Verizon Communications Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statement figures are unaudited. Verizon operates Consumer and Business segments, with wireless, broadband, wireline and related services. The period includes TracFone, acquired in November 2021; the prior-year comparison includes Verizon Media, sold in September 2021.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $33.789B | $33.764B | $67.343B | $66.631B |
| Operating income | $7.552B | $8.165B | $15.348B | $15.935B |
| Net income attributable to Verizon | $5.199B | $5.800B | $9.779B | $11.045B |
| Diluted EPS | $1.24 | $1.40 | $2.33 | $2.67 |
| Net cash from operating activities | Not separately stated | Not separately stated | $17.665B | $20.438B |
| Capital expenditures, including capitalized software | Not separately stated | Not separately stated | $10.491B | $8.716B |
| Free cash flow (non-GAAP) | Not separately stated | Not separately stated | $7.174B | $11.722B |
Q2 consolidated revenue was essentially flat year over year, while first-half revenue rose 1.1%. Q2 operating margin was approximately 22.4%, versus 24.2% a year earlier; first-half operating margin was approximately 22.8%, versus 23.9%. First-half Consolidated Adjusted EBITDA, a non-GAAP measure, was $23.905B, down from $24.352B.
- Consumer: Q2 revenue increased 9.1% to $25.6B; first-half revenue increased 10.0% to $50.9B. Growth reflected service and equipment revenue, including TracFone. Q2 segment operating income declined 4.6% to $7.150B; operating margin fell to 27.9% from 31.9%.
- Business: Q2 revenue declined 1.8% to $7.6B; first-half revenue declined 1.3% to $15.3B. Q2 segment operating income fell 21.1% to $675M, and operating margin fell to 8.9% from 11.0%.
- Consumer wireless service revenue and postpaid ARPA rose, but Q2 postpaid phone net additions were negative 215,000 and retail wireless net additions were negative 145,000. Consumer postpaid churn increased to 0.93% from 0.83%. Business postpaid net additions were 430,000 in Q2.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $1.857B; cash, cash equivalents and restricted cash totaled $3.333B. Current assets were $37.499B and current liabilities $49.224B.
- Total debt was approximately $149.1B, comprising $132.5B unsecured and $16.6B secured debt. Debt maturing within one year was $12.873B. Long-term debt was $136.184B.
- First-half operating cash flow decreased $2.773B year over year, which Verizon attributed principally to working-capital effects, higher inventory, receivables and lower earnings. Free cash flow declined $4.548B as operating cash flow fell and capital spending rose.
- First-half cash dividends paid were $5.378B. Verizon reported $3.1B of commercial paper outstanding and $1.0B borrowed under a short-term uncommitted facility. Its $9.5B revolving credit facility had $9.427B unused capacity; the filing says debt covenants were met.
Material changes and unusual items
- Consumer revenue growth was offset at the consolidated level by Business softness and the absence of Verizon Media revenue following its 2021 sale. Verizon Media contributed approximately $2.1B and $3.9B of revenue in Q2 and the first half of 2021, respectively.
- Higher device sales volumes, a shift toward higher-priced devices and TracFone increased wireless equipment revenue and related costs. First-half cost of wireless equipment rose 27.8%.
- First-half other income (expense), net was an expense of $875M, compared with income of $903M in 2021. Items include $1.241B of early debt redemption costs in 2022, versus $1.132B in 2021, and a $198M pension remeasurement loss in 2022 versus a $1.314B pension gain in 2021. The 2021 period also included a $223M spectrum-license loss.
- Verizon paid $1.4B in January 2022 for C-Band clearing incentives. First-half capital expenditures were $10.5B, including approximately $2.8B related to C-Band deployment.
Outlook, management commentary and risks
- Management described 2022 as a peak year for capital investment. It expected full-year capital expenditures of $16.5B–$17.5B, plus $5.0B–$6.0B for C-Band deployment.
- Management said operating cash flow and external financing, as needed, were expected to fund operating and investing requirements over the next 12 months and beyond. No EPS or revenue guidance is provided in the supplied filing text.
- Verizon reported that inflation was raising energy, transportation and labor costs and making customers more price conscious, contributing to elevated promotions and expected margin pressure through the rest of 2022. It had not experienced a material COVID-19 impact from new variants to date, but said future effects were uncertain.
- C-Band clearing obligations were estimated at $7.7B, with payments expected through 2024 and spectrum clearing required by December 2025. Separate early-clearance agreements could cost up to $340M; $164M had been accrued by June 30.
- Other disclosed exposures include high indebtedness, competition, 5G deployment execution, supply-chain disruption, cyberattacks, inflation, interest-rate and foreign-exchange movements, and regulatory or tax changes. Verizon said it was involved in approximately 20 federal patent-infringement actions; a small number could go to trial in the next 12 months. It did not expect pending legal or regulatory matters to materially affect financial condition, though period results could be affected.
- Verizon said disclosure controls were effective as of June 30, 2022 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Consumer customer additions and churn improve, particularly negative postpaid phone net additions and increased postpaid churn.
- Whether Consumer revenue growth translates into stronger profitability as promotions, device costs, credit-loss provisions and inflation pressure margins.
- Progress against the 2022 capital-spending outlook and C-Band deployment milestones, including clearing costs and timing.
- Cash generation, working-capital trends, free cash flow, dividends and debt maturities, including ongoing use of commercial paper and asset-backed financing.
- How much of the year-over-year earnings decline reflects unusual pension and debt-redemption items versus underlying operating performance; assess non-GAAP measures alongside GAAP results.
- Developments in TracFone integration and contingent consideration, tax audits, patent litigation, and the transition from LIBOR-based contracts.