Verizon Communications Inc. — Q1 2012 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2012, compared with the three months ended March 31, 2011. Verizon operates Verizon Wireless and Wireline. Its 55%-owned Verizon Wireless partnership is consolidated; Vodafone’s 45% share is reported as noncontrolling interest.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenues | $28.242 billion | $26.990 billion | +4.6% |
| Operating income | $5.195 billion | $4.453 billion | +16.7% |
| Net income | $3.906 billion | $3.264 billion | +19.7% |
| Net income attributable to Verizon | $1.686 billion | $1.439 billion | +17.2% |
| Diluted EPS attributable to Verizon | $0.59 | $0.51 | +$0.08 |
| Operating cash flow | $5.957 billion | $5.035 billion | +$0.922 billion |
| Capital expenditures | $3.565 billion | $4.363 billion | -$0.798 billion |
| Free cash flow (company-defined non-GAAP) | $2.392 billion | $0.672 billion | +$1.720 billion |
Operating margin was approximately 18.4%, versus 16.5% a year earlier. Consolidated EBITDA, a non-GAAP measure, was $9.223 billion versus $8.477 billion. Verizon declared dividends of $0.50 per common share, compared with $0.4875.
Segments: Verizon Wireless revenue was $18.273 billion (+8.2%); segment operating income was $5.217 billion (+19.9%) and EBITDA service margin was 46.3% versus 43.7%. Wireline revenue was $9.945 billion (-2.0%); segment operating income fell to $157 million from $288 million, and EBITDA margin was 22.6% versus 23.6%.
Financial position and material changes
- At March 31, cash and cash equivalents were $5.909 billion, down from $13.362 billion at year-end 2011. Total current assets were $23.512 billion and current liabilities were $22.913 billion.
- Debt maturing within one year was $3.121 billion and long-term debt was $48.476 billion, for total reported debt of $51.597 billion, down from $55.152 billion at December 31. Net debt to consolidated EBITDA was 1.3x. Verizon reported compliance with debt covenants and approximately $6.1 billion of unused capacity on its $6.2 billion credit facility.
- Financing cash outflow was $9.737 billion, including a $4.5 billion cash distribution to Vodafone, $1.3 billion of dividends paid, debt repayments and a reduction in short-term obligations. This drove most of the quarter’s cash decrease.
- Wireless data revenue increased 21.1% to $6.6 billion and represented 42.9% of wireless service revenue, versus 38.1%. Smartphones were 46.8% of the retail postpaid base, compared with 32.2% a year earlier. Postpaid net additions declined 44.7% to 501,000, while postpaid churn improved to 0.96% from 1.01%.
- Wireline FiOS Internet subscribers rose 16.8% to 5.010 million and FiOS Video subscribers rose 18.8% to 4.353 million. Traditional voice connections and wholesale revenues continued to decline.
Outlook, commentary and risks
- Management emphasized growth in wireless data, FiOS, strategic business services and cloud offerings. Verizon expected continued wireless service revenue growth with greater smartphone penetration and planned to extend 4G LTE to virtually its current 3G footprint by mid-2013.
- Verizon expected to close approximately $3.9 billion of AWS spectrum acquisitions in 2012, subject to FCC approval and DOJ review. It announced an open sale process for its 700 MHz A and B licenses, contingent on closing specified spectrum purchases. Cable-company commercial agreements and a related technology joint venture were also under regulatory review.
- A Verizon-Coinstar joint venture, controlled and consolidated by Verizon, planned to introduce subscription services in the second half of 2012; initial funding was not significant. The filing provides no quantified full-year earnings or revenue guidance.
- Management cited economic weakness affecting enterprise and wholesale spending, competition and technology substitution in traditional voice, execution and capital needs for network deployment, regulatory changes, supplier or network disruptions, labor and benefit costs, and financing-market risks.
- Contingencies include an ActiveVideo patent verdict of $115 million, later increased by $24 million, plus an order for approximately $11 million monthly payments through May 2012; execution was stayed and Verizon appealed. A separate injunction concerning two patents was deferred until May 2012. Verizon was involved in approximately 50 patent cases. Other significant litigation includes an Idearc claim seeking over $9 billion and a FairPoint claim seeking approximately $2 billion. The company said pending matters were not expected to materially affect financial condition, though they could materially affect results in a particular period.
- Unrecognized tax benefits were $3.0 billion at quarter-end; Verizon said this liability could change significantly over the next 12 months, but it could not estimate a possible range. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether wireless revenue growth and higher margins can persist as postpaid additions slow and data-device economics and customer usage evolve.
- Whether Wireline’s strategic-services and FiOS growth can offset continuing traditional voice, wholesale and core-service declines.
- Regulatory decisions, closing conditions and funding implications for the AWS spectrum purchases, cable agreements and planned spectrum sales.
- Developments in ActiveVideo appeals and injunctions, Idearc and FairPoint litigation, other patent actions, and tax examinations or appeals.
- Cash and debt trends after the large Verizon Wireless distribution, alongside ongoing network investment and shareholder dividends.