Where Is Sprint Corp Spending Most Of Its Money?

by Trefis Team
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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.

Total Expenses

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

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

  • 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

  • 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

  • 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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