VERIZON COMMUNICATIONS INC quarterly report, Q2 FY2023

Verizon Communications Inc. — Q2 2023 Form 10-Q

Business context and reporting period. Verizon is a communications provider with Consumer and Business reportable segments. This unaudited quarterly report covers the three and six months ended June 30, 2023, compared with the same periods in 2022.

Financial performance and condition

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Operating revenue	$32.6 billion	$33.8 billion	$65.5 billion	$67.3 billion
Operating income	$7.2 billion	$7.6 billion	$14.8 billion	$15.3 billion
Net income attributable to Verizon	$4.6 billion	$5.2 billion	$9.6 billion	$9.8 billion
Diluted earnings per share	$1.10	$1.24	$2.27	$2.33

Q2 operating margin was approximately 22.1%, compared with 22.4% a year earlier; net income attributable to Verizon declined about 11%. In the first half, operating cash flow was $18.0 billion, capital expenditures were $10.1 billion, and free cash flow, a non-GAAP measure, was $8.0 billion. Verizon paid $5.5 billion in dividends during the half.

At June 30, cash and cash equivalents were $4.8 billion, with an additional $1.5 billion of restricted cash. Total debt was approximately $152.7 billion, up from $150.6 billion at year-end 2022; $14.8 billion was classified as maturing within one year. The effective interest rate was 4.7% in the first half, versus 3.4% in 2022. Verizon reported compliance with debt covenants and $9.5 billion of unused capacity on its revolving credit facility.

Material changes versus prior comparable periods

• Q2 consolidated revenue fell 3.5%; first-half revenue fell 2.7%. Consumer revenue declined 4.1% in Q2 and 2.9% for the half; Business revenue declined 1.9% and 2.3%, respectively.
• Service revenue increased, including from postpaid pricing actions and fixed wireless access growth, but this was more than offset by lower wireless equipment revenue. Consumer equipment revenue fell 22.4% in Q2, reflecting lower device sales and a 38% decline in upgrades.
• Consumer Q2 operating income rose 2.5% to $7.3 billion, while Business operating income fell 21.0% to $533 million. Business pressure included secular declines in traditional networking and voice services; postpaid phone churn also increased year over year in both segments.
• Q2 interest expense increased 63.7% to $1.3 billion, primarily reflecting higher borrowing rates and average debt. First-half interest expense rose 58.6% to $2.5 billion.
• First-half operating cash flow increased $355 million year over year, helped by working-capital improvement, including fewer phone upgrades and lower inventories. Capital expenditures decreased $421 million.

Outlook, management commentary, and risks

• Management expects 2023 capital expenditures of $18.25 billion to $19.25 billion. Verizon said it completed its accelerated $10 billion C-Band deployment capital program in Q2; ongoing deployment will be funded through its regular capital expenditure program. C-Band covered approximately 220 million people at June 30.
• Management stated that operating and investing needs over the next 12 months and beyond can be funded through operations and, as needed, external financing. It expects capital spending to be financed primarily with internally generated funds.
• Verizon accrued about $365 million in June for C-Band accelerated-clearance incentives. Approximately $4.2 billion of remaining clearing and incentive obligations, inclusive of that accrual, was expected to be due by year-end; the company expects approximately $4.6 billion of payments through 2024. Timing and amounts depend on incumbent license holders’ clearing progress.
• Special items included $237 million of severance charges and $155 million of asset-rationalization charges in the first half. The filing also reports $249 million of first-half severance charges in its employee-benefits note; investors may wish to verify the reconciliation. The prior-year comparison included $1.2 billion of early debt-redemption costs.
• Verizon is assessing media reports alleging potential health or environmental risks from lead-sheathed copper cables. It said it lacked the reports’ testing methods and results and was conducting its own testing with a third-party expert; potential actions and financial, operational, regulatory, or reputational effects could not yet be predicted.
• Other disclosed risks include competition, inflation and economic conditions, 5G deployment execution, cybersecurity and network disruptions, high indebtedness, interest-rate exposure, tax uncertainty, and litigation. Verizon reported approximately 25 patent-infringement actions; it did not expect pending legal or regulatory matters to materially affect financial condition, though a matter could materially affect a particular period’s results. No material risk-factor changes from the 2022 Form 10-K were reported.

Important facts for investors to verify

• Whether Consumer service-revenue growth and fixed wireless additions can offset falling equipment sales, elevated upgrade declines, and prepaid subscriber pressure.
• Business segment revenue, operating income, and churn trends, particularly in enterprise networking and traditional voice services.
• Debt maturities, refinancing costs, and the effect of higher interest rates on interest expense and cash available after dividends and capital spending.
• Actual timing and amount of C-Band clearing payments, alongside delivery of the stated capital expenditure range.
• Results of the lead-sheathed cable testing and any resulting remediation, legal, regulatory, or reputational exposure.
• The severance-charge reconciliation and developments in tax audits, patent litigation, and other contingencies.