Sprint Corp (NYSE: S) saw strong volatility in its total expense level, with it decreasing sharply from $35.6 billion in 2017 to $25 billion in 2018 (due to one-time tax benefits) before increasing to $35.5 billion in 2019. As a percentage of revenues, expenses have decreased from 103.6% in 2017 to 77.2% in 2018, before rising to 105.8% in 2019. Cost of sales is the largest expense component for the company, with it accounting for almost 38% of Sprint’s total expenses in 2019. Cost of sales accounted for 39.8% of revenues as of 2019, reflecting a drop from 46.2% in 2017. This decline from 46.2% to 39.8% has added about $2.1 billion to the company’s profits, which translates into additional earnings of $0.53 per share. Cost of sales is further expected to drop to about 38.5% of revenues in 2021, which could lead to additional profit of about $457 million, translating into additional earnings of $0.11/share over the next two years. In our interactive dashboard How Does Sprint Spend Its Money?, we discuss how key expense drivers are performing.
Sprint’s total expenses have increased from $34.6 billion in 2017 to about $35.5 billion in 2019. For 2020, we expect expect total expenses to stand at $33.6 billion, which comprises of-
- Cost of Sales: $13.3 billion
- Operating Expenses: $18 billion
- Non-Operating Expense (Income): $2.3 billion
- Income Taxes: $25 million
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Net Income Margins have decreased from -3.6% in 2017 to -5.8% in 2019, driven by higher depreciation and goodwill impairment. Margins are expected to rise to -0.1% in 2020 and then to 1.7% by 2021, on the back of rising revenues and better cost management.
Cost of Sales
- Cost of sales decreased from $15.4 billion in 2017 to $13.4 billion in 2019, driven by a decrease in volume of used postpaid devices sold to third parties, a decline in postpaid and prepaid devices sold as a result of the higher mix of postpaid subscribers choosing to lease their devices and lower accessory costs.
- The cost is expected to go marginally down to $13 billion by 2021.
- As a % of revenues, cost of sales as continuously declined from 46.2% in 2017 to 39.8% in 2019, with it likely to decline further to 38.5% by 2021.
- SG&A expense has decreased from $8 billion in 2017 to $7.8 billion primarily due to lower commission costs combined with lower marketing costs, partially offset by higher general and administrative cost due to higher customer care costs and bad debt expense.
- As a % of revenue, SG&A cost has decreased from 24% in 2017 to 23.1% in 2019, which is expected to decline to 22.5% in 2021.
- D&A expense has increased steadily from $8.2 billion in 2017 to $9.4 billion in 2019 primarily due to increased depreciation on new asset additions and increased depreciation on new leased devices as a result of the continued growth of the device leasing program.
- It is expected to rise to $10 billion by 2021.
- As % of revenue, D&A has increased continuously from 24.4% in 2017 to 27.9% in 2019, and is likely to increase to 29.5% by 2021.
Other operating Expenses
- After being close to nil, other operating expenses increased sharply to $2.6 billion in 2019, as the Company completed its annual impairment testing for goodwill assigned to the Wireless reporting unit and as a result, recorded a non-cash impairment charge of $2.0 billion.
- The cost is expected to go down again in the near term.
- Non-operating expenses have marginally declined from $2.5 billion in 2017 to $2.4 billion in 2019 primarily due to $169 million of interest income and other income of $24 million as a result of a legal settlement.
- Interest as a % of debt increased from 6.1% in 2017 to 6.4% in 2019 led by higher interest rates, with the metric falling to 5.8% in 2018 due to replacement of higher interest debt with lower interest financing.
To understand how interest and non-operating expenses are expected to trend going forward, view our dashboard analysis.
Effective Tax Rate
- Effective tax rate has seen a lot of fluctuation in the recent years, with it decreasing sharply from 56.4% in 2017 to -2335% in 2018, driven by large one-time tax benefits realized on the back of the TCJ Act, before rising to -1.8% in 2019.
- The rate is expected to be around 4.5%-5.0% in the near term.
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