VZ

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, for Verizon Communications Inc. The reporting period is significantly impacted by the acquisition of Alltel Corporation, which closed on January 9, 2009. This transaction made Verizon Wireless the largest wireless provider in the U.S. by customer count and revenue. The company operates two primary reportable segments: Domestic Wireless and Wireline.

Key Financial Metrics

Note: Total Debt calculated as Debt maturing within one year ($13,459M) plus Long-term debt ($55,674M) as of March 31, 2009. Q1 2008 debt figures are derived from the balance sheet comparison in the text.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 11.6% primarily due to the inclusion of Alltel's operating results. Domestic Wireless revenue surged 29.6% to $15.1 billion, while Wireline revenue declined 3.8% to $11.6 billion due to losses in Global Wholesale and Global Enterprise segments.
• Customer Base: Domestic Wireless total customers increased 28.8% to 86.6 million, driven by the acquisition of 13.2 million Alltel customers. Excluding Alltel, Verizon added 1.3 million net retail customers.
• Expense Increases: Operating expenses rose 12.3% to $21.9 billion. This includes $298 million in acquisition-related charges and $158 million in merger integration costs related to Alltel. Interest expense more than doubled to $925 million due to increased debt levels financing the acquisition.
• Balance Sheet Impact: Total assets increased to $226.9 billion from $202.4 billion at year-end 2008, largely due to the addition of Alltel's assets, including $8.8 billion in wireless licenses and $16.6 billion in goodwill. Cash reserves decreased significantly as $5.9 billion was paid for the Alltel equity.

Guidance, Outlook, and Risks

Management Commentary: Management emphasizes a focus on revenue growth in wireless and broadband markets to offset declines in traditional wireline voice services. The company aims to achieve operational efficiencies and cost savings from the Alltel integration, including reduced roaming costs and network consolidation. Capital expenditures were disciplined at 13.9% of revenue, down from 17.7% in the prior year.

Divestiture Requirement: As a condition of regulatory approval for the Alltel acquisition, Verizon is required to divest overlapping properties in 105 markets. On May 8, 2009, Verizon signed an agreement to sell a portion of these markets (approx. 1.5 million customers) to AT&T Mobility for $2.35 billion.

Risks and Contingencies:

• Integration Risk: Failure to achieve anticipated synergies from the Alltel integration could impact credit ratings and profitability.
• Market Conditions: Adverse economic conditions may lead to increased customer churn, particularly in business segments and mobile broadband services.
• Regulatory and Legal: Ongoing class action lawsuits regarding intelligence-gathering activities and environmental remediation costs (e.g., Hicksville site) present potential liabilities, though management does not expect a material effect on financial condition.
• Debt Covenants: The company is in compliance with all debt covenants, including a leverage ratio of 1.7 to 1.0 (limit 3.25 to 1.0) for Verizon Wireless.

Investor Verification Checklist

• Alltel Integration Progress: Verify the realization of projected cost savings and the timeline for network consolidation.
• Divestiture Completion: Monitor the finalization of the $2.35 billion sale of Alltel Divestiture Markets to AT&T and any remaining regulatory hurdles.
• Wireline Decline: Assess the rate of access line losses and the effectiveness of FiOS expansion in offsetting traditional wireline revenue declines.
• Debt Refinancing: Track the repayment of the $12.4 billion Bridge Facility used for the Alltel acquisition and the associated interest rate exposure.
• Customer Churn: Review trends in retail postpaid churn rates, which increased to 1.14% in Q1 2009, potentially signaling economic sensitivity.