Verizon Wireless 2012 Annual Report Download - page 33

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
Cost of Services and Sales
Cost of services and sales increased during 2012 compared to 2011 pri-
marily due to $0.7 billion in higher cost of equipment sales, which was
driven by increased sales of higher cost smartphones, increased cost
of network services and increased data roaming, partially offset by a
decrease in cost for data services, a decrease in network connection costs
due to the ongoing deployment of Ethernet backhaul facilities primarily
targeted at sites upgrading to 4G LTE and a decrease in the cost of long
distance.
Cost of services and sales increased during 2011 compared to 2010
primarily due to higher costs of equipment sales. Cost of equipment
sales increased by $4.9 billion driven by increased sales of higher cost
smartphones,includingApple’siPhone4and4Sandotherdata-capable
devices. In addition, cost of services increased during 2011 due to higher
wireless network costs resulting from an increase in local interconnection
costs related to additional Evolution-Data Optimized (EV-DO) capacity to
meet expected data usage demands as well as an increase in Ethernet
facilities costs that support the 4G LTE network. The increase in cost of
services was also impacted by higher roaming costs incurred in markets
divested during 2010 and increased data roaming. Partially offsetting
these increases was a decrease in costs for long distance and data ser-
vices and applications.
Selling, General and Administrative Expense
Selling, general and administrative expense increased during 2012 com-
pared to 2011 primarily due to higher sales commission expense in our
indirect channel as well as costs associated with regulatory fees. Indirect
sales commission expense increased $1.3 billion during 2012 compared
to 2011 primarily as a result of increases in the average commission per
unit, as the mix of units continues to shift toward smartphones and more
customers activate data services.
Selling, general and administrative expense increased during 2011 com-
pared to 2010 primarily due to higher sales commission expense in our
indirect channel. Indirect sales commission expense increased $1.2 bil-
lion during 2011 compared to 2010 as a result of increases in the average
commission per unit, as the mix of units continues to shift toward data
devices and more customers activate data services, and increased con-
tract renewals in connection with equipment upgrades.
Depreciation and Amortization Expense
Depreciation and amortization expense was essentially unchanged
during 2012 compared to 2011. The increase in depreciation and amor-
tization expense during 2011 compared to 2010 was primarily driven by
growth in depreciable assets.
Operating Expenses (dollars in millions)
Increase/(Decrease)
Years Ended December 31, 2012 2011 2010 2012 vs. 2011 2011 vs. 2010
Cost of services and sales $ 24,490 $ 24,086 $ 19,245 $ 404 1.7 % $ 4,841 25.2 %
Selling, general and administrative expense 21,650 19,579 18,082 2,071 10.6 1,497 8.3
Depreciation and amortization expense 7,960 7,962 7,356 (2) – 606 8.2
Total Operating Expenses $ 54,100 $ 51,627 $ 44,683 $ 2,473 4.8 $ 6,944 15.5
Segment Operating Income and EBITDA (dollars in millions)
Increase/(Decrease)
Years Ended December 31, 2012 2011 2010 2012 vs. 2011 2011 vs. 2010
Segment Operating Income $ 21,768 $ 18,527 $ 18,724 $ 3,241 17.5 % $ (197) (1.1) %
Add Depreciation and amortization expense 7,960 7,962 7,356 (2) – 606 8.2
Segment EBITDA $ 29,728 $ 26,489 $ 26,080 $ 3,239 12.2 $ 409 1.6
Segment operating income margin 28.7% 26.4% 29.5%
Segment EBITDA service margin 46.6% 44.8% 46.9%
The changes in the table above during the periods presented were pri-
marily a result of the factors described in connection with operating
revenues and operating expenses above.
Non-recurringornon-operationalitemsexcludedfromVerizonWireless’
Operating income were as follows:
(dollars in millions)
Years Ended December 31, 2012 2011 2010
Mergerintegrationandacquisition
related charges $ – $ – $ 867
Severance, pension and benefit charges 37 76 –
Impact of divested operations – – (348)
Deferred revenue adjustment – – 235
$ 37 $ 76 $ 754