Verizon Communications Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; financial statements are unaudited. Amounts are in U.S. dollars unless noted. Verizon reports Domestic Wireless and Wireline; Vodafone owns 45% of Verizon Wireless, reflected as noncontrolling interest.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $27.536 billion | $26.773 billion | $54.526 billion | $53.686 billion |
| Operating income | $4.892 billion | $410 million | $9.345 billion | $4.851 billion |
| Net income | $3.604 billion | $553 million | $6.868 billion | $2.871 billion |
| Net income attributable to Verizon | $1.609 billion | Loss of $1.192 billion | $3.048 billion | Loss of $749 million |
| Diluted EPS attributable to Verizon | $0.57 | Loss of $0.42 | $1.07 | Loss of $0.26 |
Revenue rose 2.8% in Q2 and 1.6% in the first half year over year. Operating margin was approximately 17.8% in Q2 2011, compared with 1.5% in Q2 2010; the prior-year comparison included $3.9 billion in severance, pension and benefit charges and other unusual items. Verizon-attributable net income excludes earnings attributable to noncontrolling interests.
- Segments, Q2: Domestic Wireless revenue was $17.293 billion, up 10.2%, with operating income of $4.692 billion, essentially flat. Wireline revenue was $10.247 billion, down 0.3%; operating income increased to $318 million from $207 million.
- Wireless indicators: Total connections rose 6.6% to 106.3 million. Retail postpaid data ARPU increased 15.2% to $21.26; smartphone penetration among retail postpaid customers reached 35.9%, versus 21.3% a year earlier. Wireless segment EBITDA service margin declined to 45.4% from 47.2%.
- Wireline indicators: FiOS Internet subscribers increased 22.4% to 4.478 million and FiOS TV subscribers rose 24.7% to 3.848 million. Total voice connections declined 7.9%. Strategic services revenue grew 17.8% in Q2, partly reflecting Terremark.
- Cash flow, six months: Operating cash flow was $12.792 billion, down $4.015 billion year over year. Capital expenditures were $8.918 billion, up from $7.619 billion; reported free cash flow was $3.874 billion, down from $9.188 billion. Cash and equivalents decreased $428 million to $6.240 billion.
- Liquidity and debt: Current assets were $22.472 billion versus current liabilities of $27.374 billion. Debt maturing within one year was $6.055 billion and long-term debt was $47.927 billion, for total balance-sheet debt of $53.982 billion. Verizon reported $6.1 billion of unused capacity on its $6.2 billion credit facility and compliance with debt covenants.
- Dividends: Q2 dividend declared was $0.4875 per share, compared with $0.4750 a year earlier. First-half dividends paid were $2.759 billion.
Material changes and unusual items
- Q2 2010 results included $3.896 billion of severance, pension and benefit charges, $187 million of merger integration and acquisition costs, $195 million of access-line spin-off charges, and a $268 million non-cash wireless revenue deferral adjustment. These items materially affect year-over-year earnings comparisons.
- First-half operating cash flow fell, mainly due to timing of tax payments and refunds, wireless-device inventory purchases, higher pension contributions, and cash flows from operations divested in 2010.
- Verizon acquired Terremark in April 2011 for $19 per share in cash. The preliminary purchase-price allocation recorded $1.404 billion of goodwill and $410 million of amortizable intangible assets; acquired debt was repaid in May. Valuations remained preliminary.
- Verizon issued $6.25 billion of notes in March and used proceeds for debt repayment and general corporate purposes. It also redeemed or repaid debt, while Verizon Wireless repaid $4.0 billion of notes in May.
- Verizon Wireless declared a $10 billion distribution on July 28, after quarter-end, payable January 31, 2012. Based on ownership at the filing date, Verizon expected to receive $5.5 billion and Vodafone $4.5 billion.
Outlook, commentary and risks
- Management expected 2011 consolidated capital expenditures to be similar to 2010 spending of $16.5 billion. LTE coverage had reached more than 100 markets as of July 2011; management expected more than 175 markets and population coverage above 185 million by year-end.
- Management cited growth in wireless data, FiOS and strategic services, alongside ongoing cost-control efforts. It expected wireless service and data revenue to continue growing, while noting that data ARPU growth depends partly on device mix and pricing.
- Key pressures include wireline voice-line losses and technology substitution, declining Global Wholesale revenue and traditional voice usage, wireless voice ARPU declines, and higher smartphone equipment costs, commissions and network costs. Management also cautioned that renewed economic pressures could affect revenue and profitability.
- Risks identified include competition, economic conditions, labor matters, technology and supplier disruption, benefit-plan costs, network or cybersecurity incidents, natural disasters, financing and interest-rate conditions, regulation, litigation, and execution of acquisitions and business strategies. A 100-basis-point change affecting floating-rate debt was estimated to change annual interest expense by about $0.1 billion.
- Verizon reported pending litigation, including an Idearc-related suit seeking more than $9 billion. The company said no pending matter had a material accrual and that it could not estimate reasonably possible losses; resolution could nevertheless materially affect results for a particular period. The company did not expect pending legal or regulatory matters to materially affect financial condition.
- Unrecognized tax benefits were $2.7 billion at June 30, 2011; the company said this liability could change significantly over the next 12 months, but a range could not be estimated. Tax examinations and litigation were ongoing.
Important facts for investors to verify
- How much of the year-over-year profit improvement reflects the absence of 2010 restructuring and other unusual charges, versus underlying operating progress.
- Whether wireless revenue growth and subscriber additions can offset lower voice ARPU, higher device costs and the decline in wireless segment margins.
- Whether FiOS and strategic-services growth can counter continued wireline voice and wholesale revenue declines.
- Whether cash generation and the announced Verizon Wireless distribution support capital spending, dividends and debt management, given lower first-half free cash flow.
- Developments in the Idearc litigation, tax examinations, Terremark purchase-price allocation and environmental remediation obligations.