Verizon Communications Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Verizon provides wireless and wireline communications services and products through its Consumer and Business segments. Unless otherwise stated, financial amounts are in U.S. dollars.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $33.8B | $30.4B | $66.6B | $62.1B |
| Operating income | $8.2B | $7.4B | $15.9B | $13.9B |
| Net income attributable to Verizon | $5.8B | $4.7B | $11.0B | $8.9B |
| Diluted EPS | $1.40 | $1.13 | $2.67 | $2.14 |
| Operating cash flow | Not stated separately | Not stated separately | $20.4B | $23.6B |
| Free cash flow | Not stated separately | Not stated separately | $11.7B | $13.7B |
Q2 revenue rose 10.9%; first-half revenue rose 7.4%. Q2 operating margin was approximately 24.2%, roughly flat year over year; first-half operating margin was approximately 23.9%, versus 22.5%. Verizon’s reported Q2 earnings included a $1.3B pension remeasurement gain and $1.1B in early debt redemption costs. These items, and the prior-year spectrum-license loss, affect period comparability.
Segments and operating trends
- Consumer: Revenue increased 11.2% in Q2 to $23.5B. Segment operating income rose 6.1% to $7.5B, while operating margin declined to 31.9% from 33.5%. Wireless postpaid phone net additions were 197,000; postpaid phone churn increased to 0.65% from 0.51%. Postpaid ARPA rose 4.5% to $121.24.
- Business: Revenue increased 3.7% to $7.8B, but segment operating income fell 9.5% to $856M and margin declined to 11.0% from 12.6%. Small and Medium Business and Public Sector revenue grew; Global Enterprise and Wholesale revenue declined.
- Wireless equipment revenue growth contributed to higher revenue, alongside service growth. Equipment costs also rose, reflecting more devices sold and a shift toward higher-priced devices. A recall of certain jetpack units added to first-half costs.
Cash, debt and investment
- First-half operating cash flow was $20.4B, down $3.1B year over year, primarily due to working-capital changes and the absence of prior-year tax-related cash benefits. Free cash flow, defined as operating cash flow less capital expenditures, was $11.7B, down $2.0B. This measure excludes spectrum purchases, acquisitions and finance-lease payments.
- Capital expenditures were $8.7B in the first half. Verizon expected 2021 capital expenditures of $17.5B–$18.5B, excluding approximately $10B of C-Band deployment spending over three years; $2B–$3B of C-Band deployment spending was expected in 2021.
- Verizon paid $45.5B for C-Band licenses, including $44.6B paid in Q1, and estimated additional clearing and incentive payments of $7.4B through 2024, subject to incumbent spectrum clearing. The licenses were received from the FCC on July 23, 2021.
- Total debt was $151.9B at June 30, versus $129.1B at year-end 2020. Cash and cash equivalents were $4.7B, versus $22.2B at year-end; cash, cash equivalents and restricted cash totaled $6.1B. Verizon attributed the cash reduction partly to the C-Band purchase and said it had reduced its elevated pandemic-era cash balance.
- First-half financing included $31.4B of proceeds from long-term borrowings, $5.2B of dividends paid, and $7.6B of repayments, redemptions and repurchases of long-term borrowings and finance-lease obligations. Verizon reported compliance with debt covenants.
Outlook, material developments and risks
- Management emphasized network investment, customer retention and growth, 5G deployment, fiber expansion and development of its Intelligent Edge Network. 5G Ultra Wideband was available in parts of 75 U.S. cities; 5G Nationwide in more than 2,700 markets. No full-year revenue or EPS guidance is stated in the provided filing text.
- Verizon agreed to sell Verizon Media to an Apollo affiliate for $4.3B cash, $750M in preferred units and a 10% interest in common units, subject to customary adjustments, approvals and closing conditions. Closing was expected in the second half of 2021.
- The proposed TracFone acquisition was expected to close in the second half of 2021. Consideration was approximately $3.1B cash and $3.1B in Verizon stock, plus up to $650M of potential future cash consideration.
- COVID-19 effects were most significant in Q2 2020 and affect year-over-year comparability. Other cited risks include competition, 5G deployment delays, cybersecurity and supplier disruption, high indebtedness, financing conditions, regulation, economic conditions, benefit-plan costs and tax-law changes.
- Approximately 20 federal patent-infringement actions were pending; some could proceed to trial in the coming 12 months. Verizon said it could not estimate a reasonably possible loss range for pending matters, and did not expect their resolution to materially affect financial condition, though a given period’s results could be affected.
Most important facts for investors to verify
- How much reported earnings growth reflects recurring operating performance versus the pension remeasurement gain, debt redemption costs and prior-year spectrum loss.
- Whether service-revenue growth and Consumer customer additions persist, and whether higher churn and lower segment margins stabilize.
- The cash-flow and leverage implications of C-Band clearing payments and planned network deployment spending.
- Completion, final consideration and financial effects of the Verizon Media sale and TracFone acquisition.
- Potential outcomes of patent, regulatory and tax matters, including the $2.7B of unrecognized tax benefits and possible changes in that liability.