Verizon Communications Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless otherwise stated. Verizon operates Wireless and Wireline businesses; Vodafone holds a 45% noncontrolling interest in Verizon Wireless.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $29.420 billion | $28.242 billion | +4.2% |
| Operating income | $6.222 billion | $5.195 billion | +19.8% |
| Net income | $4.855 billion | $3.906 billion | +24.3% |
| Net income attributable to Verizon | $1.952 billion | $1.686 billion | +15.8% |
| Diluted EPS attributable to Verizon | $0.68 | $0.59 | +$0.09 |
| Operating cash flow | $7.531 billion | $5.957 billion | +$1.574 billion |
| Capital expenditures | $3.602 billion | $3.565 billion | +$0.037 billion |
| Free cash flow (non-GAAP) | $3.929 billion | $2.392 billion | +$1.537 billion |
- Operating margin was approximately 21.2%, versus 18.4% a year earlier. Consolidated EBITDA, a non-GAAP measure, was $10.340 billion, up from $9.223 billion.
- Interest expense was $537 million, down from $685 million; the effective income tax rate was 15.1%, versus 15.7%.
- Cash and cash equivalents were $5.475 billion at quarter-end, up from $3.093 billion at December 31, 2012. Current assets were $25.258 billion and current liabilities $31.489 billion.
- Total debt carrying amount was approximately $52.9 billion, compared with $52.0 billion at year-end. Debt due within one year rose to $10.888 billion from $4.369 billion, largely because $6.008 billion of long-term debt was reclassified as current maturities. Verizon reported compliance with all debt covenants and approximately $6.1 billion of unused capacity under its $6.2 billion credit facility.
- Verizon declared dividends of $0.515 per common share, versus $0.500; cash dividends paid were $1.472 billion. The company repurchased approximately 3.5 million shares for about $0.2 billion.
Business trends and changes versus prior period
- Wireless: Revenue increased 6.8% to $19.523 billion, and segment operating income rose 23.0% to $6.418 billion. Growth reflected higher postpaid connections, smartphone penetration and customer account usage. Retail postpaid connections increased 5.9%; postpaid ARPA rose 6.9% to $150.27. However, postpaid churn increased to 1.01% from 0.96%.
- Wireline: Revenue declined 1.2% to $9.830 billion. Mass Markets revenue grew 3.3%, supported by FiOS, while Global Enterprise revenue fell 2.6% and Global Wholesale fell 7.2%, reflecting declines in traditional voice and core services. Segment operating income decreased to $13 million from $157 million; segment EBITDA fell 6.2% to $2.108 billion.
- Consolidated revenue growth was led by Wireless and FiOS-related Mass Markets growth, partly offset by weakness in traditional wireline and wholesale services. Consolidated operating expenses increased 0.7%; lower cost of services was more than offset by higher SG&A and depreciation and amortization.
- Capital expenditures were 12.2% of revenue, principally supporting the 4G LTE build-out. By quarter-end, LTE covered more than 287 million people; Verizon reported deployment in 491 markets as of April 18, 2013.
Outlook, risks and unusual items
- Management expected to continue LTE deployment in 2013 and stated that by the end of Q2 the LTE footprint was expected to effectively match the existing 3G footprint. The filing provides no specific earnings or revenue guidance.
- Verizon agreed to sell certain 700 MHz licenses for $1.9 billion in cash plus AWS licenses from AT&T, and other licenses for $0.2 billion. The transactions required FCC approval; $2.3 billion of licenses was classified as held for sale at March 31. Separate AWS license exchanges were completed, bringing $0.5 billion of licenses at fair value and an immaterial gain.
- Management cited economic conditions, competition, technology substitution, regulation, cybersecurity and network disruption, financing conditions, labor matters, benefit costs and execution of business strategy among factors that could affect future results. It stated that previously disclosed risk factors had not materially changed.
- Legal and regulatory matters include approximately 50 patent-infringement actions. The Idearc litigation trust seeks more than $9 billion; after a court valuation ruling, a decision on the viability of the claims was pending. The FairPoint litigation trust seeks approximately $2 billion; proceedings were continuing. Verizon said no current litigation accrual was material and that a reasonably possible loss range could not be estimated. It did not expect pending matters to materially affect financial condition, though a matter could materially affect results in a particular period.
- Unrecognized tax benefits were $2.8 billion at quarter-end; the company said the liability could change significantly within 12 months, but it could not estimate a range. A $0.9 billion severance liability remained. The filing also discusses remediation at the former Hicksville, New York facility; costs may change depending on remediation requirements and possible Army Corps of Engineers responsibility.
- Q1 2013 net income included a much larger share attributable to noncontrolling interests—$2.903 billion versus $2.220 billion—primarily because of higher Wireless earnings and Vodafone’s 45% interest. Thus consolidated net income growth exceeded growth in income attributable to Verizon shareholders.
Key facts for investors to verify
- Whether FCC approval and completion of the announced spectrum sales occur, and how proceeds and transferred licenses affect spectrum strategy.
- Whether Wireless connection and service-revenue growth persists, particularly as churn rose, and whether the announced LTE deployment timetable is achieved.
- Whether FiOS and strategic-services growth can offset continuing declines in traditional wireline, Global Enterprise Core and wholesale revenues.
- The composition and refinancing plans for the $10.888 billion of debt classified as due within one year, given the substantial reclassification from long-term debt.
- Developments in the Idearc and FairPoint litigation, tax audits and Hicksville remediation, where potential outcomes or loss ranges remain uncertain.