Sprint - Nextel 2015 Annual Report Download - page 45

Table of Contents
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.
Equipment Revenue and Cost of Products
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 devices are sold under the subsidy program, the installment billing program, or leased under the
leasing program. Under the 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.
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. As subscribers
migrate from acquiring devices through our subsidy program to installment billing or choose to lease under our leasing program, equipment net subsidy continues
to decline. We also make incentive payments to certain indirect dealers who purchase devices directly from OEMs or other device distributors. 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.)
The net impact to equipment revenue and cost of products from the sale of devices under our installment billing program is relatively neutral except for
the impact from the time value of money element related to the imputed interest on the installment receivables. Under the leasing program, lease revenue is
recorded over the term of the lease. The cost of the leased device is depreciated to its estimated residual value generally over the lease term. During the years ended
March 31, 2016 and 2015 , we leased devices through our Sprint direct channels totaling approximately $3.2 billion and $1.2 billion , respectively, which were
reclassified from inventory to property, plant and equipment and, as such, the cost of the device was not recorded as cost of products compared to when purchased
under the installment billing or traditional subsidized programs.
SuccessorYearEndedMarch31,2016andSuccessorYearEndedMarch31,2015
Equipment revenue increased $16 million , or remained relatively flat, for the Successor year ended March 31, 2016 compared to the Successor year
ended March 31, 2015 , primarily due to higher revenue from the leasing program of approximately $1.7 billion and a higher average sales price per postpaid
handset sold, which was primarily offset by a decrease in postpaid handsets sold as a result of Brightstar Corp. (Brightstar) purchasing inventory from the OEMs to
sell directly to our indirect dealers and more subscribers choosing to lease their device, combined with lower average sales price per prepaid handset sold. Cost of
products decreased $3.5 billion , or 38% , for the Successor year ended March 31, 2016 compared to the Successor year ended March 31, 2015 primarily due to a
decrease in postpaid handsets sold as a result of Brightstar purchasing inventory from the OEMs to sell directly to our indirect dealers and subscribers choosing to
lease devices instead of purchasing them.
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 Successor 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
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