Sprint - Nextel 2014 Annual Report Download - page 48

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Successor Three-Month Transition Period Ended March 31, 2014 and Predecessor Three-Month Period Ended
March 31, 2013
Cost of services decreased $65 million, or 3%, for the Successor three-month transition period ended March 31,
2014 compared to the same Predecessor period in 2013, primarily reflecting reduced network costs such as rent, utilities and
backhaul costs related to the shut-down of the Nextel platform in June 2013 combined with a decrease in service and repair
costs due to a decline in the volume and frequency of repairs and a decrease in roaming fees due to lower volume and rates,
partially offset by net increases as a result of the Clearwire Acquisition.
Successor Year Ended December 31, 2013 and Predecessor Year Ended December 31, 2012
Cost of services decreased $4.7 billion, or 52%, for the Successor year ended December 31, 2013 compared to the
Predecessor year ended December 31, 2012, primarily due to comparing operating results for the shortened Post-merger
period to the 2012 Predecessor period consisting of a full calendar year. In addition, we had reduced network costs such as
rent and utilities in 2013 as a result of the shut-down of the Nextel platform in June 2013 combined with a decrease in service
and repair costs due to a decline in the volume and frequency of repairs. These decreases were partially offset by additional
network costs due to the modernization of our network as well as the net impact of the Clearwire Acquisition.
Combined Year Ended December 31, 2013 and Predecessor Year Ended December 31, 2012
In addition to the explanations above, cost of services for the Combined year ended December 31, 2013 compared
to the Predecessor year ended December 31, 2012 decreased as a result of a reduction in payments to third-party vendors for
use of their proprietary data applications and premium services as a result of more favorable contract rates. These decreases
were partially offset by higher backhaul costs primarily due to increased capacity.
Equipment Net Subsidy
We recognize equipment revenue and corresponding costs of devices when title and risk of loss passes to the
indirect dealer or end-use subscriber, assuming all other revenue recognition criteria are met. Our marketing plans assume
that devices will be sold under the traditional subsidy program or the installment billing program, or leased under the leasing
program. Under the traditional subsidy program, we offer certain incentives to retain and acquire subscribers such as new
devices at discounted prices. The cost of these incentives is recorded as a reduction to equipment revenue upon activation of
the device with a service contract. Under the installment billing program, the device is sold at or near full retail price and we
recognize most of the future expected installment payments at the time of sale of the device, which results in the recognition
of significantly less equipment net subsidy. Under the leasing program, lease revenue is recorded over the term of the lease.
Cost of products includes equipment costs (primarily devices and accessories), order fulfillment related expenses,
and write-downs of device and accessory inventory related to shrinkage and obsolescence. Additionally, cost of products is
reduced by any rebates that are earned from the equipment manufacturers. Cost of products in excess of the net revenue
generated from equipment sales is referred to in the industry as equipment net subsidy. We also make incentive payments to
certain indirect dealers, who purchase the iPhone® directly from Apple. Those payments are recognized as selling, general and
administrative expenses when the device is activated with a Sprint service plan because Sprint does not recognize any
equipment revenue or cost of products for those transactions. (See Selling, General and Administrative Expense below.)
Successor Year Ended March 31, 2015 and Successor Year Ended December 31, 2013
Equipment revenue increased $3.2 billion, or 178%, and cost of products increased $4.7 billion, or 102%, for the
Successor year ended March 31, 2015 compared to the year ended December 31, 2013, primarily due to comparing results for
a full twelve-month period to a shortened Post-merger period. In addition, equipment revenue increased due to higher
revenue from the installment billing and leasing programs and a higher average sales price per postpaid handset sold,
partially offset by a decrease in postpaid handsets sold as a result of customers choosing to lease devices instead of
purchasing them. Cost of products also increased due to higher average cost per handset sold for postpaid handsets, combined
with an increase in prepaid handsets sold. These increases were partially offset by a decrease in postpaid handsets sold as a
result of customers choosing to lease devices instead of purchasing them and a lower average cost per handset sold for
prepaid handsets, which resulted in an overall decrease in cost of products when comparing the Successor year ended March
31, 2015 to the Combined year ended December 31, 2013.
Successor Three-Month Transition Period Ended March 31, 2014 and Predecessor Three-Month Period Ended
March 31, 2013
Equipment revenue increased $186 million, or 23%, for the Successor three-month transition period ended
March 31, 2014 compared to the same Predecessor period in 2013. The increase in equipment revenue was primarily due to
higher average sales prices per postpaid and prepaid device sold combined with the impact of a different revenue recognition