Verizon Communications Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Verizon provides wireless and wireline communications services through Consumer and Business segments; the company reorganized into these two reportable segments effective April 1, 2019 and recast prior-period segment information.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $32.894B | $32.607B | $97.093B | $96.582B |
| Operating income | $8.180B | $7.675B | $23.739B | $21.641B |
| Net income | $5.337B | $5.062B | $14.571B | $13.974B |
| Net income attributable to Verizon | $5.194B | $4.924B | $14.170B | $13.589B |
| Diluted EPS | $1.25 | $1.19 | $3.42 | $3.29 |
- Q3 revenue increased 0.9%; operating income rose 6.6% and Verizon-attributable net income rose 5.5%. Nine-month revenue increased 0.5%, while operating income rose 9.7%.
- Operating margin was approximately 24.9% in Q3 versus 23.5% a year earlier; nine-month operating margin was approximately 24.5% versus 22.4%. Q3 net margin was approximately 16.2% versus 15.5%.
- Q3 segment performance: Consumer revenue increased 1.4% to $22.7B and segment operating income rose 3.8% to $7.489B. Business revenue was nearly flat at $7.885B, while segment operating income declined 15.3% to $977M.
- Consumer wireless service revenue benefited from higher-tier and unlimited plans, more devices per account, and reseller usage. Business growth in Small and Medium Business was offset by declines in Global Enterprise and Wholesale, including continued pressure on traditional voice and data services.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $26.748B (up $504M year over year); capital expenditures were $12.332B; reported free cash flow, defined as operating cash flow less capex, was $14.416B (up $198M).
- Cash and cash equivalents were $3.020B at September 30, 2019; cash, cash equivalents and restricted cash totaled $4.206B. Current assets were $34.895B versus current liabilities of $39.209B.
- Total debt was approximately $109.6B, down from $113.1B at December 31, 2018. Debt included $8.8B of asset-backed debt. Verizon reported an effective interest rate of 4.8% for the nine-month period and approximately $9.4B of unused capacity under its $9.5B credit facility.
- Dividends paid in the first nine months were $7.474B. Financing activities used $14.301B, including debt repayments and dividends; proceeds from borrowings partly offset these outflows.
Material changes and unusual items
- Operating lease accounting adopted January 1, 2019 added $22.1B of operating lease liabilities and $23.2B of right-of-use assets at adoption. Prior-year comparisons were not recast, limiting comparability of affected balance-sheet items.
- Nine-month results included $1.544B of early debt redemption costs, primarily from tender offers for long-dated notes; the filing reports a $1.6B loss on early redemptions. The company also recorded a $195M pension remeasurement loss for the nine months, compared with a $454M gain in 2018.
- A $261M pretax net gain from asset and business dispositions was recorded in 2019. Verizon received approximately $1.0B in gross proceeds from a July real estate sale-leaseback transaction.
- Verizon paid approximately $521M for millimeter-wave spectrum licenses in 2019. It reported launching its 5G Ultra Wideband network in 15 U.S. markets and targeted commercial availability in more than 30 markets by year-end 2019.
- Approximately 10,400 eligible employees separated under the voluntary separation program; related payments were substantially completed by September, with $1.9B of severance benefits paid during the first nine months.
Outlook, commentary and risks
- The filing provides no clear numerical full-year revenue, earnings or cash-flow guidance. Management said it expects capital spending requirements to be financed primarily through internally generated funds.
- Management emphasized investment in 4G capacity, 5G deployment, fiber and the Intelligent Edge Network. Nine-month capex increased 2.5% year over year, to 12.7% of revenue.
- Key disclosed risks include competition and technology substitution, high indebtedness and financing-market conditions, cybersecurity incidents and other disruptions, regulation, labor and benefit costs, tax changes, and execution of business strategies.
- Verizon was involved in approximately 25 patent-infringement actions. It said pending legal and regulatory matters were not expected to materially affect financial condition, though a matter could materially affect results in a particular period. Potential additional losses could not be reasonably estimated. Unrecognized tax benefits were $2.7B, and the amount could change significantly within 12 months.
- Management reported effective disclosure controls as of September 30, 2019, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Consumer service and connection growth can offset higher churn and declining wireline voice, DSL and Fios video connections.
- Whether ongoing Business declines in Global Enterprise and Wholesale continue to pressure segment profitability and margins.
- Debt reduction, interest costs, debt maturities and the cash demands of dividends, capex and spectrum investment.
- The returns and timing of 5G and fiber investment relative to the company’s deployment targets and capital requirements.
- The effects of lease adoption on comparisons, and the recurrence or cash impact of pension remeasurement, debt-redemption costs and disposition gains.
- Developments in patent, environmental and regulatory matters, as well as audits and other uncertain tax positions.