Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
Sprint Corporation, including its consolidated subsidiaries, is a communications
company offering a comprehensive range of wireless and wireline communications
products and services that are designed to meet the needs of individual
consumers, businesses, government subscribers, and resellers. Unless the context
otherwise requires, references to “Sprint,” “we,” “us,” “our” and the “Company”
mean Sprint Corporation and its consolidated subsidiaries for all periods
presented, inclusive of Successor and Predecessor periods (each as defined
within “Results of Operations”), and references to “Sprint Communications” are
to Sprint Communications, Inc. and its consolidated subsidiaries.
Description of the Company
We are the third largest wireless communications company in the U.S. based on
wireless revenue, one of the largest providers of wireline long distance
services, and one of the largest Internet carriers in the nation. Our services
are provided through our ownership of extensive wireless networks, an
all-digital global long distance network and a Tier 1 Internet backbone.
We offer wireless and wireline voice and data transmission services to
subscribers in all 50 states, Puerto Rico, and the U.S. Virgin Islands under the
Sprint corporate brand, which includes our retail brands of Sprint, Boost
Mobile, Virgin Mobile, and Assurance Wireless on networks that utilize third
generation (3G) code division multiple access (CDMA) or Internet protocol (IP)
technologies. We also offer fourth generation (4G) services utilizing Long Term
Evolution (LTE) as well as Worldwide Interoperability for Microwave Access
(WiMAX) technologies (which we expect to shut-down by the end of calendar year
2015). We utilize these networks to offer our wireless and wireline subscribers
differentiated products and services whether through the use of a single network
or a combination of these networks. We offer wireless services on a postpaid and
prepaid payment basis to retail subscribers and also on a wholesale and
affiliate basis, which includes the sale of wireless services that utilize the
Sprint network but are sold under the wholesaler’s brand.
Wireless
We continue to support the open development of applications, content, and
devices on the Sprint platform through products and services such as Sprint ID,
which provides an easy way for users to discover content from leading brands and
special interests as well as manage those experiences on certain Android
devices, and Sprint Zone, which allows subscribers to not only manage their
account and self-service functions via their device but facilitates discovery of
new content and personalization through recommendations for applications and
entertainment content. We also support Sprint Guardian, a collection of mobile
safety and device security bundles that provide families relevant tools to help
stay safe and secure, and Pinsight Media+, which gives advertisers the power to
reach consumers on their mobile device by providing more relevant advertising
based on information consumers choose to share about their location and mobile
Web browsing history. In addition, we enable a variety of business and consumer
third-party relationships through our portfolio of machine-to-machine solutions,
which we offer on a retail postpaid and wholesale basis. Our machine-to-machine
solutions portfolio provides a secure, real-time and reliable wireless two-way
data connection across a broad range of connected devices such as the Chrysler
Group’s UConnect Access in-vehicle communications system powered through our
Sprint Velocity end-to-end telematics solution, which enables hands free phone
calls and the ability to access music, navigation, and other applications and
services through cell connections built into the vehicle. Other connected
devices include original equipment manufacturer (OEM) devices and after-market
in-vehicle connectivity and electric vehicle charging stations, point-of-sale
systems, kiosks and vending machines, asset tracking, digital signage, security,
smartgrid utilities, medical equipment, and a variety of other consumer
electronics and appliances.
Postpaid
In our postpaid portfolio, we recently launched the Sprint Family Share Pack,
Sprint $60 Unlimited Plan and an exclusive rate plan for the iPhone 6 and 6
Plus, Sprint Simply Unlimited Plan. The Sprint Family Share Pack is available to
new and eligible existing subscribers, and allows subscribers to share data
across up to ten lines of service under one account. Subscribers choose a shared
monthly data allowance starting at $20 per month for 1 gigabyte (GB) of data.
For each handset, subscribers pay an access charge which includes unlimited talk
and text and ranges from $15 to $40 per month depending on how the subscriber
chooses to purchase a handset and the size of data allowance selected.
