Lower subsidy costs are one of the factors behind Sprint’s increasing margins
In the previous part of this series, we discussed why the Easy Pay plan’s success is important for Sprint (S). Easy Pay is an installment plan, similar to the plans offered by Verizon (VZ), AT&T (T), and T-Mobile (TMUS). The Easy Pay plan helps Sprint lower its subsidy cost and improve its operating margins. As the chart below shows, Sprint’s adjusted EBITDA margin for its wireless segment improved from 17.6% in 2Q13 to 25.3% in 2Q14—a year-over-year improvement of about 8%.
But there were other factors as well that helped Sprint increase its margins. Let’s discuss below.
Sprint managed to reduce its cost of services and SG&A expenses
Sprint cited a number of reasons why its margins have been improving. One of the major reasons was obviously the lower subsidy cost, which declined from $1.48 billion in 2Q13 to $1.05 billion in 2Q14. Sprint also managed to reduce its cost of services from $2.29 billion in 2Q13 to $2.05 billion in 2Q14. This reduction occurred because of the elimination of network expenses related to the Nextel platform as Sprint shut Nextel down last year. Another factor behind the lower cost of service was reduced spending on 3G roaming and the 3G network as Sprint transitions to an LTE network.
Sprint also managed to reduce its SG&A expenses from $2.29 billion in 2Q13 to $2.05 billion in 2Q14 as it cut its workforce during the year. This reduction was partially offset by higher bad debt expenses, which were driven by the introduction of installment plans earlier this year.
Continued increases in Sprint’s margins should benefit exchange-traded funds (or ETFs) such as the Vanguard Telecommunication Services (VOX) that have high exposure to Sprint.