Verizon Communications Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Verizon operates Wireless and Wireline segments.
Financial performance
- Revenue: $31.984 billion, up 3.8% year over year. Wireless revenue rose 6.9% to $22.328 billion; Wireline revenue fell 2.0% to $9.469 billion.
- Profit: Operating income was $7.960 billion, up 11.2%; operating margin was approximately 24.9%, versus 23.2%. Net income was $4.338 billion, down 27.6%, while net income attributable to Verizon increased to $4.219 billion from $3.947 billion. Diluted EPS was $1.02, versus $1.15.
- Key comparison factors: Q1 2014 included a $1.9 billion gain on the sale of the Vodafone Omnitel interest and $0.9 billion of early debt redemption costs. Verizon’s full acquisition of Vodafone’s Verizon Wireless interest in February 2014 also changed the noncontrolling-interest comparison and share base.
- Cash flow: Operating cash flow was $10.169 billion; capital expenditures were $3.665 billion; reported free cash flow, a non-GAAP measure, was $6.504 billion. Operating cash flow and free cash flow benefited from $2.4 billion of tower-transaction proceeds classified in operating activities and $1.3 billion of cash from equipment-receivable sales.
- Margins and segments: Wireless operating income was $7.810 billion, with a 35.0% operating margin; its EBITDA service margin rose to 55.8% from 52.1%. Wireline operating income was $405 million, versus $141 million, while EBITDA declined 1.1% to $2.151 billion.
- Debt and liquidity: Total debt was $113.388 billion, compared with $113.271 billion at year-end. Cash and equivalents fell to $4.386 billion from $10.598 billion. Current assets were $22.836 billion and current liabilities $28.713 billion. Verizon reported approximately $7.9 billion of unused capacity under its $8.0 billion credit facility and said it complied with financial and restrictive covenants.
- Other: Interest expense rose 9.7% to $1.332 billion; the effective tax rate increased to 35.0% from 13.9%. Dividends declared were $0.55 per share, compared with $0.53.
Material changes and business developments
- Wireless equipment revenue rose 80.4%, largely reflecting device sales and greater Verizon Edge adoption: approximately 39% of phone activations were on Edge, versus 13% a year earlier. Service revenue declined 0.4%, partly due to the resulting shift in revenue recognition from service to equipment.
- Wireless retail postpaid connections increased 5.5%; postpaid churn improved to 1.03% from 1.07%. Postpaid ARPA decreased 2.2% to $156.14.
- Wireline consumer retail revenue rose 4.0%, supported by FiOS; FiOS Internet subscribers increased 9.4% and FiOS Video subscribers 7.9%. Declines in Global Enterprise, traditional voice and wholesale connections weighed on Wireline results.
- Verizon paid approximately $10.4 billion for 181 AWS-3 spectrum licenses, including $9.5 billion paid during the quarter. The FCC granted the licenses on April 8, 2015.
- Verizon completed a tower transaction with American Tower for approximately $5.0 billion upfront, granting long-term rights to lease and operate about 11,300 towers; Verizon continues to use tower capacity under subleases.
- Verizon agreed to sell its California, Florida and Texas local exchange and related landline businesses to Frontier for approximately $10.5 billion, subject to adjustments and including Frontier’s assumption of $0.6 billion of debt. Closing was expected in the first half of 2016, subject to regulatory and other conditions. The business generated approximately $5.4 billion of 2014 revenue.
- Verizon paid $5.0 billion under an accelerated share repurchase agreement and initially received 86.2 million shares; final settlement was scheduled for Q2 2015.
Outlook, risks and contingencies
- Management emphasized continued investment in wireless spectrum, network capacity, fiber and technology platforms. The filing provides no specific consolidated earnings or revenue guidance.
- Verizon expected Edge adoption to continue shifting revenue from service to equipment and affecting revenue-recognition timing. It also expected lower depreciation and amortization on the held-for-sale Wireline assets through the Frontier transaction’s anticipated close.
- The FCC’s 2015 reclassification of broadband Internet access as a Title II telecommunications service creates regulatory uncertainty. Verizon warned that restrictions, including possible rate regulation, could affect network management, investment and innovation; the decision was being challenged.
- Risks identified include competition and technology substitution, regulatory changes and license renewals, high indebtedness and credit-market conditions, security breaches, supplier disruption, labor matters, pension costs, tax changes and execution of business strategy.
- Pending litigation and regulatory matters were not expected to materially affect financial condition, though Verizon said they could materially affect results in a particular period. The company reported approximately 60 patent-infringement actions; the reasonably possible loss range for pending matters could not be estimated. It also disclosed environmental reserves and a California hazardous-waste investigation, with penalties not expected to be material.
Most important facts for investors to verify
- Whether reported cash flow and free cash flow are sustainable after the one-time tower proceeds and wireless installment-receivable sales.
- The effects of Edge-related revenue shifts on service revenue, ARPA, equipment economics and margins.
- Completion, regulatory approvals, proceeds and operating effects of the Frontier sale, and final settlement of the accelerated share repurchase.
- Debt repayment and refinancing needs, liquidity, and compliance with the term-loan leverage covenant.
- Developments in broadband regulation, litigation, tax audits and other contingencies.