Verizon Communications Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Verizon operates Wireless and Wireline segments, with Media, telematics and other activities reported in Corporate and other.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $31.7B | $30.9B | $92.1B | $93.6B |
| Operating income | $7.2B | $6.5B | $22.6B | $19.0B |
| Net income attributable to Verizon | $3.6B | $3.6B | $11.4B | $8.6B |
| Diluted EPS | $0.89 | $0.89 | $2.80 | $2.11 |
| Consolidated Adjusted EBITDA | $11.6B | $11.3B | $34.1B | $34.3B |
- Q3 revenue rose 2.5%, while nine-month revenue declined 1.7%. Q3 growth reflected Yahoo’s operating business and telematics in Corporate and other; Wireless revenue remained a drag.
- Q3 operating margin was approximately 22.7%, versus 21.1% a year earlier; nine-month operating margin was approximately 24.6%, versus 20.3%. Nine-month results benefited from a larger gain on divestitures and lower pension-related charges than in 2016.
- Wireless revenue fell 2.4% in Q3 and 3.1% for the nine months. Wireless service revenue declined 5.1% and 6.0%, respectively; equipment revenue increased 5.5% and 5.4%.
- Wireline revenue increased 1.1% in Q3 and 0.7% for the nine months. Fios revenue was $2.9B in Q3; Fios Internet subscribers grew 3.9% year over year, while Fios Video subscribers declined 0.5%.
- Operating cash flow was $17.2B for nine months, down from $17.7B. Capital expenditures were $11.3B; reported free cash flow was $5.9B, down from $6.3B. Dividends paid were $7.1B.
- Cash and equivalents were $4.5B at September 30, up from $2.9B at year-end 2016. Total debt was $117.5B, versus $108.1B at year-end; interest expense for the nine months rose to $3.5B from $3.2B.
- Unused capacity under the $9.0B credit facility was approximately $8.9B. Verizon reported compliance with its financial and restrictive covenants.
Material changes and unusual items
- Verizon completed its $4.8B acquisition of Yahoo’s operating business on June 13 and combined it with its Media business as Oath. Yahoo-related acquisition and integration charges were $0.7B for the nine months.
- Verizon disclosed on October 3, after the quarter-end, that new information led it to believe the 2013 Yahoo breach affected all Yahoo accounts. The filing says any potential breach-related liability could not yet be reasonably estimated; Yahoo retained 50% of certain specified post-closing liabilities, subject to the transaction agreements.
- The May sale of 23 data-center sites generated net cash proceeds of approximately $3.5B and contributed to a $1.8B nine-month net gain on divested businesses. Verizon also recorded $1.3B in early debt redemption costs for the nine months.
- Verizon acquired XO’s wireline business for approximately $1.8B in February. Its planned purchase of Straight Path, with stated enterprise value of approximately $3.1B and about $0.7B in cash transaction costs, was pending regulatory approval and expected to close by the end of Q1 2018. The WOW! fiber-asset purchase, expected to cost approximately $0.3B, was also pending.
- A $3.4B discretionary pension contribution was a major use of cash. Management said mandatory qualified-pension funding through 2020 was expected to be minimal following the contribution.
- Retail postpaid additions improved year over year in Q3, but declined for the nine-month period. Postpaid ARPA fell 6.0% in Q3; management attributed service-revenue pressure to plan changes, unlimited offers and migration to unsubsidized service pricing.
Outlook, commentary and risks
- Management’s 2017 priorities include retaining and growing customers while balancing profitability, leveraging network leadership, developing Media and telematics, and monetizing network capabilities. It said capital spending would primarily be funded from internally generated cash.
- Verizon intended to launch fixed commercial 5G wireless broadband in 2018, subject to the results of ongoing trials. The Straight Path acquisition and planned XO spectrum transaction were intended to support 5G deployment.
- No specific consolidated earnings or revenue guidance is provided in the filing. Management cautions that interim results are not necessarily indicative of full-year results.
- Risks highlighted include intense competition and technology substitution, cybersecurity and data breaches, high indebtedness and financing costs, regulatory changes, labor and benefit-plan costs, natural disasters, tax uncertainty, litigation, and execution of acquisitions and other strategic plans.
- Verizon reported approximately 40 patent-infringement actions. It said pending legal and regulatory matters were not expected to materially affect financial condition, though a matter could significantly affect results in a particular period. The filing also notes environmental reserves, including the former Sylvania site in Hicksville, New York.
Important facts for investors to verify
- Whether Wireless service-revenue declines and lower postpaid ARPA stabilize, and how customer additions and churn develop.
- Oath’s post-acquisition revenue, profitability, integration costs and ability to deliver the anticipated strategic benefits.
- Potential financial, legal and regulatory exposure from the Yahoo data breaches, including the scope of liabilities retained by each party.
- Debt growth, refinancing needs, interest costs and the sustainability of dividends alongside network investment and acquisition spending.
- Free-cash-flow comparability: pension contributions and the shift from receivable sales to asset-backed financing affect cash-flow presentation and trends.
- Regulatory approvals and closing conditions for Straight Path, XO spectrum and WOW! transactions, and the timing and economics of planned 5G deployment.
- The impact of divestiture gains, debt-redemption costs and other special items when assessing recurring earnings and margins.