Subscribers may also add data access at $10 per month per tablet or $20 per
month per mobile broadband device or hotspot. The Sprint $60 Unlimited Plan is
also available to new and eligible existing subscribers, and includes unlimited
talk, text and data while on the Sprint network for $60 per line per month with
the purchase of a handset at full retail price or the lease of a handset. The
Sprint Simply Unlimited Plan is available to new and eligible existing
subscribers, and includes unlimited talk, text and data while on the
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Sprint network for $50 per line per month for subscribers who purchase at full
retail price or lease the iPhone 6 or 6 Plus. Qualified subscribers have the
option to lease an iPhone 6 or 6 Plus through the iPhone for Life Plan at $20
per month for an iPhone 6 (16 GB) or $25 per month for an iPhone 6 Plus (16 GB)
with no upfront cost for the handset for qualified customers. The terms of the
iPhone for Life Plan do not require the subscriber to execute a traditional,
two-year wireless service contract.
Subscribers may purchase an eligible handset at full retail price under an
installment contract payable over 24 months through the use of the Sprint Easy
PaySM program and may pay an additional $5 per month per handset line to upgrade
to a new handset as early as every 12 months if they turn in their handset. The
terms of the Sprint Easy Pay program do not require the subscriber to execute a
traditional, two-year wireless service contract.
We also offer price plans tailored to new and eligible existing business
subscribers such as Sprint Business Share Plans, which provide for monthly
unlimited talk and text and allow business decision makers to choose buckets of
data for a certain number of lines of service to suit their needs. In addition,
in July 2014, we launched Sprint Business Fusion Plans, which start at $15 per
month with a qualifying handset purchase and include unlimited talk and text and
Sprint Direct Connect and allow subscribers to choose unlimited data or share a
pool of data among users for an additional fee. Subscribers also have the choice
to add other devices to the shared pool of data, including tablets, mobile
broadband cards, mobile hotspots, routers and machine-to-machine devices.
Prepaid
Our prepaid portfolio currently includes multiple brands, each designed to
appeal to specific subscriber segments. Sprint Prepaid primarily serves
subscribers who want plans that are affordable, simple and flexible without a
long-term commitment. Boost Mobile serves subscribers with our Data Boost Plans,
which offer subscribers unlimited text and talk with step pricing based on their
preferred data usage for a lower monthly fee and double the data than our
previously offered Monthly Unlimited Select plans. Virgin Mobile primarily
serves subscribers with our new Virgin Mobile Unlimited plans and our broadband
plan, Broadband2GoSM, which offer subscribers control, flexibility and
connectivity through various plan options and communication vehicles. Virgin
Mobile is also designated as a Lifeline-only Eligible Telecommunications Carrier
in certain states and provides service for the Lifeline program under our
Assurance Wireless brand. Assurance Wireless provides eligible subscribers, in
certain states, who meet income requirements or are receiving government
assistance, with a free wireless phone, 250 free local and long-distance voice
minutes each month and unlimited free texts.
Wholesale
We have focused our wholesale business on enabling our diverse network of
customers to successfully grow their business by providing them with an array of
network, product, and device solutions. This allows our customers to customize
this full suite of value-added solutions to meet the growing demands of their
businesses. As part of these growing demands, some of our wholesale mobile
virtual network operators (MVNO) are also selling prepaid services under the
Lifeline program.
Wireline
We provide a broad suite of wireline voice and data communications services to
other communications companies and targeted business and consumer subscribers.
In addition, we provide voice, data and IP communication services to our
Wireless segment.
Business Strategies and Key Priorities
The communications industry continues to compete on the basis of network
performance and quality, types of services and devices offered, and price. Our
business strategy is to be responsive to changing customer mobility demands by
being innovative and differentiated in the marketplace. Our future growth plans
and strategy revolve around achieving the following three key priorities:
Provide the best value;
Enhance network coverage and capacity; and
Operationalize a more effective cost structure.
We strive to provide the best value through several new offerings of unlimited
talk, text and data, and we also offer a broad selection of some of the most
desired and iconic devices. We continue to enhance our network coverage,
capacity and data speeds utilizing our unique spectrum portfolio to provide
broad market coverage for voice and data, focusing on in-building penetration
improvements. We are also re-evaluating our cost structure for opportunities to
reduce costs to be more in-line with our competitors and the new price plans we
are offering.
