Verizon Communications Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless noted. Verizon provides wireless and wireline communications and related services through Consumer and Business segments. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Operating revenue | $32.912B | $33.554B | Down 1.9% |
| Operating income | $7.584B | $7.796B | Down 2.7% |
| Net income | $5.018B | $4.711B | Up 6.5% |
| Net income attributable to Verizon | $4.909B | $4.580B | Diluted EPS was $1.17 versus $1.09 |
| Net cash from operating activities | $8.289B | $6.821B | Up $1.468B |
| Capital expenditures | $5.958B | $5.821B | Includes capitalized software |
| Free cash flow | $2.331B | $1.000B | Non-GAAP; operating cash flow less capital expenditures |
| Total debt | $152.9B | $150.6B at Dec. 31, 2022 | $132.0B unsecured and $20.8B secured at quarter-end |
Consolidated operating expenses declined 1.7% to $25.328B. Selling, general and administrative expense rose 4.7% to $7.506B, including a $202M increase in the provision for credit losses; cost of wireless equipment fell with lower device sales. Interest expense increased 53.6% to $1.207B, reflecting higher average interest rates. The effective interest rate on debt was 4.6%, versus 3.4%.
Cash and cash equivalents were $2.234B at March 31, down $371M from year-end; restricted cash was $1.673B. Current assets were $35.722B and current liabilities $47.768B. Debt maturing within one year was $12.081B. Verizon said operating cash flow and external financing sources are sufficient for ongoing requirements over the next 12 months and beyond; it reported compliance with debt covenants.
Material changes and operating trends
- Consumer revenue decreased 1.7% to $24.857B and segment operating income declined 3.0% to $7.099B. Wireless service revenue grew, supported by 2022 pricing actions and fixed wireless access, while equipment revenue fell with fewer phone upgrades. Postpaid phone net additions were negative 263,000; postpaid churn rose to 0.84% from 0.77%.
- Business revenue decreased 2.8% to $7.494B and segment operating income fell 18.1% to $551M. Enterprise and Public Sector and Wholesale revenue declined, including from secular pressure on traditional voice, data and networking services. Business postpaid phone net additions were 136,000, down from 256,000.
- Wireless service revenue across reportable segments increased to $18.889B from $18.342B. Total broadband net additions were 437,000 across Consumer and Business, compared with 229,000 in the prior-year quarter.
- Consolidated Adjusted EBITDA, a non-GAAP measure, was $11.902B versus $12.032B. Net income rose partly because the prior-year quarter included $1.2B of early debt redemption costs and $1.231B in net debt extinguishment losses; Q1 2023 included $70M in net debt extinguishment gains.
- Operating cash flow improved primarily from working capital, including fewer phone upgrades, modestly better customer payment patterns and lower inventory. Dividends paid were $2.744B.
Outlook, commentary and risks
- Management’s 2023 capital expenditure outlook is $18.25B to $19.25B. Q1 capital expenditures were approximately $6.0B, primarily for network investment and 5G deployment. Verizon said the accelerated $10B C-Band deployment program is substantially complete.
- Verizon expects approximately $4.7B of remaining C-Band clearing-cost and incentive payments through 2024; timing and final amounts depend on incumbent spectrum holders’ progress. FCC-ordered clearing must be completed by December 2025.
- Management priorities include network reliability, customer retention and growth while balancing profitability, and monetizing network capabilities. No full-year revenue or earnings guidance is stated in the provided filing text.
- Risks highlighted include intense competition, execution and benefits of 5G deployment, inflation and economic conditions, cyberattacks, network disruption, labor and regulatory matters, high indebtedness, financing costs, litigation, benefit-plan costs and tax-law changes. Verizon cited approximately 25 federal patent-infringement actions; some could go to trial within 12 months. It said pending legal matters were not expected to materially affect financial condition, though a period’s results could be materially affected.
- Unrecognized tax benefits were $2.7B; the amount could change significantly over the next 12 months, but the filing does not estimate a possible range. Verizon also disclosed 25 renewable energy purchase agreements with 12-to-20-year fixed-price terms.
Important facts for investors to verify
- Whether declining consolidated and Business segment revenue, weaker segment operating income and rising churn persist in subsequent quarters.
- Whether higher interest costs and $152.9B of total debt affect cash generation, refinancing needs and dividend capacity; review the $12.1B of debt maturing within one year.
- Whether the $2.331B of Q1 free cash flow is sustainable, given working-capital benefits and planned 2023 capital expenditures of $18.25B–$19.25B.
- Progress and final costs of C-Band clearing payments, and delivery of expected network benefits.
- Developments in credit-loss provisions, tax audits and unrecognized tax benefits, patent litigation, and other contingencies.