Verizon Communications Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020. Verizon is a communications and technology provider operating through Consumer and Business segments, with Verizon Media and other activities included in corporate and other. Results are unaudited interim results and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenue | $32.867 billion | $31.610 billion | +4.0% |
| Operating income | $7.770 billion | $6.579 billion | +18.1% |
| Net income attributable to Verizon | $5.245 billion | $4.156 billion | +26.2% |
| Diluted earnings per share | $1.27 | $1.00 | +$0.27 |
| Net cash from operating activities | $9.694 billion | $8.824 billion | +$870 million |
| Capital expenditures, including capitalized software | $4.494 billion | $5.274 billion | -$780 million |
| Free cash flow (non-GAAP) | $5.200 billion | $3.550 billion | +$1.650 billion |
Revenue growth was led by Consumer (+4.7% to $22.8 billion); Business revenue increased 1.3% to $7.8 billion. Consolidated operating expenses rose just 0.3%, while operating income improved. Consumer operating income was $7.519 billion, with a 33.0% margin versus 33.5%; Business operating income was $899 million, with an 11.6% margin versus 12.4%. Consolidated Adjusted EBITDA, a non-GAAP measure, was $12.167 billion versus $11.924 billion.
Cash and cash equivalents were $10.205 billion at quarter-end, down from $22.171 billion at year-end; cash, cash equivalents and restricted cash totaled $11.495 billion. Current assets were $39.647 billion and current liabilities $38.730 billion. Total debt was approximately $158.5 billion, up from $129.1 billion at year-end; management reported $147.6 billion unsecured and $10.9 billion secured debt. Verizon paid $2.601 billion in dividends. Free cash flow excludes spectrum purchases, acquisitions and certain other cash uses, and should not be viewed as cash available for discretionary spending.
Material changes and notable items
- Revenue increased $1.257 billion year over year. Wireless equipment revenue rose as more devices were sold and the sales mix shifted toward higher-priced devices; service revenue also grew.
- The prior-year comparison includes a $1.195 billion pre-tax loss on spectrum licenses and a $182 million pension remeasurement loss. Q1 2021 included a $223 million pre-tax loss on agreements to sell certain licenses. These items affect comparisons of reported earnings.
- Q1 investing cash outflow was $49.653 billion, chiefly reflecting $44.6 billion paid for C-Band licenses. Financing cash inflow was $27.956 billion, including $31.383 billion of proceeds from long-term borrowings.
- Interest expense increased 6.5% to $1.101 billion, principally because average debt was higher; the reported effective interest rate on average debt was 3.8%, down from 4.2%.
- Consumer wireless retail postpaid net additions were negative 326,000, versus negative 525,000 a year earlier; postpaid phone churn was 0.77% in both periods. Consumer Fios internet connections increased, while Fios video connections declined.
Outlook, commentary and risks
- Management expects 2021 capital expenditures of $17.5–$18.5 billion, excluding C-Band deployment costs. C-Band spending is expected to be approximately $10 billion over three years, including $2–$3 billion in 2021.
- Verizon paid $45.5 billion for C-Band licenses and expects approximately $7.4 billion in additional clearing-cost and incumbent incentive payments, beginning in 2021 and continuing through 2024, depending on spectrum clearing progress. The FCC requires clearing by December 2025.
- Verizon expects to continue assessing its elevated cash balance, which it maintained in response to pandemic-related uncertainty. Management says operating cash and available financing are expected to fund ongoing needs; additional financing may be required for further investments.
- In April 2021, Verizon modified certain cell-tower leases to support 5G deployment. It expects these changes to increase operating lease assets and liabilities by approximately $7.0–$7.5 billion in Q2 2021.
- The TracFone acquisition, for approximately $3.1 billion cash plus $3.1 billion in Verizon stock and up to $650 million of potential additional cash consideration, remained subject to approvals and was expected to close in the second half of 2021. Bluegrass Cellular was acquired in March for approximately $405 million.
- Management cited competition, COVID-19 impacts, supplier disruption, 5G deployment execution, high indebtedness, credit-market conditions, cybersecurity, regulatory changes, taxes and benefit-plan costs among factors that could affect results. The filing says existing risk factors had no material changes.
- Legal and regulatory matters are ongoing; no pending matter had a material accrual, and the filing says outcomes could affect results in a particular period. Verizon also faced approximately 25 patent-infringement actions. Unrecognized tax benefits were $2.8 billion, and the possible change over the next 12 months could be significant, though the range could not be estimated.
Important facts for investors to verify
- Track C-Band clearing-payment timing, total spectrum-related cash commitments, and the timing of licenses becoming available for use.
- Assess how higher debt and the planned network investment program affect interest costs, liquidity, dividends and future free cash flow.
- Monitor service revenue, postpaid customer trends and churn, particularly against equipment-promotion costs and declining legacy wireline services.
- Review the lease modifications, TracFone closing terms and approvals, and any material developments in litigation or tax examinations.
- Distinguish reported earnings from adjusted measures and account for prior-year spectrum and pension charges when evaluating year-over-year trends.