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Significant Transactions
On July 9, 2013, Sprint Nextel Corporation (Sprint Nextel) completed the
acquisition of the remaining equity interests in Clearwire Corporation and its
consolidated subsidiary Clearwire Communications LLC (together “Clearwire”) that
it did not previously own (Clearwire Acquisition) in an all cash transaction for
approximately $3.5 billion, net of cash acquired of $198 million, which provides
us with control of 2.5 gigahertz (GHz) spectrum and tower resources for use in
conjunction with our network modernization plan. The consideration paid was
allocated to assets acquired and liabilities assumed based on their estimated
fair values at the time of the Clearwire Acquisition. The allocation of
consideration paid was based on management’s judgment after evaluating several
factors, including a valuation assessment.
On July 10, 2013, SoftBank Corp. and certain of its wholly-owned subsidiaries
(together, “SoftBank”) completed the merger (SoftBank Merger) with Sprint Nextel
contemplated by the Agreement and Plan of Merger, dated as of October 15, 2012
(as amended, the Merger Agreement), and the Bond Purchase Agreement, dated as of
October 15, 2012 (as amended, the Bond Agreement). As a result of the SoftBank
Merger, Starburst II, Inc. (Starburst II) became the parent company of Sprint
Nextel. Immediately thereafter, Starburst II changed its name to Sprint
Corporation and Sprint Nextel changed its name to Sprint Communications, Inc.
Pursuant to the Bond Agreement, Sprint Communications, Inc. issued a convertible
bond (Bond) to Starburst II with a principal amount of $3.1 billion, interest
rate of 1%, and maturity date of October 15, 2019, which was converted into
590,476,190 shares of Sprint Communications, Inc. common stock at $5.25 per
share immediately prior to the close of the SoftBank Merger.
As a result of the completion of the SoftBank Merger in which SoftBank acquired
an approximate 78% interest in Sprint Corporation, and subsequent open market
stock purchases, SoftBank owns approximately 80% of the outstanding voting
common stock of Sprint Corporation. The SoftBank Merger consideration totaled
approximately $22.2 billion, consisting primarily of cash consideration of $14.1
billion, net of cash acquired of $2.5 billion, and the estimated fair value of
the 22% interest in Sprint Corporation issued to the then existing stockholders
of Sprint Communications, Inc. The allocation of consideration paid was based on
management’s judgment after evaluating several factors, including a valuation
assessment. The close of the transaction provided additional equity funding of
$5.0 billion, consisting of $3.1 billion received by Sprint Communications, Inc.
in October 2012 related to the Bond, which automatically converted to equity
immediately prior to the closing of the SoftBank Merger, and $1.9 billion cash
consideration at closing of the SoftBank Merger.
In connection with the close of the SoftBank Merger, Sprint Corporation became
the successor registrant to Sprint Nextel under Rule 12g-3 of the Securities
Exchange Act of 1934 (Exchange Act) and is the entity subject to the reporting
requirements of the Exchange Act for filings with the Securities and Exchange
Commission (SEC) subsequent to the close of the SoftBank Merger. In addition, in
order to align with SoftBank’s reporting schedule, our Board of Directors
approved a change in fiscal year end to March 31, effective March 31, 2014.
References herein to fiscal year 2014 refer to the twelve-month period ending
March 31, 2015.
Network Modernization
We are in the process of modernizing our network to allow the consolidation and
optimization of our 1.9 GHz, 800 megahertz (MHz) and 2.5 GHz spectrum into our
base stations. The Network Vision project, which commenced in late 2011,
includes the deployment of enhanced 3G and 4G LTE technology using our 1.9 GHz
spectrum and the deployment of voice technology on our 800 MHz spectrum on the
majority of our 38,000 cell sites. We have substantially completed the
deployment of enhanced 3G technology using 1.9 GHz spectrum. In addition, we
have enabled High Definition Voice services nationwide with this technology. The
deployment of enhanced 3G voice services utilizing our 800 MHz spectrum, which
is subject to the timing and completion of work to reconfigure the spectrum (the
“Report and Order”), and 4G LTE using our 1.9 GHz spectrum is expected to be
substantially complete by the calendar year ended 2014.
