Verizon Communications Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Verizon provides wireless and wireline communications services through Consumer and Business segments. Results include TracFone, acquired in November 2021; Verizon Media was sold in September 2021, affecting comparability.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior balance |
|---|---|---|
| Operating revenue | $33.6 billion | $32.9 billion; up 2.1% |
| Operating income | $7.8 billion | $7.8 billion; broadly flat |
| Net income attributable to Verizon | $4.6 billion; diluted EPS $1.09 | $5.2 billion; diluted EPS $1.27 |
| Operating cash flow | $6.8 billion | $9.7 billion |
| Capital expenditures | $5.8 billion | $4.5 billion |
| Free cash flow (non-GAAP) | $1.0 billion | $5.2 billion |
| Total debt | $153.4 billion | $150.9 billion at Dec. 31, 2021 |
| Cash and cash equivalents | $1.7 billion | $2.9 billion at Dec. 31, 2021 |
| Dividends paid | $2.7 billion | $2.6 billion |
Margins: Consolidated operating margin was approximately 23.2%, versus 23.6%. Consumer operating income fell 2.7% to $7.3 billion, with operating margin of 28.9% versus 33.0%. Business operating income fell 25.1% to $673 million, with margin of 8.7% versus 11.6%. Consolidated Adjusted EBITDA, a non-GAAP measure, was $12.0 billion versus $12.2 billion.
Liquidity and debt: Current assets were $35.6 billion and current liabilities $46.6 billion at March 31. Debt maturing within one year was $13.4 billion, up from $7.4 billion at year-end. Debt included $137.3 billion unsecured and $16.1 billion secured. Verizon reported compliance with restrictive debt covenants and said available funding sources were sufficient for operating and investing needs over the next 12 months and beyond.
Material changes and drivers
- Consumer revenue rose 10.9% to $25.3 billion, supported by TracFone, higher wireless service revenue and equipment sales. Business revenue declined 0.9% to $7.7 billion, with weakness in wholesale, public sector and global enterprise partly offset by small and medium business growth.
- Service revenue and other declined to $27.2 billion from $27.9 billion, while wireless equipment revenue increased to $6.3 billion from $4.9 billion. Equipment costs also increased, reflecting higher device volumes, mix and TracFone.
- Net income fell, principally reflecting $1.2 billion of early debt redemption costs. Other income (expense), net shifted to an expense of $924 million from income of $401 million. Lower interest expense and a lower effective tax rate partly offset the effect; the tax rate was 22.6% versus 24.0%.
- Operating cash flow decreased $2.9 billion, primarily from working-capital changes, including higher inventory and receivables, and lower earnings. Higher capital spending contributed to the $4.2 billion reduction in free cash flow.
- Reported revenue comparisons also reflect the Verizon Media divestiture: the business contributed approximately $1.9 billion of Q1 2021 revenue. The TracFone acquisition increased Consumer revenue and costs in Q1 2022.
Outlook, commentary and risks
- Management expects 2022 to be a peak capital-investment year. Forecast capital expenditures are $16.5–$17.5 billion, plus $5.0–$6.0 billion for C-Band deployment. Q1 spending included approximately $1.5 billion for C-Band.
- Verizon said C-Band service launched in January and covered approximately 113 million U.S. points of presence at quarter-end. Agreements with satellite operators aim to accelerate spectrum clearing; related costs could reach $340 million.
- Inflation was increasing network energy, transportation and labor costs; management expected continued cost pressures during 2022 and noted potential effects on customers and the industry. COVID-19 had not materially affected results to date, but future effects remained uncertain.
- The company estimates C-Band clearing and incentive obligations at $7.7 billion, with payments expected through 2024 and clearing required by December 2025; timing and amounts may vary. TracFone contingent consideration may total up to $650 million, with payments expected to begin in 2022 and continue through 2024.
- Pending legal and regulatory matters were not expected to materially affect financial condition, though an individual period’s results could be affected. Verizon disclosed about 20 patent-infringement actions; a reasonably possible loss range was not estimable. Unrecognized tax benefits were $3.0 billion, and the liability could change significantly over the next 12 months.
- Key stated risks include competition, execution and timing of 5G deployment, high indebtedness and credit-market conditions, inflation and economic conditions, cyberattacks, supplier disruption, litigation, regulation, and benefit-plan costs. No specific revenue or EPS guidance was provided in the supplied filing text.
Important facts for investors to verify
- Progress against the 2022 capital-spending plan, including additional C-Band investment and spectrum-clearing obligations.
- Whether operating cash flow and free cash flow recover from Q1’s working-capital and capital-spending pressures.
- Consumer and Business customer trends, churn, margins and the contribution and integration costs of TracFone.
- Debt maturities, refinancing needs and the effect of interest rates; management estimated that a 100-basis-point change affecting floating-rate debt would change annual interest expense by approximately $405 million.
- Developments in inflation, tax audits, patent litigation and C-Band clearing that could affect costs or reported results.