Verizon Communications Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The interim financial statements are unaudited. Verizon provides wireless and wireline communications services and products through its Consumer and Business segments.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $33.34B | $34.24B | $98.84B | $101.58B |
| Operating income | $7.47B | $7.89B | $22.28B | $23.24B |
| Net income attributable to Verizon | $4.76B | $4.90B | $14.32B | $14.68B |
| Diluted EPS | $1.13 | $1.17 | $3.40 | $3.49 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $28.80B | $28.20B |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $14.16B | $15.81B |
| Free cash flow (non-GAAP) | Not stated for quarter | Not stated for quarter | $14.63B | $12.39B |
Q3 operating margin was approximately 22.4%, versus 23.1% a year earlier. For the nine-month period it was approximately 22.5%, versus 22.9%. Consolidated Adjusted EBITDA, a non-GAAP measure, was $12.24B in Q3 versus $12.22B; nine-month results were $36.11B versus $36.12B.
- Revenue drivers: Revenue declined 2.6% in Q3 and 2.7% over nine months. Lower wireless equipment sales, primarily associated with fewer device upgrades, were the main pressure. Consumer service revenue grew, supported by postpaid pricing actions and fixed wireless access (FWA); Business revenue declined.
- Segments: Q3 Consumer revenue was $25.26B, down 2.3%, while operating income rose 2.7% to $7.55B and operating margin increased to 29.9% from 28.4%. Business revenue was $7.53B, down 4.0%; operating income fell 22.8% to $539M and margin declined to 7.2% from 8.9%.
- Cash and investment: Nine-month operating cash flow increased $599M year over year, and free cash flow increased $2.25B, reflecting improved working capital and lower capital spending. Capital expenditures were down about $1.65B, principally after completion of the accelerated C-Band capital program.
- Debt and liquidity: Total debt was approximately $147.4B at September 30, down from $150.6B at year-end 2022. Cash and cash equivalents were $4.21B; cash, cash equivalents and restricted cash totaled $5.66B. Current debt maturities were $12.95B. Verizon reported $9.46B of unused capacity on its $9.5B revolving credit facility and compliance with debt covenants.
- Interest and dividends: Q3 interest expense rose to $1.43B from $937M; nine-month expense rose to $3.93B from $2.51B. The effective interest rate for the nine months was 4.8%, versus 3.5%. Nine-month cash dividends were $8.23B.
Material changes and unusual items
- Q3 SG&A increased 7.7%, including higher device-insurance claims, business transformation costs, credit-loss provisions and BlueJeans shutdown costs. Nine-month SG&A also reflected $237M of severance charges and a $155M asset-rationalization charge.
- Q3 other income, net, was $170M versus expense of $439M a year earlier, partly because the prior-year period included a $645M pension remeasurement loss. Nine-month other income was $494M versus expense of $1.31B, with the comparison also affected by 2022 debt-redemption losses and pension charges.
- In October 2023, Verizon paid $3.7B for C-Band spectrum clearing incentives; the amount had been accrued at September 30. Approximately $400M of remaining spectrum-related payments were expected through 2024, subject to claims and processing.
- Allowance for credit losses and bad-debt provisions rose as collections returned to pre-pandemic levels. Verizon reported $1.60B of nine-month provisions for expected credit losses in operating cash-flow adjustments.
Outlook, risks and contingencies
- Management expected 2023 capital expenditures to be at the upper end of its $18.25B–$19.25B guidance range. It said internally generated funds were expected to meet ongoing operating and investing needs over the next 12 months and beyond.
- Verizon said its Business reporting unit remained susceptible to goodwill impairment. Its prior annual test showed fair value only about 8% above carrying value; a sustained decline in revenue or earnings, or higher long-term interest rates, could contribute to a potentially material impairment in Q4 2023.
- A newly disclosed risk concerns allegations that lead-sheathed copper cables may create public-health or environmental risks. Verizon reported related lawsuits and said investigation, remediation, compliance, litigation or reputational costs could be material but could not be reasonably estimated; insurance may not cover all costs.
- Verizon identified competition, economic conditions, cybersecurity, network deployment and disruption, regulation, high indebtedness, interest rates, litigation, labor and benefit costs, and tax changes among risks that could affect future results.
- Pending litigation and regulatory matters had no individually material accruals. Verizon said excess losses could not currently be estimated and that a material effect on results for a particular period remained possible. It also reported approximately 25 patent-infringement actions; a small number could proceed to trial in the coming 12 months.
Most important facts for investors to verify
- Whether postpaid service growth and FWA additions can offset declines in equipment revenue, prepaid customers and Business-segment revenue.
- Whether Consumer margin gains persist and Business-segment profitability stabilizes amid competitive and secular pressures.
- The outcome of Verizon’s Q4 2023 Business goodwill impairment test and the assumptions supporting the reporting unit’s valuation.
- The scale and potential costs of lead-cable investigations and litigation, and the extent of insurance coverage.
- Cash generation, capital spending, debt maturities, interest costs and remaining C-Band payments, including the effect of the October $3.7B payment.
- Changes in credit-loss provisions, customer payment behavior, and the effect of higher interest rates on financing costs.