Some of our subscribers have experienced network service disruptions,
particularly voice service, during the construction phase of Network Vision,
which, among other factors, we believe has contributed to the elevated postpaid
churn rates in recent quarters (refer to the churn results table within “Results
of Operations”). Based on our experience in several markets that have reached
near completion of Network Vision construction, we have observed that
network-related churn elevates during the construction phase and then gradually
improves to pre-construction levels over a period of several months following
the achievement of substantial completion in the market.
The Network Vision project and the related shut-down of the Nextel platform have
resulted in incremental charges, beginning in 2012, including, but not limited
to, an increase in depreciation associated with existing assets related to both
the Nextel and Sprint platforms due to changes in our estimates of the remaining
useful lives of long-lived assets, changes in the expected timing and amount of
asset retirement obligations, and lease exit and other contract termination
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costs. The Nextel platform was successfully shut-down on June 30, 2013, and the
remaining infrastructure is expected to be completely decommissioned by the end
of calendar year 2016.
In October 2013, we announced Sprint SparkSM , which is an enhanced LTE network
capability that analyzes our three spectrum bands of LTE and connects a device
to the most optimal band available in the area. We expect the deployment period
for this technology to be determined over time based on many factors including
the availability of equipment, devices and applications. As part of Sprint
Spark, we plan to continue to expand 4G LTE technology on our 800 MHz and 2.5
GHz spectrum, which we expect will further enhance the quality of our network.
We expect the majority of the efforts to roll out 4G LTE on our 800 MHz spectrum
band to be completed by the end of calendar year 2015, subject to the timing and
completion of work to reconfigure the 800 MHz band (the “Report and Order”). We
expect the majority of the efforts to roll out 4G LTE on our 2.5 GHz spectrum
band to be completed over the next three years.
We are also modifying our existing backhaul architecture to enable increased
capacity to our network at a lower cost by utilizing Ethernet as opposed to our
existing time division multiplexing (TDM) technology. We are incurring
termination costs associated with our TDM contractual commitments with
third-party vendors on an on-going basis, and expect future termination costs
will range between approximately $25 million to $75 million, the majority of
which we expect will be recorded by March 31, 2016.
As of the date of the Clearwire Acquisition, Clearwire had deployed WiMAX
technology on approximately 17,000 cell towers and was in the process of
deploying 4G LTE technology using the 2.5 GHz spectrum on certain sites. We have
evaluated our consolidated cell tower portfolio, including the 17,000 cell
towers obtained in the Clearwire Acquisition, and identified approximately 6,500
redundant sites that we expect to no longer utilize. We expect lease exit costs
recorded in future periods associated with these redundant sites to range
between approximately $50 million to $100 million on a net present value basis.
The timing of lease exit charges will be dependent upon the date we cease
utilizing these sites without future economic benefit. We have continued to
deploy 4G LTE technology using the 2.5 GHz spectrum on approximately 10,000 of
the remaining Clearwire sites, of which 6,800 have now been completed. We plan
to cease using WiMAX technology by the end of calendar year 2015.
Ultimately, we expect Network Vision, along with our ongoing network
modernization efforts, to bring financial benefit to the Company through reduced
network maintenance and operating costs, capital efficiencies, reduced energy
costs, lower roaming expenses, backhaul savings, and reduction in total cell
sites, as well as improvements to the quality of service to subscribers. Our
expectation of financial savings is affected by multiple variables, including
our expectation of the timeliness of modernization across our existing network
footprint, which is managed by Sprint but is partly dependent upon our primary
OEMs.
Installment Billing Programs
During 2013, wireless carriers introduced new plans that allow subscribers to
forgo traditional service contracts and handset subsidies in exchange for lower
monthly service fees, early upgrade options, or both. In the latter part of
2013, AT&T, Verizon Wireless and T-Mobile each launched early upgrade programs
that included an option to purchase a handset using an installment billing
program. Sprint offers our own handset installment billing program called Sprint
Easy Pay.
