Verizon Communications Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are with Q1 2019 unless otherwise noted. Verizon operates Consumer and Business reportable segments; Verizon Media and other items are included in Corporate and other.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Operating revenue | $31.610 billion | $32.128 billion; down 1.6% |
| Operating income / margin | $6.579 billion / 20.8% | $7.709 billion / 24.0% |
| Net income attributable to Verizon | $4.156 billion | $5.032 billion; down 17.4% |
| Diluted EPS | $1.00 | $1.22 |
| Net cash from operating activities | $8.824 billion | $7.081 billion |
| Capital expenditures | $5.274 billion | $4.268 billion |
| Free cash flow | $3.550 billion | $2.813 billion |
| Cash and cash equivalents | $7.047 billion | $2.594 billion at December 31, 2019 |
| Total debt | $117.7 billion | $111.5 billion at December 31, 2019 |
Operating cash flow and free cash flow improved, primarily reflecting working-capital changes and the absence of a $300 million pension contribution made in Q1 2019; lower earnings and higher capital spending partly offset the increase. Q1 2020 dividends paid were $2.547 billion. Verizon reported $104.7 billion of unsecured debt and $13.0 billion of secured asset-backed debt. Its $9.5 billion revolving credit facility was undrawn at quarter-end, with approximately $9.4 billion of unused capacity. Management said available cash, expected operating cash flow and financing sources should be sufficient for ongoing needs.
Segments
- Consumer: Revenue was $21.765 billion, down 1.7%; operating income was $7.282 billion, up 0.4%, and operating margin was 33.5% versus 32.7%. Lower wireless equipment sales were partly offset by service and other revenue growth.
- Business: Revenue was $7.681 billion, down 0.5%; operating income was $954 million, down 9.0%, and operating margin was 12.4% versus 13.6%. Global Enterprise and Wholesale revenue declined; Small and Medium Business revenue increased.
- Verizon Media: Revenue was approximately $1.7 billion, down 4.0%, with advertising and search affected by the crisis.
Material changes and unusual items
- Revenue fell $518 million year over year. Wireless equipment revenue declined $802 million, while service revenue and other revenue increased $284 million and $344 million, respectively.
- SG&A rose $1.387 billion, primarily reflecting a $1.195 billion pre-tax loss on the FCC spectrum-license auction, higher credit-loss allowances and sales commissions. The auction loss was $914 million after tax.
- Verizon won 4,940 spectrum licenses valued at $3.4 billion; $1.8 billion was to be settled through relinquished licenses. The remaining $1.3 billion payment was made in April 2020.
- Q1 included a $182 million pension remeasurement loss, versus a $96 million gain in Q1 2019. Consolidated adjusted EBITDA, a non-GAAP measure, was $11.924 billion versus $11.940 billion.
- Comprehensive income attributable to Verizon was $1.656 billion, including a $2.500 billion other comprehensive loss, principally related to cash-flow hedge valuation changes.
- Verizon adopted the expected-credit-loss accounting standard on January 1, 2020, recording a $200 million after-tax reduction to opening retained earnings. The filing states the adoption had no significant effect on Q1 operating results.
Outlook, management commentary and risks
- Management forecast 2020 capital expenditures of $17.5 billion to $18.5 billion, including continued 5G investment. The filing provides no clear full-year revenue or EPS guidance.
- Verizon estimated COVID-19 reduced Q1 EPS by approximately $0.04, mainly through higher credit-loss allowances, and expected a greater impact in Q2. Management said effects could persist through the crisis and related response measures.
- COVID-19-related actions included remote work for more than 115,000 employees, temporary closure of nearly 70% of company-owned retail stores, limits on some field operations, and the FCC Keep Americans Connected pledge. The pledge and changing customer behavior contributed to lower fees, roaming and equipment revenue, and higher credit-loss provisions and compensation costs.
- The allowance for credit losses increased by $228 million at quarter-end based on expected payment relief under the pledge. Further delinquency increases could require significant additional provisions and reduce cash flow. Increased delinquencies could also trigger early amortization of asset-backed debt, redirecting securitized-receivable collections to debt repayment.
- Verizon raised its cash balance as a precaution. In April it issued $3.5 billion of commercial paper, repaid $700 million borrowed under a short-term facility, redeemed approximately $1.7 billion of subsidiary preferred stock, and paid the remaining $1.3 billion for spectrum licenses.
- Other risks include competition and technology substitution, execution and timing of 5G deployment, high indebtedness and capital-market conditions, supplier disruption, benefit-plan costs, regulatory changes, cyber risks and macroeconomic uncertainty. Verizon disclosed approximately 25 patent-infringement actions; it did not expect pending legal or regulatory matters to materially affect financial condition, though a matter could materially affect a particular period’s results.
- In April 2020, Verizon agreed to acquire BlueJeans Network, subject to customary approvals, with closing expected in Q2.
Most important facts for investors to verify
- Whether customer delinquencies and credit-loss allowances continue to rise, and the resulting effect on cash flow and asset-backed debt triggers.
- Whether COVID-19 causes the anticipated greater Q2 impact on revenue, costs and EPS, and how quickly customer activity normalizes.
- Whether operating cash flow can sustain planned capital expenditures, dividends and debt service as total debt increases.
- Progress against the $17.5–$18.5 billion 2020 capital-spending range and the deployment and monetization of 5G.
- The completion and accounting consequences of the spectrum-license exchange and BlueJeans acquisition, and any material developments in legal, regulatory or tax matters.