Operating margins for Sprint’s peers declined
Adjusted earnings before interest, tax, depreciation, and amortization (or EBITDA) is an important parameter in the telecom industry. It indicates the company’s profitability. Sprint’s (S) adjusted EBITDA improved in the last quarter—compared to the same quarter last year.
In contrast, the margins for Sprint’s main peers—T-Mobile (TMUS), AT&T (T), and Verizon (VZ)—declined. The operating margins for Sprint’s peers declined because of the increasing promotional expenses and discounts associated with acquiring customers.
For example, AT&T offered discounts to customers adopting higher data buckets under the Mobile Share Value plan. We discussed this aspect of AT&T in detail in “Why did AT&T’s wireless margin decline in 2nd quarter 2014?” So, why did Sprint’s operating margins increase on a year-over-year (or YoY) basis?
Network modernization and increasing popularity of Easy Pay plan
There were a couple of reasons why Sprint’s operating margins increased. The wireless cost of service decreased by $339 million in the last quarter—compared to the same quarter last year. The decrease was due to lower roaming expenses and lower backhaul expenses. The lower expenses were a result of network modernization.
Another reason why Sprint’s margins improved was the increasing penetration of its Easy Pay program. It’s the installment plan. Earlier in this series, we discussed how Sprint is promoting its installment plans instead of its subsidy plans. In fact, Sprint plans to completely eliminate subsidy plans by next year.
Since Sprint saves on the subsidy cost from installment plans, it helped Sprint improve the net subsidy cost by $100 million in the last quarter. It also helped Sprint realize upfront equipment or device revenues. The revenues were up $329 million YoY.
However, Sprint’s cost savings were offset by Apple’s (AAPL) iPhone 6 sales. The majority of iPhones are still sold by telecom companies on subsidies. Verizon’s EDGE, AT&T’s Next, and T-Mobile’s Jump are similar installment plans. However, for these companies, the cost savings associated with installment plans wasn’t enough to offset the increase in promotional expenses.