Under the Sprint Easy Pay installment billing program, we expect to recognize a
majority of the revenue associated with future expected installment payments at
the time of sale of the handset. As compared to our traditional subsidized
plans, this results in better alignment of the equipment revenue with the cost
of the handset, which is expected to reduce the amount of subsidy recognized in
our operating results. Additionally, Sprint is offering lower monthly service
fees without a traditional contract as an incentive to attract subscribers to
certain of our service plans. These lower rates for service are available
whether the subscriber brings their own handset, pays the full retail price of
the handset or purchases the handset under our Sprint Easy Pay program. As the
adoption rates of these plans increase throughout our base of subscribers, we
expect Sprint platform postpaid average revenue per user (ARPU) to continue to
decline as a result of lower pricing associated with our new service plans as
compared to our traditional plans; however, as a result of Sprint Easy Pay, we
also expect reduced equipment net subsidy expense to partially offset these
declines. Since inception, these lower priced plans combined with the Sprint
Easy Pay program have been accretive to earnings. We expect that trend to
continue with the magnitude of the impact being dependent upon the rate of
subscriber adoption. We also expect that Sprint Easy Pay will require a greater
use of operating cash flows in the earlier part of the installment contract as
the subscriber will pay less upfront than traditional plans because they are
financing the handset over 24 months.
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RESULTS OF OPERATIONS
As discussed above, both the Clearwire Acquisition and the SoftBank Merger were
completed in July 2013. As a result of these transactions, the assets and
liabilities of Sprint Communications and Clearwire were adjusted to estimated
fair value on the respective closing dates. The Company’s financial statement
presentations distinguish between the predecessor period (Predecessor) relating
to Sprint Communications for periods prior to the SoftBank Merger and the
successor period (Successor) relating to Sprint Corporation, formerly known as
Starburst II, for periods subsequent to the incorporation of Starburst II on
October 5, 2012. The Successor financial information represents the activity and
accounts of Sprint Corporation, which includes the activity and accounts of
Starburst II prior to the close of the SoftBank Merger on July 10, 2013 and
Sprint Communications, inclusive of the consolidation of Clearwire Corporation,
prospectively following completion of the SoftBank Merger, beginning on July 11,
2013, for the 82 day period (Post-merger period). The accounts and operating
activity of Starburst II prior to the close of the SoftBank Merger primarily
related to merger expenses that were incurred in connection with the SoftBank
Merger (recognized in selling, general and administrative expense) and interest
related to the $3.1 billion convertible bond (Bond) Sprint Communications, Inc.
issued to Starburst II. The Predecessor financial information represents the
historical basis of presentation for Sprint Communications for the 10-day and
101-day periods ended July 10, 2013 prior to the SoftBank Merger.
The following discussion covers results for the Successor three and six-month
periods ended September 30, 2014 as compared to 2013. Results for the Successor
six-month period ended September 30, 2014 compared to the combined six-month
period ended September 30, 2013 are also discussed, to the extent necessary, to
provide an analysis of results on comparable periods although the basis of
presentation may not be comparable due to the application of the acquisition
method of accounting. Results for the combined three-month period ended
September 30, 2014 compared to the combined three-month period ended
September 30, 2013 are not discussed as the Successor discussions for that
period are considered sufficient to describe the significant trends in the
business since the activity from July 1, 2013 through July 10, 2013 (10-day
period ended July 10, 2013) is immaterial for the quarter ended September 30,
2013 (or is already described in the Predecessor Period of 10 and 101 Days Ended
July 10, 2013 section below).
Predecessor 10-Day and 101-Day Periods Ended July 10, 2013
Significant changes in the underlying trends affecting the Company’s
consolidated results of operations and net loss for the 10 and 101 days ended
July 10, 2013 were as follows:
We recorded a gain on previously-held Clearwire equity interests of approximately $2.9 billion for the difference between the estimated fair value of the equity interests owned prior to the acquisition ($5.00 per share offer price less an estimated control premium of approximately $0.60) and the carrying value of approximately $325 million for those previously-held equity interests; and Increased income tax expense was primarily attributable to taxable temporary differences as a result of the $2.9 billion gain on the previously-held equity interests in Clearwire, which was principally attributable to the increase in the fair value of Federal Communications Commission (FCC) licenses held by Clearwire and from amortization of FCC licenses. FCC licenses are amortized over 15 years for income tax purposes but, because these licenses have an indefinite life, they are not amortized for financial statement reporting purposes. |
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