Verizon Communications Inc. — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016; comparisons are with Q1 2015 unless noted. Verizon operates Wireless and Wireline segments, with AOL and other activities reported in Corporate and other. The interim results are unaudited and are not necessarily indicative of full-year results.
Financial and operating results
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Operating revenue | $32.2 billion | $32.0 billion; up 0.6% |
| Operating income | $7.9 billion | $8.0 billion; down slightly |
| Net income attributable to Verizon | $4.3 billion | $4.2 billion |
| Diluted EPS | $1.06 | $1.02 |
| Operating cash flow | $7.4 billion | $10.2 billion |
| Capital expenditures | $3.4 billion | $3.7 billion |
| Free cash flow | $4.0 billion | $6.5 billion |
| Total debt at March 31 | $109.9 billion | $109.7 billion at Dec. 31, 2015 |
| Cash and equivalents at March 31 | $5.8 billion | $4.5 billion at Dec. 31, 2015 |
Verizon declared dividends of $0.565 per share, versus $0.550 a year earlier, and paid $2.3 billion in cash dividends. Its $8.0 billion credit facility had approximately $7.9 billion of unused capacity. Current liabilities exceeded current assets by approximately $9.7 billion.
- Wireless: Revenue fell 1.5% to $22.0 billion as service revenue declined 6.2%, partly offset by equipment revenue growth of 17.2%. Retail postpaid connections increased 4.4%; postpaid churn improved to 0.96% from 1.03%. Segment operating income was $7.9 billion and EBITDA margin was 46.2%.
- Wireline: Revenue declined 1.9% to $9.3 billion, mainly from Global Enterprise and Global Wholesale. Fios revenue was $3.5 billion; Fios Internet subscribers rose 5.7% and video subscribers 2.2%. Segment operating income was $589 million and EBITDA margin was 23.4%.
Material changes and unusual items
- Consolidated revenue increased modestly, supported by equipment sales and AOL, which was acquired in June 2015. Wireless service revenue continued to shift toward lower-priced unsubsidized plans; 48% of retail postpaid phone connections were on those plans, versus 18% a year earlier.
- Operating cash flow and free cash flow were lower year over year, largely because Q1 2015 included $2.4 billion of proceeds from the tower monetization transaction, alongside working-capital changes. Q1 2016 operating cash flow also included $2.0 billion of proceeds from sales of device-installment receivables.
- Q1 2016 included a $165 million pre-tax pension remeasurement charge and a $142 million pre-tax gain on a spectrum-license exchange. Management’s non-GAAP adjusted EBITDA excludes these items; reported consolidated EBITDA was $12.0 billion, compared with $11.9 billion.
- Verizon’s sale of its California, Florida and Texas landline business to Frontier closed April 1, 2016, for approximately $10.5 billion before adjustments, including Frontier’s assumption of $0.6 billion of debt. The business was classified as held for sale at quarter-end.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management described continued network investment, including 4G LTE capacity and densification, development of 5G, and growth initiatives in video and the Internet of Things.
- Verizon expects to acquire XO Holdings’ wireline business for approximately $1.8 billion, subject to adjustments and regulatory approvals; closing was expected in the first half of 2017. Verizon also agreed to lease certain XO spectrum and has a conditional purchase option.
- After the Frontier sale, Verizon completed debt tender offers on April 4, repurchasing notes for $10.2 billion including accrued interest, and redeemed additional notes for $2.3 billion on April 8. Verizon expected a Q2 pre-tax loss of $1.8 billion from the tender offers and early redemption.
- Unions initiated a work stoppage on April 13 after labor contracts covering approximately 36,000 wireline employees had expired; negotiations continued as of the filing date.
- Management cited competition, technology substitution, high indebtedness, financing and credit-rating conditions, labor matters, benefit costs, cybersecurity, regulation, litigation and execution of business strategy as risks. Verizon reported approximately 50 patent-infringement cases; it said pending legal and regulatory matters were not expected to materially affect financial condition, though they could affect results in a particular period. Tax audits could materially change unrecognized tax benefits, but the potential range was not estimable.
Important facts for investors to verify
- Whether wireless service-revenue pressure from plan migration is offset by equipment sales, connection growth and customer economics over time.
- The sustainability of operating cash flow and free cash flow, particularly the contribution and risks of device-receivable sales and the absence of prior-year tower proceeds.
- The post-Frontier debt balance, use of sale proceeds, and the actual Q2 debt-redemption loss compared with management’s estimate.
- Labor-stoppage duration and its potential effects on operations, customer service and costs.
- Progress and regulatory conditions for the XO acquisition, and any material outcomes from tax, patent, environmental or other legal matters.