
with industry practice. Our subscriber retention efforts often include providing incentives to customers such as
offering new handsets at discounted prices. Handset costs in excess of the revenues generated from handset sales
(referred to in our industry as subsidy) as a percentage of equipment revenues increased to 94% in 2007 from
55% in 2006 and 54% in 2005, as a result of efforts to promote the acquisition of new and retention of existing
subscribers.
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