Verizon Communications Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unless noted, amounts are in U.S. dollars; financial statement amounts are in millions.
Business context and reporting period
Verizon operates Domestic Wireless and Wireline businesses. On July 1, 2010, it completed the spin-off and merger of certain local exchange and related landline operations with Frontier Communications. Those operations contributed approximately $1.7 billion of Wireline revenue in the first half of 2010 and are included in the nine-month results through June 30, but not Q3. Verizon also completed required divestitures of Alltel overlapping markets during the first half.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $26,484 | $27,265 | $80,170 | $80,717 |
| Operating income | $3,747 | $3,986 | $10,137 | $13,098 |
| Net income | $2,920 | $2,887 | $6,751 | $9,257 |
| Net income attributable to Verizon | $881 | $1,176 | $1,092 | $4,304 |
| Diluted EPS attributable to Verizon | $0.31 | $0.41 | $0.39 | $1.51 |
Q3 operating margin was approximately 14.1%, versus 14.6% a year earlier; nine-month operating margin was approximately 12.6%, versus 16.2%. Q3 operating revenue fell 2.9%, while nine-month revenue declined 0.7%. The filing attributes the declines mainly to divested operations and ongoing Wireline voice losses, partly offset by growth in wireless and FiOS.
- Wireless: Q3 revenue rose 6.0% to $16.25 billion; service revenue increased 7.7%. Total customers reached 93.2 million, up 7.1% year over year. Data ARPU rose 17.6% to $18.20, while retail net additions slowed to 447,000 from 916,000.
- Wireline: Q3 revenue declined 3.6% to $10.29 billion. FiOS Internet subscribers were 3.9 million and FiOS TV subscribers 3.3 million, up 23.9% and 26.5%, respectively. Switched access lines fell 8.5% year over year.
- Cash flow: Nine-month operating cash flow was $25.21 billion, capital expenditures were $11.84 billion, and management-defined free cash flow was $13.37 billion, up from $10.67 billion in 2009. Cash and equivalents were $5.39 billion at September 30, versus $2.01 billion at year-end 2009.
- Debt and liquidity: Reported current and long-term debt totaled $53.17 billion, down from $62.26 billion at year-end 2009. Current liabilities exceeded current assets by approximately $7.43 billion. Verizon reported $6.1 billion of unused capacity under its $6.2 billion credit facility and compliance with debt covenants. Its debt-to-debt-plus-equity ratio was 58.4%, versus 59.9% at year-end.
- Dividends and investment: Nine-month dividends paid were $4.03 billion. The quarterly dividend increased 2.6% to $0.4875 per share. Capital expenditures were 14.8% of revenue.
Material changes, unusual items, and management outlook
Verizon’s reported nine-month results include substantial nonrecurring and transaction-related items. Severance, pension and benefit charges totaled $3.32 billion, including costs associated with approximately 11,000 voluntary union employee departures. A $962 million noncash tax charge in Q1 reflected reduced tax benefits associated with Medicare Part D subsidies. A $268 million noncash adjustment in Q2 deferred previously recognized wireless data revenue and reduced Verizon-attributable net income by $92 million. Frontier spin-off-related charges were $463 million for the nine-month period. These items, along with divestitures, complicate year-over-year comparisons.
Management expected 2010 capital expenditures to be at the low end of, or slightly below, its $16.8–$17.2 billion target. It expected wireless service and data revenue to continue growing as customer and data-device penetration increased, while noting continuing pressure on traditional Wireline voice and the economy. Verizon announced plans to launch LTE service in 38 metropolitan areas and more than 60 airports by year-end 2010. It projected a 2010 effective tax rate of 16%–17%, excluding specified integration, divestiture and severance-related costs.
Risks include competition, economic weakness, technology substitution, labor and benefit costs, Alltel integration, regulatory outcomes, financing costs and the execution of network investment plans. Standard & Poor’s placed Verizon’s ratings on CreditWatch with negative implications in August 2010. Verizon disclosed a lawsuit by the Idearc litigation trust seeking more than $9 billion in damages; Verizon stated that it did not expect pending legal and regulatory matters to materially affect financial condition, though they could materially affect results in a particular period. The filing also describes environmental remediation matters and an appeal in litigation concerning alleged government surveillance activities.
Important facts for investors to verify
- How much of the year-over-year change reflects the Frontier and Alltel dispositions rather than underlying operations.
- Whether wireless service and data growth can offset slower retail additions, declining voice ARPU and higher wireless operating costs.
- Whether FiOS growth and cost reductions can counter access-line losses and weakness in wholesale and traditional Wireline services.
- The cash, earnings and credit-rating implications of pension and severance obligations, leverage and the Idearc litigation.
- Whether capital spending, free cash flow and the dividend remain sustainable as Verizon funds LTE and other network investments.