Sprint - Nextel 2007 Annual Report Download - page 50

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Selling, General and Administrative Expense
Sales and marketing costs primarily consist of customer acquisition costs, including commissions paid to
our indirect dealers, third-party distributors and direct sales force for new handset activations and upgrades,
residual payments to our indirect dealers, payroll and facilities costs associated with our direct sales force, retail
stores and marketing employees, advertising, media programs and sponsorships, including costs related to
branding. General and administrative expenses primarily consist of costs for billing, customer care and
information technology operations, bad debt expense and back office support activities, including collections,
legal, finance, human resources, strategic planning and technology and product development.
Sales and marketing expense increased about 9% in 2007 from 2006 as compared to an increase of 47% in
2006 from 2005. For the year ended December 31, 2007, we experienced increased advertising expense,
reflecting our renewed focus on promoting our brand in an effort to gain market share by attracting new
subscribers and continuing to build loyalty among existing subscribers, and we increased compensation of our
post-paid third-party dealers for both new subscriber additions and upgrades.
General and administrative costs increased about 5% in 2007 from 2006 as compared to an increase of 67%
in 2006 from 2005, primarily due to increases in bad debt expense resulting from higher average write-offs per
account and increases in customer care costs due to higher call volumes and additional customer care
representatives. These costs were partially offset by decreases in IT and billing costs due to application
rationalization, including financial reporting and billing system consolidations.
Bad debt expense increased $262 million in 2007 to $896 million, as compared to a $168 million increase in
2006 to $634 million. The 2007 increase was primarily the result of higher average write-offs per account, which
accounted for about 77% of the increase in bad debt. Increases in the average write-offs per account can be
attributed to a higher number of subscribers per account, increased add-a-phone activity, increased incidence of
overages, increased fees related to data services and increased credit extended in early 2007 and 2006. The 2006
increase is primarily attributable to the increase in the number of subscribers, including subscribers acquired
through acquisitions, and an increase in involuntary churn.
Wireless Segment Earnings
Wireless segment earnings decreased about $1.8 billion or 15% in 2007 from 2006 primarily due to
increases in costs to acquire our subscribers, due to lower equipment revenue, and increases in network and
interconnection costs. Wireless segment earnings increased $4.7 billion or 68% in 2006 from 2005, primarily due
to increased revenue resulting from additional subscribers acquired in connection with the Sprint-Nextel merger
and the PCS Affiliate and Nextel Partners acquisitions.
Based on information currently available to management, we expect to experience continued downward
pressure on Wireless segment earnings in the near term, including a significant reduction in the first quarter 2008
as compared to our Wireless segment earnings of about $2.2 billion in the fourth quarter 2007. Specifically, we
expect service revenue to continue to decline in the near term due to expected declines in the number of new
subscribers and increases in churn including churn on our CDMA network for the reasons discussed on page 39,
as well as a decline in our average monthly service revenue per user as growth from our data services is expected
to only partially offset declines in voice services. In addition, because we plan to lower the prices of certain
handset devices, our equipment net subsidy may increase, which could increase the overall cost to acquire
subscribers. Although management has implemented a program designed to rationalize our cost structure by
reducing our workforce, decreasing the number of external contractors and eliminating poor performing
distribution points, we do not expect that these cost reductions will offset the expected service revenue declines
and increases in net equipment subsidy described above. See “—Forward-Looking Statements.”
48