Verizon Communications Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Verizon provides wireless and wireline communications, media and related services. Figures below are in U.S. dollars; year-over-year comparisons may be affected by accounting changes and unusual items.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $32.2B | $30.5B | $64.0B | $60.4B |
| Operating income | $6.6B | $8.0B | $14.0B | $15.0B |
| Net income | $4.2B | $4.5B | $8.9B | $8.0B |
| Net income attributable to Verizon per diluted share | $1.00 | $1.07 | $2.10 | $1.91 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $16.4B | $9.3B |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $7.8B | $7.0B |
| Free cash flow | Not stated for quarter | Not stated for quarter | $8.6B | $2.3B |
- Q2 revenue rose 5.4%; operating income fell 17.4% and net income fell 5.2%. The reported Q2 operating margin was approximately 20.5%, versus 26.2% a year earlier; the prior-year figure included a $1.8B divestiture gain.
- For the first half, revenue rose 6.0%, operating income declined 6.7%, and net income increased 11.0%. The effective tax rate fell to 23.0% from 33.9%, primarily reflecting the lower U.S. federal corporate tax rate under the Tax Cuts and Jobs Act.
- Management’s non-GAAP adjusted EBITDA was $11.9B for Q2 versus $11.2B, and $23.6B for the first half versus $22.1B. These measures exclude specified special items and are not GAAP results.
- Wireless revenue increased 5.5% in Q2 and 5.2% year to date; Wireless segment operating income rose 11.7% and 12.7%, respectively. Wireline revenue decreased 3.4% in Q2 and 2.5% year to date; its segment had a $19M operating loss in Q2 and $50M operating income for the first half.
- Q2 diluted EPS was lower year over year despite revenue growth. The six-month EPS increase reflects, among other factors, the lower tax rate.
Cash, debt and liquidity
- At June 30, 2018, cash and cash equivalents were $1.75B, total debt was $114.6B, and current assets and current liabilities were $30.9B and $32.3B, respectively. Total debt was down from $117.1B at December 31, 2017.
- First-half free cash flow was $8.6B, up from $2.3B. Verizon attributed the improvement primarily to working-capital changes, including a tax-reform benefit, higher earnings, and lower discretionary employee-benefit contributions. This non-GAAP measure does not represent cash available for all discretionary uses.
- First-half dividends paid were $4.8B. The declared dividend was $0.59 per share for Q2. Verizon reported $9.4B of unused capacity under its $9.5B credit facility and compliance with its debt covenants.
- Approximately 78% of debt was fixed-rate, including the effect of hedges. Management estimated that a 100-basis-point change affecting floating-rate debt would alter annual interest expense by about $0.3B.
Material changes, outlook and notable items
- Wireless equipment revenue increased, partly because of higher-priced devices and the adoption of revenue-accounting Topic 606. Topic 606 reallocates some contract revenue from service to equipment and defers certain commissions. Verizon reported that its adoption increased first-half 2018 net income by $657M versus the amount without adoption; prior-year periods were not restated, limiting comparability.
- Q2 results included approximately $0.7B of product realignment charges, primarily related to discontinuing the go90 platform and associated content, and $0.3B of severance charges. The first half also included $0.2B of early debt-redemption losses. Q2 2017 included the $1.8B divestiture gain and higher Yahoo acquisition and integration charges.
- Wireless postpaid net additions were 531,000 in Q2, down from 614,000; postpaid churn was 0.97% versus 0.94%. Verizon cited higher churn partly offset by higher gross additions. Wireline faced continuing competition, technology substitution and declines in traditional voice, broadband and linear video; management warned that accelerated declines could lead to a future goodwill impairment, although it concluded impairment was not more likely than not at quarter-end.
- Management described ongoing investment in network capacity, fiber and 5G. Verizon said it planned a commercial 5G residential broadband launch in four U.S. markets during 2018, including Sacramento, Los Angeles and Houston. The filing provides no specific full-year financial guidance.
- Verizon expects adoption of lease accounting in 2019 to significantly increase reported balance-sheet assets and liabilities for operating leases; the impact had not yet been quantified. It also continued to assess the tax-reform effects and reported $2.4B of unrecognized tax benefits, with possible changes over the next 12 months not estimable.
- The filing discusses ongoing litigation, environmental matters and approximately 35 patent-infringement actions. Verizon said it did not expect pending legal or regulatory matters to materially affect financial condition, but they could materially affect results in a particular period. It also identified competition, technology change, cybersecurity, high indebtedness, financing costs, labor matters and benefit-plan costs as risks.
Important facts for investors to verify
- How much of revenue and earnings growth is driven by underlying customer economics versus Topic 606, device sales mix, tax changes and special items.
- Whether Wireless service revenue, postpaid churn, net additions and customer spending trends improve or weaken in subsequent quarters.
- Whether Wireline revenue and profitability declines accelerate, and whether future impairment indicators emerge.
- Whether free-cash-flow improvement is sustainable after working-capital, tax and pension-contribution effects, alongside the funding needs of capital spending and dividends.
- Debt maturity, refinancing and floating-rate exposure, and the eventual balance-sheet impact of the 2019 lease-accounting adoption.
- Progress and costs of 5G deployment, and whether planned launches translate into commercial customer demand.