Verizon Communications Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; dollar amounts are in millions unless stated otherwise. Verizon operates Wireless and Wireline segments.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Operating revenue | $33,158 | $31,586 | $97,366 | $93,887 |
| Operating income | $7,535 | $6,890 | $23,316 | $21,735 |
| Net income | $4,171 | $3,794 | $12,862 | $14,104 |
| Net income attributable to Verizon | $4,038 | $3,695 | $12,488 | $11,856 |
| Diluted EPS attributable to Verizon | $0.99 | $0.89 | $3.05 | $3.03 |
| Dividends declared per share | $0.565 | $0.550 | $1.665 | $1.610 |
- Cash flow, nine months: Operating cash flow was $28,426, versus $23,157; capital expenditures were $12,540, versus $12,624; reported free cash flow was $15,886, versus $10,533. Verizon says the increase in operating cash flow and free cash flow was substantially supported by $4.5 billion of proceeds from device-installment receivable sales and $2.4 billion of tower-transaction proceeds classified in operating cash flow, as well as higher Wireless earnings.
- Liquidity and debt: Cash and cash equivalents were $3,875 at September 30, down from $10,598 at year-end 2014. Total debt was $112,324, including $7,264 maturing within one year, compared with $113,271 at year-end. The $8.0 billion credit facility had approximately $7.9 billion of unused capacity. Verizon reported compliance with its covenants.
- Segment results, Q3: Wireless revenue was $23,005, up 5.4%; operating income was $7,668, up 10.3%. Wireless EBITDA margin was 43.2%, versus 41.6%, and service EBITDA margin was 56.4%, versus 49.5%. Wireline revenue was $9,355, down 2.3%; operating income was $577, compared with $225. Wireline EBITDA margin was 23.5%, versus 23.0%.
Material changes versus the prior comparable periods
- Q3 consolidated revenue increased 5.0%, while nine-month revenue increased 3.7%. Higher wireless equipment revenue—primarily reflecting greater device-payment-plan adoption—and AOL revenue more than offset declining wireless service revenue and Wireline weakness.
- Wireless equipment revenue rose 73.1% in Q3; service revenue fell 4.1%. Verizon attributed the shift partly to device-payment plans, which recognize more equipment revenue when a device is sold and move revenue away from service revenue. Device-payment-plan activations were about 58% of phone activations in Q3, versus 12% a year earlier.
- Wireline revenue declined 2.3% in Q3, primarily from Global Enterprise declines and foreign-exchange effects; Fios-driven Mass Markets growth partly offset the declines. Fios internet subscribers increased 7.2% year over year to 6.935 million, and Fios video subscribers increased 5.0% to 5.807 million.
- Nine-month net income fell 8.8%, while net income attributable to Verizon increased 5.3%. Comparability was affected by 2014 items, including the $1.9 billion Vodafone Omnitel gain and the 2014 Wireless Transaction, which changed Verizon’s ownership of Verizon Wireless and noncontrolling interests. The 2015 period also included a $342 million pension remeasurement charge; 2014 included a $707 million spectrum-transaction gain and $0.9 billion of early debt-redemption costs.
- Nine-month operating cash flow improved, but cash declined by $6,723 as investing and financing uses remained substantial. Investing cash use increased to $24,596, including $9,811 for wireless licenses and $3,205 for acquisitions and investments. Financing cash use was $10,553, including $6,373 of dividends and $5,134 for treasury-stock purchases, partly offset by borrowing and tower-transaction proceeds.
Outlook, management commentary, risks and unusual items
- Management provided no specific full-year revenue, earnings or cash-flow guidance in the supplied filing text. It expects capital spending to be funded primarily from internally generated funds and says network investment, including spectrum, 4G LTE capacity and fiber, remains central to its strategy.
- Verizon expects the Frontier sale of its California, Florida and Texas local-exchange businesses for approximately $10.5 billion, subject to adjustments and including Frontier’s assumption of $0.6 billion of debt, to close at the end of Q1 2016. Required federal approvals and Texas approval had been obtained; other closing conditions and regulatory approvals remained. The business generated approximately $5.4 billion of 2014 revenue.
- The AOL acquisition closed June 23, 2015, for approximately $3.7 billion cash paid to shareholders; preliminary accounting included $1.814 billion of goodwill and $2.612 billion of amortizable intangible assets. Verizon cited digital content and advertising as strategic rationale. Purchase accounting remained subject to valuation adjustments.
- In March 2015, American Tower received exclusive rights to lease and operate approximately 11,300 Verizon towers for an upfront payment of about $5.0 billion, plus about $0.1 billion for towers sold. Verizon continues to use tower capacity under subleases. The upfront proceeds were accounted for partly as deferred rent and partly as a financing obligation, not wholly as a sale gain.
- The $342 million pension remeasurement charge reflected lump-sum settlements and investment-return and discount-rate changes. Verizon planned a further fourth-quarter 2015 pension remeasurement and cautioned that it could produce significant charges or credits.
- Risks include competition and technology substitution, declining traditional Wireline services, high indebtedness, regulation and uncertainty from the FCC’s 2015 Title II treatment of broadband, cybersecurity and operational disruptions, labor matters, pension investment returns, tax changes and execution of business strategy. Verizon said pending legal or regulatory matters were not expected to materially affect financial condition, though a matter could materially affect results in a particular period. It could not estimate a reasonably possible loss range beyond recorded accruals.
- Tax audits remain ongoing; Verizon stated unrecognized tax benefits were $1.5 billion and that the liability could change significantly within 12 months, with no range estimable at the time. Disclosure controls were reported effective as of September 30, 2015.
Most important facts for investors to verify
- How much of reported revenue, operating cash flow and free cash flow growth reflects sustainable customer economics versus device-payment-plan revenue timing, receivable sales and tower-transaction proceeds.
- Wireless service-revenue, ARPA and connection trends as device-payment-plan adoption and the new Verizon Plan affect reported revenue mix; Q3 retail postpaid ARPA was $152.38, down 5.5% year over year.
- Progress and final proceeds, adjustments, approvals and closing timing for the Frontier divestiture, and the resulting effect on continuing operations and debt.
- AOL’s contribution to revenue and profitability, and final purchase-price allocation, including the valuation and amortization of acquired intangible assets.
- Debt maturities, refinancing needs, covenant headroom and the effects of capital spending, dividends and pension funding on liquidity.
- Fourth-quarter pension remeasurement, tax-audit developments, and outcomes of significant litigation, regulatory and environmental matters.