Verizon Communications Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Verizon provides wireless and wireline communications, network, and related services through Consumer and Business segments; Corporate and other includes Verizon Media. Results reflect significant disruption from COVID-19.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $30.45 billion | $32.07 billion | $62.06 billion | $64.20 billion |
| Operating income | $7.36 billion | $7.85 billion | $13.94 billion | $15.56 billion |
| Net income attributable to Verizon | $4.70 billion | $3.94 billion | $8.86 billion | $8.98 billion |
| Diluted EPS | $1.13 | $0.95 | $2.14 | $2.17 |
| Consolidated Adjusted EBITDA (non-GAAP) | $11.54 billion | $12.08 billion | $23.47 billion | $24.02 billion |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $23.55 billion | $15.84 billion |
| Capital expenditures | Not presented separately for the quarter | Not presented separately for the quarter | $9.85 billion | $7.97 billion |
| Free cash flow (non-GAAP) | Not presented separately for the quarter | Not presented separately for the quarter | $13.70 billion | $7.87 billion |
- Q2 revenue declined 5.1%; six-month revenue declined 3.3%. Lower wireless equipment sales and weaker service and Verizon Media revenue were major factors.
- Q2 Verizon-attributable net income and diluted EPS rose year over year, despite lower operating income. The comparison benefited from substantially lower early debt redemption costs than in Q2 2019.
- Q2 Consumer revenue fell 4.0% and Business revenue fell 3.7%. Verizon Media revenue fell 24.5%. Business operating income declined 11.7% in Q2; Consumer operating income declined 3.7%.
- Six-month operating cash flow and free cash flow increased, principally reflecting working-capital changes, including about $2.0 billion of tax payments deferred to July, a $2.2 billion cash tax benefit received, and the absence of certain 2019 pension contributions and severance payments. Capital spending also increased 23.6%.
- Q2 segment operating margins were 33.5% for Consumer and 12.6% for Business, compared with 33.4% and 13.8%, respectively, a year earlier.
Financial position, liquidity, and debt
- At June 30, cash and cash equivalents were $7.9 billion, versus $2.6 billion at December 31, 2019. Verizon said it retained a higher cash balance because of COVID-19 uncertainty.
- Total debt was approximately $112.8 billion, comprising $102.2 billion unsecured and $10.6 billion secured debt, compared with $111.5 billion at year-end 2019. Long-term debt on the balance sheet was $106.2 billion; debt maturing within one year was $6.7 billion.
- Verizon had not drawn on its $9.5 billion revolving credit facility; approximately $9.4 billion remained available. The company reported compliance with restrictive covenants.
- For the first six months, dividends paid were $5.1 billion. Verizon issued $9.1 billion of long-term debt and repaid or redeemed $8.3 billion of long-term borrowings and other securities, in addition to asset-backed debt activity.
- Capital expenditures for full-year 2020 were expected to be $17.5–$18.5 billion, including continued 5G investment.
Material changes, outlook, and risks
- COVID-19: Management estimated the pandemic reduced Q2 EPS by approximately $0.14, mainly through lower wireless service revenue, weaker Media advertising and search revenue, and operating actions. Lower device activations, upgrades, roaming, overage revenue, and fees also affected results. Management expected effects to continue in Q3 and beyond; the extent depends on the health crisis, restrictions, economic conditions, customer behavior, and regulatory actions.
- Customer delinquencies increased beginning late in Q1 and moderated during Q2. Verizon warned that renewed increases could require significant additional credit-loss provisions and weaken cash flow. Early amortization of asset-backed debt could also redirect receivable collections to debt service and increase financing cash requirements.
- Special items: Verizon recorded a $1.2 billion pretax loss on the FCC spectrum-license transaction in the first half. New licenses valued at $3.4 billion were received in Q2. The company also recorded $335 million of first-half pension remeasurement losses. Q2 included $129 million of early debt redemption costs, compared with $1.5 billion in Q2 2019.
- Verizon acquired BlueJeans Network for approximately $396 million net of cash acquired; its reported 2020 results were insignificant.
- Wireless retail postpaid churn remained historically low in Consumer, while pandemic restrictions reduced gross additions and device upgrades. Verizon reported improvement in several consumer activity measures in June as stores and field operations reopened. Small and medium business remained under pressure; Public Sector demand benefited from crisis-related connectivity needs.
- Risks include COVID-19 duration and economic effects, competition, 5G deployment and execution, cybersecurity and supplier disruptions, regulation, high indebtedness and credit-market access, pension assumptions, and tax matters. Verizon disclosed approximately 25 federal patent-infringement actions; it said pending legal matters were not expected to materially affect financial condition, though a matter could materially affect a particular period’s results. The possible change in unrecognized tax benefits over the next 12 months could be significant, but the range was not estimable.
- The filing provides capital expenditure expectations but no clear full-year revenue or EPS guidance.
Important facts for investors to verify
- Whether service revenue, device sales, churn, and customer additions recover as pandemic restrictions ease, and how much Q2 performance reflected temporary conditions.
- Whether customer delinquencies and expected credit losses stabilize, including any implications for cash generation and asset-backed debt amortization.
- Whether operating cash flow remains strong after the timing-related tax and working-capital benefits in the first half.
- Progress and returns on the $17.5–$18.5 billion 2020 capital expenditure plan and 5G deployment.
- Debt levels, refinancing costs, dividend funding, and the effect of pension, tax, spectrum, and legal exposures on future results.