Verizon Communications Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; interim financial statements are unaudited. Comparisons are with the corresponding 2011 periods unless noted. Verizon reports Wireless and Wireline segments; Vodafone holds a 45% noncontrolling interest in Verizon Wireless.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Operating revenue | $28.552bn | $27.536bn | $56.794bn | $54.526bn |
| Operating income | $5.651bn | $4.892bn | $10.846bn | $9.345bn |
| Net income | $4.285bn | $3.604bn | $8.191bn | $6.868bn |
| Net income attributable to Verizon | $1.825bn | $1.609bn | $3.511bn | $3.048bn |
| Diluted earnings per share | $0.64 | $0.57 | $1.23 | $1.07 |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $15.271bn | $12.792bn |
| Capital expenditures | Not presented for quarter | Not presented for quarter | $7.430bn | $8.918bn |
| Free cash flow | Not presented for quarter | Not presented for quarter | $7.841bn | $3.874bn |
Q2 revenue rose 3.7%; operating income rose 15.5%. Operating margin was approximately 19.8%, versus 17.8%. The filing’s non-GAAP consolidated EBITDA was $9.779bn for Q2 and $19.002bn for the first half, compared with $9.005bn and $17.482bn, respectively.
- Wireless: Q2 revenue increased 7.4% to $18.577bn; segment operating income increased 21.8% to $5.713bn. Service revenue grew 7.3%, with data revenue of $6.9bn, or 43.6% of service revenue. Postpaid ARPU was $56.13, up 3.7%; postpaid net additions were 888,000, down 29.4%, while postpaid churn improved to 0.84% from 0.89%.
- Wireline: Q2 revenue declined 3.1% to $9.931bn; segment operating income fell 40.9% to $188m. Consumer retail revenue increased 2.5%, supported by FiOS, while Global Enterprise and Global Wholesale revenues declined 3.4% and 10.0%. FiOS Internet subscribers reached 5.144m and FiOS Video subscribers 4.473m.
- Margins: Wireless segment operating margin was 30.8%, up from 27.1%; EBITDA service margin was 49.0%, up from 45.4%. Wireline operating margin was 1.9%, down from 3.1%; EBITDA margin was 23.1%, down from 23.8%.
Financial position and liquidity
- At June 30, cash and equivalents were $10.001bn, down from $13.362bn at year-end 2011. Current assets were $27.130bn and current liabilities $26.353bn.
- Total debt was $52.391bn ($5.912bn due within one year and $46.479bn long-term), down from $55.152bn at December 31, 2011. Verizon reported compliance with debt covenants. Approximately $6.1bn remained available under its $6.2bn credit facility.
- First-half financing cash outflow was $11.048bn, including a $4.5bn special distribution to Vodafone, $2.587bn in dividends paid, and reduced short-term obligations. Dividends declared were $0.50 per share in Q2, versus $0.4875.
- Management says operations and available financing are sufficient for ongoing needs; it expects capital spending to be financed primarily from internally generated funds. First-half capex was 13.1% of revenue, versus 16.4% a year earlier.
Material changes, outlook and risks
- Wireless growth reflected customer and data-service expansion, higher smartphone penetration, and improved churn. Smartphones were 49.7% of the retail postpaid phone base, compared with 35.9% a year earlier. Management expected service revenue to continue growing as smartphone penetration increased.
- Verizon had deployed LTE in 337 markets covering more than 230 million people as of July 18, 2012, and expected LTE coverage across virtually its entire existing 3G footprint by mid-2013. Spectrum purchases and exchanges remained subject to regulatory approvals and other closing conditions; the planned AWS purchases had an aggregate stated value of about $3.9bn.
- Wireline continued shifting toward FiOS, strategic services, cloud and data-center offerings amid declines in traditional voice and circuit-based services. Management expected Global Wholesale revenue to continue declining approximately 10% per quarter year over year, with Ethernet and IP growth partly offsetting core-product declines. The filing provides no consolidated earnings or revenue guidance.
- After quarter-end, Verizon completed its approximately $0.6bn cash acquisition of HUGHES Telematics on July 26, 2012, and repaid about $0.1bn of the acquired company’s debt.
- Contingencies: Verizon disclosed approximately 50 patent-infringement actions. In the ActiveVideo matter, a jury award of $115m was increased by the court by $24m; related injunction and payment orders were stayed, and Verizon’s appeal was pending. The company also faced Idearc litigation seeking more than $9bn, with trial set for October 2012, and FairPoint litigation seeking about $2bn, with trial set for May 2013. Verizon said accruals in pending matters were not material; it could not estimate reasonably possible losses above accruals.
- Other risks include competition, economic conditions, technology substitution, labor matters, benefit-plan costs, network security and disruption, regulatory changes, financing conditions, and execution of network investments and strategic plans. Verizon noted possible significant changes in unrecognized tax-benefit liabilities over the next 12 months, but could not estimate a range.
Most important facts for investors to verify
- Whether Wireless revenue, data growth, ARPU and churn improvements persist, given the slowdown in postpaid net additions and higher selling costs.
- Whether Wireline’s FiOS and strategic-services growth can offset continuing declines in legacy voice, enterprise core and wholesale revenues—and the effect on margins.
- Capital-spending needs and cash generation as LTE deployment and spectrum transactions proceed; confirm approvals, closing terms and funding impacts.
- Debt maturities, dividends and liquidity, including the effect of the Vodafone distribution and subsequent debt repayments.
- Developments and potential exposure in the Idearc, FairPoint, ActiveVideo and other litigation, as well as tax examinations and environmental remediation.