Verizon Communications Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited, with comparisons to Q1 2017. Verizon operates Wireless and Wireline reportable segments; Corporate and other includes Oath, Verizon Connect and corporate items.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $31.8 billion | $29.8 billion | +6.6% |
| Operating income | $7.35 billion | $6.96 billion | +5.6% |
| Net income | $4.67 billion | $3.55 billion | +31.3% |
| Net income attributable to Verizon | $4.55 billion | $3.45 billion | +31.7% |
| Diluted EPS | $1.11 | $0.84 | +$0.27 |
| Operating cash flow | $6.65 billion | $1.38 billion | +$5.27 billion |
| Capital expenditures | $4.55 billion | $3.07 billion | +$1.49 billion |
| Free cash flow (non-GAAP) | $2.10 billion | $(1.69) billion | +$3.79 billion |
- Operating margin was approximately 23.1% and net margin approximately 14.7% in Q1 2018.
- Cash and cash equivalents were $1.92 billion at March 31, 2018; including restricted cash, the cash-flow statement total was $2.94 billion.
- Total debt was $119.1 billion, up from $117.1 billion at year-end 2017; $6.3 billion was classified as maturing within one year. Long-term debt was $112.7 billion.
- Current assets were $31.0 billion and current liabilities $31.6 billion. Verizon reported $8.9 billion of unused capacity under its $9.0 billion credit facility at quarter-end; it amended the facility in April to $9.5 billion and extended maturity to April 2022.
- Quarterly dividends declared were $0.59 per share; cash dividends paid were $2.4 billion.
Material changes and business performance
- Wireless segment revenue rose 4.9% to $21.9 billion; segment operating income increased 13.8% to $8.05 billion. Higher equipment revenue drove reported growth, while service revenue declined. Retail postpaid net additions were 260,000 and postpaid churn improved to 1.04% from 1.15%.
- Wireline revenue fell 1.6% to $7.56 billion and operating income declined to $69 million from $206 million. Traditional voice, video and legacy data weakness persisted; Fios Internet connections increased 4.0%, while Fios Video connections declined 1.8%.
- Corporate and other revenue increased substantially, mainly because Oath includes Yahoo’s operating business, acquired in June 2017. Oath revenue was approximately $1.9 billion in the quarter. IoT revenue, including Verizon Connect, was $0.4 billion, up 13%.
- Q1 operating cash flow and free cash flow improved sharply year over year, driven mainly by a $3.0 billion improvement in working-capital movements, higher earnings and $2.4 billion lower discretionary pension contributions. Cash flow comparisons also reflect other timing and tax effects.
- The effective tax rate declined to 22.9% from 31.4%, primarily reflecting the reduction in the U.S. federal corporate tax rate, partly offset by tax-law base broadening and fewer favorable audit resolutions than in the prior period.
Outlook, accounting changes and risks
- Management said 2018 priorities include retaining and growing the customer base, expanding growth businesses, monetizing network capabilities and investing in 4G/5G, fiber and technology infrastructure. The filing does not provide a clear numerical full-year financial guidance range.
- Verizon announced plans to launch 5G residential broadband commercially in three to five U.S. markets in 2018. The Straight Path and NextLink spectrum acquisitions support planned 5G deployment.
- Topic 606 revenue accounting was adopted January 1, 2018 using the modified retrospective method. Verizon recorded a $3.9 billion pretax ($2.9 billion after-tax) opening retained-earnings adjustment. Q1 2018 net income was $315 million higher than it would have been without Topic 606; prior-year figures were not restated, limiting direct comparability. The change shifted revenue toward equipment at device sale and deferred commissions.
- Q1 special items included $105 million of acquisition and integration charges and $249 million of early debt redemption costs. The prior-year quarter included $848 million of early debt redemption costs and a $126 million spectrum-transaction gain.
- Verizon reported $119.1 billion in total debt and identified high indebtedness, refinancing and interest-rate exposure among risks. A 100-basis-point rate change affecting floating-rate debt was estimated to change annual interest expense by approximately $0.3 billion.
- Other risks include competition and technology substitution, cybersecurity or network disruptions, regulation, pension costs, tax-law changes and execution of strategic transactions. Yahoo-related data-breach claims remain a contingency: Yahoo retained 50% of certain specified post-closing claims, while Verizon said a potential loss could not be reasonably estimated.
- Verizon reported approximately 35 patent-infringement actions, certain environmental matters and a California hazardous-waste investigation; management did not expect a material effect on financial condition from pending matters, though a matter could affect results in a particular period.
- Verizon expects adoption of the new lease standard in 2019 to have a significant balance-sheet impact. The company reported disclosure controls effective as of March 31, 2018.
Important facts for investors to verify
- Separate underlying operating trends from Topic 606 effects, particularly wireless equipment/service revenue, commission expense and the $315 million net-income impact.
- Assess the sustainability of cash generation: Q1 cash flow benefited from working-capital movements and pension-contribution timing, while capital expenditures rose to $4.55 billion.
- Track debt maturities, funding costs, asset-backed debt and liquidity; device-payment receivables secure $10.1 billion of asset-backed debt and related cash is restricted.
- Monitor wireless service revenue, postpaid churn and subscriber additions, alongside continued declines in Wireline legacy services and Wireline profitability.
- Follow 5G deployment and capital requirements, Oath integration and monetization, and the resolution of Yahoo-related contingencies and other legal or regulatory matters.