VZ

Verizon Communications Inc. - 10-Q Summary (Q3 2003)

Business Context and Reporting Period

This filing covers the quarterly period ended September 30, 2003. Verizon Communications Inc. operates as a leading provider of wireline and wireless communications services in the United States, with international investments. The company is organized into four reportable segments: Domestic Telecom, Domestic Wireless, Information Services, and International. The reporting period includes significant accounting changes regarding directory revenue recognition and the adoption of SFAS No. 143 for asset retirement obligations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased slightly ($42M or 0.2% in Q3) driven by strong growth in the Domestic Wireless segment (+18.2% in Q3), which added 1.4 million net subscribers. This offset declines in Domestic Telecom (-4.1% in Q3) due to regulatory pricing rules and technology substitution.
• Profitability Decline: Operating income decreased significantly ($2.8B or 46.7% in Q3) primarily due to the absence of a $2.5B gain from the sale of access lines in Q3 2002 and increased pension costs. Net income dropped $2.6B in Q3 compared to the prior year, heavily influenced by the prior year's one-time gains and the current year's accounting change charges.
• Accounting Changes: The company adopted the amortization method for directory revenues (Jan 1, 2003), resulting in a one-time cumulative charge of $1.65B after-tax. Adoption of SFAS No. 143 resulted in a one-time gain of $2.15B after-tax related to asset retirement obligations.
• Discontinued Operations: The company sold its interest in Iusacell in July 2003, recording a $931M after-tax loss in Q2 2003. This is now classified as discontinued operations.
• Debt Reduction: Total debt decreased by approximately $7.8B year-to-date through repayments, reducing the debt-to-debt-plus-equity ratio to 56.4%.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects total capital expenditures for 2003 to be between $12.0 billion and $12.5 billion.
• Outlook Revision: On September 23, 2003, the company issued a revised financial outlook for 2003 (details of specific numbers not provided in this text, but noted as a significant update).
• Labor Costs: New union contracts reached in September 2003 will result in a Q4 2003 charge of approximately 3 cents per share for lump-sum payments and 4 cents per share for retiree health care costs. Voluntary separation offers announced in September/October 2003 are expected to have a significant financial impact in Q4 2003.
• Regulatory Risks: The FCC's February 2003 order on unbundling network elements is estimated to impact earnings by less than 1 cent per share in 2003, but potentially 4 to 6 cents per share in 2004 due to arbitrage opportunities.
• Contingencies: Vodafone holds put rights to sell up to $20 billion of its interest in Verizon Wireless between 2003 and 2007. Vodafone did not exercise these rights in the window ending August 9, 2003.

Investor Verification Checklist

• Wireless Subscriber Quality: Verify the sustainability of the 14.3% subscriber growth and the 1.85% churn rate in the Domestic Wireless segment.
• Regulatory Impact: Assess the potential 4-6 cent per share earnings impact in 2004 from the FCC's unbundling rules and the status of ongoing appeals.
• Q4 2003 Charges: Confirm the final financial impact of the new union contracts and voluntary separation offers, which are expected to be significant.
• Debt Strategy: Monitor the execution of the debt reduction strategy and the potential exercise of Vodafone's put rights on Verizon Wireless equity.
• Accounting Adjustments: Review the long-term effects of the directory revenue recognition change on the Information Services segment margins.