Verizon Communications Inc. 10-Q Summary
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended June 30, 2008. Verizon Communications Inc. operates two primary reportable segments: Wireline (voice, broadband, video, and data services) and Domestic Wireless (wireless voice and data services via Verizon Wireless). The company is a large accelerated filer with approximately 228,600 employees.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 |
|---|---|---|
| Operating Revenues | $24,124 million | $47,957 million |
| Operating Income | $4,546 million | $8,879 million |
| Net Income | $1,882 million | $3,524 million |
| Diluted EPS | $0.66 | $1.23 |
| Operating Margin | 18.8% | 18.5% |
| Cash from Operating Activities | N/A | $12,052 million |
| Capital Expenditures | N/A | $8,397 million |
| Total Debt (Current + Long-term) | $43,109 million | $43,109 million |
| Cash and Cash Equivalents | $582 million | $582 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 3.7% for the quarter and 4.6% for the six months compared to 2007. This was driven primarily by an 11.8% increase in Domestic Wireless revenues, offset by a 1.8% decline in Wireline revenues due to access line losses.
- Profitability: Operating income rose 9.6% for the quarter and 11.7% for the six months. Net income increased 11.8% for the quarter and 10.9% for the six months.
- Wireline Segment: Revenues declined due to competition and technology substitution (VoIP, wireless). However, the segment added 54,000 net broadband connections and 176,000 net FiOS TV customers in the quarter.
- Wireless Segment: Revenues grew 11.8% for the quarter, driven by a 10.7% increase in customers (reaching 68.7 million total) and higher data usage. Average service revenue per customer increased slightly.
- Spin-off: On March 31, 2008, Verizon completed the spin-off of its local exchange assets in Maine, New Hampshire, and Vermont to FairPoint Communications, reducing net debt by approximately $1.4 billion.
Guidance, Outlook, and Material Events
- Alltel Acquisition: On June 5, 2008, Verizon Wireless agreed to acquire Alltel Corporation for approximately $5.9 billion in equity, with an aggregate transaction value of $28.1 billion including net debt. The deal is subject to regulatory approval and targeted for completion by year-end 2008.
- Rural Cellular Acquisition: Verizon Wireless is proceeding with the acquisition of Rural Cellular Corporation (approx. $2.67 billion value), subject to divestitures required by a DOJ consent decree. Closing is expected in Q3 2008.
- Spectrum Auction: Verizon Wireless successfully bid $9.4 billion in the FCC's 700 MHz spectrum auction (Auction 73), with licenses expected to be granted in Q3 2008.
- Dividends: The quarterly dividend was declared at $0.430 per share, a 6.2% increase from the prior year.
- Stock Repurchases: The company repurchased $1,117 million of common stock during the first half of 2008.
- Rating Outlook: Following the Alltel announcement, S&P revised its outlook to negative (from stable), while Moody's placed the rating on review for possible downgrade. Fitch placed ratings on Rating Watch Negative.
Investor Verification Checklist
- Verify the regulatory approval status and closing timeline for the Alltel and Rural Cellular acquisitions.
- Monitor the impact of the 700 MHz spectrum acquisition on future capital expenditures and network deployment costs.
- Assess the trajectory of Wireline access line losses versus the growth rate of FiOS broadband and video subscribers.
- Review credit rating agency actions regarding the negative outlook and potential downgrades following the Alltel deal.
- Confirm the resolution of the Hicksville environmental remediation costs and potential adjustments to reserves.