Verizon Communications Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in U.S. dollars. Verizon provides Wireless and Wireline communications services; Corporate and other includes Oath media, Verizon Connect and corporate items.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $32.6B | $31.7B | $96.6B | $92.1B |
| Operating income | $7.7B | $7.0B | $21.6B | $22.0B |
| Net income | $5.1B | $3.7B | $14.0B | $11.8B |
| Net income attributable to Verizon | $4.9B | $3.6B | $13.6B | $11.4B |
| Diluted EPS | $1.19 | $0.89 | $3.29 | $2.80 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $26.2B | $16.5B |
| Capital expenditures | Not provided for the quarter | Not provided for the quarter | $12.0B | $11.3B |
| Free cash flow | Not provided for the quarter | Not provided for the quarter | $14.2B | $5.2B |
Q3 revenue rose 2.8%; nine-month revenue rose 4.9%. Wireless segment revenue increased 6.5% in Q3 and 5.6% year to date, while Wireline revenue declined 3.8% and 2.9%, respectively. Wireless operating income rose 11.9% in Q3 and 12.4% year to date; Wireline recorded a $50M operating loss in Q3 and break-even operating income for the nine months. Wireless EBITDA margin was 47.7% in Q3 and 47.8% year to date; Wireline EBITDA margin was 20.4% and 20.6%, respectively.
Operating cash flow increased by $9.8B year over year for the nine-month period, primarily due to a $4.3B working-capital improvement, including tax-reform effects, higher earnings, lower pension contributions and the absence of prior-year divestiture effects. Free cash flow is a company-defined non-GAAP measure.
At September 30, cash and cash equivalents were $2.5B; cash, cash equivalents and restricted cash totaled $3.6B. Total debt was $112.9B, down from $117.1B at December 31, 2017, including $6.5B maturing within one year. Verizon had approximately $9.4B of unused capacity under its $9.5B credit facility. Cash dividends paid in the first nine months were $7.3B; dividends declared were $0.6025 per share in Q3.
Material changes and comparability
- Wireless equipment revenue increased substantially, reflecting a shift toward higher-priced devices and the accounting allocation under Topic 606; equipment costs also rose as device mix shifted upward.
- Topic 606 adoption increased reported nine-month 2018 revenue by $264M and net income by $923M versus the amounts calculated without the new standard. Prior-year results were not restated, so reported comparisons are not fully comparable. The adoption added $2.9B, after tax, to opening retained earnings.
- Q3 and nine-month earnings benefited from a $454M pre-tax pension remeasurement gain, primarily from a higher discount-rate assumption. Other income also reflects debt-redemption costs; nine-month 2018 early debt redemption costs were $725M.
- Year-to-date 2017 results included a $1.774B gain on divested businesses, affecting comparisons. 2018 also included $451M in product-realignment charges, $339M in severance charges, and $364M in acquisition and integration charges.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided in the supplied filing text. Management said 2018 priorities include customer retention and growth, network monetization, and investment in wireless, fiber and advanced technologies.
- Verizon began installing 5G Home in four U.S. markets on October 1, 2018. Spectrum acquired through Straight Path and NextLink is intended for 5G deployment.
- Management cited persistent competition and market pressure in Wireline and Media, with lower-than-expected revenue and earnings. It warned that a sustained decline or other adverse assumptions could lead to future goodwill impairment; $3.9B of goodwill was allocated to Wireline and $4.8B to Media.
- A voluntary separation program for select U.S. management employees opened in October. Verizon expects a potentially significant fourth-quarter severance charge, dependent on accepted volunteers.
- About 78% of debt was fixed-rate, including hedges. A 100-basis-point change in rates on floating-rate exposure was estimated to change annual interest expense by approximately $0.3B.
- Key disclosed risks include high indebtedness, competition and technology substitution, cybersecurity incidents, regulatory and labor matters, benefit-plan costs, tax changes and execution of strategic initiatives. Verizon reported approximately 35 patent-infringement lawsuits; it stated that no current matter had a material accrual and that the reasonably possible loss range could not be estimated. Unrecognized tax benefits were $2.4B, and their liability could change significantly.
- Verizon expects adoption of lease accounting in 2019 to significantly increase recognized balance-sheet assets and liabilities for operating leases. The filing says the ultimate impact was still under evaluation.
Most important facts for investors to verify
- Separate underlying operating trends from Topic 606 effects and one-time pension, debt-redemption, severance and product-realignment items.
- Track Wireless service revenue, postpaid additions and churn: Q3 postpaid net additions were 515,000, while postpaid churn increased to 1.04% from 0.97% a year earlier.
- Monitor Wireline revenue declines and the forthcoming annual goodwill impairment assessment for Wireline and Media.
- Assess debt maturity, interest-rate exposure, capital spending and the sustainability of cash generation after dividends and network investment.
- Follow the cost and execution of the 5G rollout, the voluntary separation program and the potential effects of litigation and tax matters.