Verizon Communications Inc. — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2020, compared with the same 2019 periods. Verizon provides wireless and wireline communications through its Consumer and Business segments; Corporate and other includes Verizon Media and corporate items. Results were affected by COVID-19 and associated changes in customer activity and operations.
Financial performance
- Revenue: Q3 revenue was $31.5 billion, down 4.1% year over year; nine-month revenue was $93.6 billion, down 3.6%. Wireless equipment revenue fell 20.1% in Q3 and 18.9% for the nine months, largely reflecting fewer device sales and delayed upgrades. Wireless service revenue was broadly stable: $16.4 billion in Q3 and $48.7 billion for the nine months.
- Profit and margins: Q3 operating income was $7.7 billion (down 6.1%) and net income attributable to Verizon was $4.4 billion (down 16.1%); diluted EPS was $1.05 versus $1.25. For the nine months, operating income was $21.6 billion (down 8.9%), net income attributable to Verizon was $13.2 billion (down 6.8%), and diluted EPS was $3.19 versus $3.42. Calculated consolidated operating margin was about 24.3% in Q3 versus 24.9% a year earlier, and 23.1% for the nine months versus 24.4%.
- Cash flow and investment: Nine-month operating cash flow was $32.5 billion versus $26.7 billion; capital expenditures were $14.2 billion versus $12.3 billion. Company-defined free cash flow was $18.3 billion versus $14.4 billion. Cash, cash equivalents and restricted cash totaled $10.2 billion at September 30, including $9.0 billion of cash and cash equivalents.
- Debt and liquidity: Total debt was approximately $115.6 billion, including $105.5 billion unsecured and $10.1 billion secured asset-backed debt. The company reported $5.8 billion of debt maturing within one year and approximately $9.4 billion of unused capacity under its $9.5 billion revolving credit facility; it had no commercial paper outstanding. Verizon stated it expected cash on hand, operating cash flow and available financing to meet ongoing needs.
- Dividends: Verizon paid $7.6 billion in dividends during the first nine months of 2020. The board-authorized repurchase program covers up to 100 million shares; no shares were repurchased through September 30.
Changes, outlook and notable items
- Consumer revenue declined 4.3% in Q3 and 3.3% for the nine months; Business revenue declined 1.7% and 2.0%, respectively. Consumer postpaid churn improved, while Business operating income declined 5.5% in Q3 and 8.8% for the nine months.
- Management estimated COVID-19 reduced Q3 EPS by about $0.05, mainly through lower wireless service and Verizon Media advertising/search revenue and operating actions. It reported that customer delinquencies improved significantly in Q3 after rising earlier in the year, but warned renewed increases could affect cash flow and credit-loss provisions.
- Management expected 2020 capital expenditures to be at the upper end of its $17.5 billion–$18.5 billion range, including continued 5G investment. It expected COVID-19 effects to continue in Q4 and beyond; the duration and scale were uncertain. The filing provides no specific full-year earnings guidance.
- Special items included a $1.2 billion pre-tax loss from the FCC spectrum-license transaction in the first nine months and $1.4 billion of pension remeasurement losses. Q3 pension remeasurement loss was $1.1 billion. These items weighed on reported results; management’s non-GAAP adjusted EBITDA was $11.9 billion in Q3 versus $12.0 billion and $35.3 billion for the nine months versus $36.1 billion.
- Verizon paid a $1.9 billion deposit for 3.5 GHz spectrum licenses; timing of license issuance depended on the FCC. The announced TracFone acquisition was expected to close in the second half of 2021, subject to approvals, for approximately $3.1 billion cash and $3.1 billion in Verizon stock, plus up to $650 million of contingent consideration. The BlueJeans acquisition closed in May 2020.
- Other matters to monitor include the high debt load, competition and legacy wireline declines, 5G deployment and spectrum costs, pension assumptions, possible early amortization of asset-backed debt if receivables deteriorate, and ongoing litigation and regulatory proceedings. Verizon said it was in compliance with debt covenants and that no currently pending legal or regulatory accrual was material.
Important facts for investors to verify
- Whether wireless service and customer growth can offset lower equipment sales and ongoing revenue pressure in Consumer and Business.
- How much reported earnings and cash flow are affected by pension remeasurement, spectrum spending, credit losses, and other one-time or non-GAAP adjustments.
- Whether cash generation can sustain network investment, dividends, spectrum purchases and planned acquisitions while managing approximately $115.6 billion of debt.
- How customer payment performance and COVID-19-related repayment arrangements affect receivables, provisions and asset-backed financing tests.
- Execution, regulatory approval, financing and integration risks for the TracFone and Bluegrass Cellular transactions, and the timing and cost of 5G spectrum deployment.