Business context and reporting period
Verizon Communications Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. Verizon operates Consumer and Business segments, providing wireless and wireline communications services and equipment. The company said 2022 was expected to be a peak year for capital investment as it deploys C-Band spectrum and expands its 5G network.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $34.2 billion | $32.9 billion | $101.6 billion | $99.5 billion |
| Operating income | $7.9 billion | $8.9 billion | $23.2 billion | $24.8 billion |
| Net income attributable to Verizon | $4.9 billion | $6.4 billion | $14.7 billion | $17.5 billion |
| Diluted EPS | $1.17 | $1.55 | $3.49 | $4.21 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $28.2 billion | $31.2 billion |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $15.8 billion | $13.9 billion |
| Free cash flow | Not provided for quarter | Not provided for quarter | $12.4 billion | $17.3 billion |
Q3 consolidated operating margin was approximately 23.1%, down from 27.1% a year earlier (calculated from reported revenue and operating income). Q3 service revenues and other were nearly flat at $27.7 billion, while wireless equipment revenue rose to $6.6 billion from $5.4 billion. The reported net income decline also reflected lower other income, including pension remeasurement costs.
At September 30, 2022, total debt was $147.9 billion, including $15.0 billion maturing within one year; cash and cash equivalents were $2.1 billion, with an additional $1.5 billion of restricted cash. Total current assets were $39.7 billion versus current liabilities of $53.1 billion. Verizon reported compliance with debt covenants and said available funding sources were sufficient for operating and investing needs over the next 12 months and beyond.
Material changes versus the prior comparable period
- Q3 revenue increased 4.0%, but operating income fell 11.4%, net income attributable to Verizon fell 23.5%, and diluted EPS declined from $1.55 to $1.17. For the first nine months, revenue increased 2.0%, while operating income declined 6.4% and diluted EPS fell from $4.21 to $3.49.
- Consumer revenue grew 10.8% in Q3, reflecting TracFone, service growth and higher equipment sales, but segment operating income declined 3.2%; operating margin fell to 28.4% from 32.5%. Business revenue rose 1.9%, while segment operating income fell 21.2% and margin declined to 8.9% from 11.5%.
- Consumer retail postpaid net additions were 28,000 in Q3 versus 423,000 a year earlier; postpaid phone connections declined by 189,000. Consumer postpaid churn increased to 1.10% from 0.84%. Business postpaid net additions rose to 360,000 from 276,000.
- Nine-month operating cash flow fell $3.0 billion and capital expenditures increased $2.0 billion, reducing free cash flow by $4.9 billion. Verizon cited working-capital effects, higher receivables and inventory, and lower earnings.
- The comparison includes material portfolio effects: TracFone was acquired in November 2021, while Verizon Media was sold in September 2021. Its sale boosted prior-year results with a reported $706 million net gain in SG&A and contributed $1.4 billion of Q3 2021 revenue.
Outlook, commentary, risks and unusual items
- 2022 capital expenditures were expected to be $16.5–$17.5 billion, with C-Band deployment spending of an additional $5.0–$6.0 billion. Verizon described 2022 as a peak investment year. Through September, total capital expenditures were $15.8 billion, including approximately $4.5 billion related to C-Band deployment.
- Management reported cost pressure from inflation, including energy, transportation and labor costs, alongside increased interest expense from higher rates; it expected inflationary pressures to continue through the remainder of 2022 and potentially beyond. The filing provides no specific earnings or revenue guidance.
- Q3 included a $645 million pre-tax pension remeasurement loss; the nine-month loss was $843 million, compared with a $1.2 billion gain in the prior-year nine-month period. Nine-month early debt redemption costs were $1.2 billion. These and other special items affect period comparisons.
- Verizon posted $4.9 billion of collateral related to derivative contracts during the first nine months. C-Band clearing payments are expected to continue through 2024; final amounts and timing depend on incumbent spectrum holders’ progress. The company also reported expected costs of up to $340 million under agreements intended to accelerate spectrum clearance.
- Risks include high indebtedness, competition, inflation and adverse economic conditions, 5G deployment execution, cyberattacks, supplier disruptions, labor matters, regulation and benefit-plan costs. Approximately 20 federal patent cases were pending; the company said no current matter had a material accrual and it could not estimate reasonably possible losses beyond accrued amounts. Unrecognized tax benefits were $2.9 billion, and a significant change in the liability within 12 months was considered reasonably possible, though the range could not be estimated.
Important facts for investors to verify
- Whether postpaid phone losses and higher Consumer churn persist, and whether broadband and Business connection growth can offset them.
- Whether Consumer and Business margins stabilize as equipment costs, credit-loss provisions, compensation and network expenses rise.
- Progress against the 2022 capital-spending outlook, including C-Band deployment and spectrum-clearing costs, and the resulting effect on free cash flow.
- Debt maturities, refinancing costs and liquidity, particularly given $15.0 billion of debt maturing within one year and higher interest rates.
- How much reported year-over-year change reflects underlying performance versus the TracFone acquisition, Verizon Media divestiture, pension remeasurement and debt-redemption items.