Verizon Communications Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Amounts are U.S. dollars. Verizon operates Wireless and Wireline segments; its reporting structure changed effective April 1, 2019.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenue | $32.128 billion | $31.772 billion |
| Operating income | $7.709 billion | $7.349 billion |
| Net income | $5.160 billion | $4.666 billion |
| Net income attributable to Verizon | $5.032 billion | $4.545 billion |
| Diluted earnings per share | $1.22 | $1.11 |
| Operating cash flow | $7.081 billion | $6.648 billion |
| Capital expenditures | $4.268 billion | $4.552 billion |
| Free cash flow (non-GAAP) | $2.813 billion | $2.096 billion |
Revenue increased 1.1%; operating income rose 4.9% and Verizon-attributable net income rose 10.7%. Operating margin was approximately 24.0%, versus 23.1%. Free cash flow increased as operating cash flow rose and capital expenditures declined. Verizon paid $2.489 billion in dividends.
Wireless revenue grew 3.7% to $22.7 billion, with service revenue up 4.4%; Wireless operating income increased to $8.466 billion. Wireline revenue fell 3.9% to $7.264 billion and the segment posted an $88 million operating loss, compared with $69 million of operating income a year earlier. Wireline pressures included declines in traditional voice, data and video services.
At March 31, cash and cash equivalents were $2.322 billion; total cash, cash equivalents and restricted cash were $3.537 billion. Total debt was approximately $113.7 billion, up from $113.1 billion at year-end 2018; reported short- and long-term debt excluding finance leases had a carrying amount of $112.725 billion. The company also reported $21.968 billion of operating lease liabilities following adoption of the new lease standard. Unused capacity under its $9.5 billion credit facility was approximately $9.4 billion.
Material changes, outlook and notable items
- Q1 2019 results include adoption of lease accounting Topic 842 from January 1, 2019. Verizon recognized $23.2 billion of operating lease right-of-use assets and $22.1 billion of lease liabilities at adoption; prior-year comparisons were not recast.
- Other income improved to $295 million from an expense of $75 million, partly reflecting the absence of the prior-year $249 million early debt redemption loss and a $96 million pension remeasurement credit in Q1 2019. The credit was tied to employee reductions and included a $150 million return-related credit partly offset by a $54 million discount-rate charge.
- Verizon said it was focused on retaining and growing its customer base, network investment and monetization, and expanding 5G. It announced broader 5G Home coverage for the second half of 2019 and, after quarter-end, launched mobile 5G in Chicago and Minneapolis, with plans for additional cities during 2019. These are plans, not quantified financial guidance; the filing provides no clear full-year earnings or revenue forecast.
- A voluntary separation program covered approximately 10,400 eligible employees; severance payments were $807 million in Q1 and the remaining liability was $1.3 billion. The company expected significant payments to be completed by September 2019.
- Management reported no goodwill impairment in the quarter, but Wireline fair value exceeded carrying value by only about 5%; continued revenue and earnings declines or adverse valuation assumptions could lead to future impairment.
- Risks highlighted include competition and technology substitution, high indebtedness and financing conditions, cybersecurity and network disruptions, regulatory changes, labor matters, benefit-plan costs, and execution of business strategies. Verizon stated that pending legal and regulatory matters were not expected to materially affect financial condition, though they could materially affect results in a particular period. It disclosed approximately 30 patent-infringement actions and ongoing tax audits; the possible change in unrecognized tax benefits could be significant, but no range was estimable.
Important facts for investors to verify
- Whether Wireless growth and postpaid customer trends can persist: postpaid net additions were 61,000 versus 260,000, and postpaid churn increased to 1.12% from 1.04%.
- Whether Wireline revenue and profitability stabilize amid continuing voice, video and legacy-service declines; assess the narrow Wireline goodwill valuation cushion.
- How much of the cash-flow improvement reflects recurring operations versus working-capital movements, pension contributions and severance payments.
- Debt repayment needs, interest-rate exposure, and the effects of lease obligations; approximately 79% of debt was fixed-rate, while management estimated a 100-basis-point rate change on floating-rate debt would affect annual interest expense by about $258 million.
- The impact of 5G rollout and network investment on capital spending, customer adoption and returns; the filing does not quantify expected financial returns.