Verizon Communications Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted. Verizon reports Consumer and Business segments following a reorganization effective April 1, 2019; prior-period segment figures were recast.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $32.071B | $32.203B | $64.199B | $63.975B |
| Operating income | $7.850B | $6.617B | $15.559B | $13.966B |
| Net income | $4.074B | $4.246B | $9.234B | $8.912B |
| Net income attributable to Verizon | $3.944B | $4.120B | $8.976B | $8.665B |
| Diluted EPS | $0.95 | $1.00 | $2.17 | $2.10 |
| Consolidated Adjusted EBITDA* | $12.082B | $11.865B | $24.022B | $23.643B |
Q2 operating margin was approximately 24.5% versus 20.5% a year earlier; net margin was approximately 12.7% versus 13.2%. For the first half, operating margin was approximately 24.2% versus 21.8%, and net margin approximately 14.4% versus 13.9%.
- Revenue mix and trends: Q2 revenue declined 0.4%; first-half revenue increased 0.4%. Consumer revenue was essentially flat in Q2 and up 1.2% for the first half. Business revenue declined 1.1% and 0.9%, respectively. Wireless service revenue grew, while wireless equipment revenue fell amid fewer device sales and longer handset upgrade cycles.
- Cash flow: First-half operating cash flow was $15.836B, down from $16.433B. Capital expenditures were $7.967B, up from $7.838B; reported free cash flow was $7.869B versus $8.595B. Dividends paid were $4.981B.
- Debt and liquidity: Total debt was approximately $113.4B at June 30, versus $113.1B at year-end 2018; the effective interest rate was 4.8%. Cash and cash equivalents were $1.949B; cash, cash equivalents and restricted cash totaled $3.120B. Current assets of $33.308B were below current liabilities of $38.214B. Verizon reported about $9.4B of unused capacity under its $9.5B credit facility.
- Balance sheet: Total assets were $283.108B and equity was $57.947B. Adoption of lease accounting added operating lease right-of-use assets and liabilities; at June 30, operating lease liabilities totaled $21.408B. This change affects comparison with 2018, which was not restated.
Material changes versus the prior comparable period
- Q2 operating income rose $1.233B, despite slightly lower revenue, as operating expenses fell 5.3%; the first-half operating income increase was $1.593B.
- Q2 net income attributable to Verizon fell $176M and diluted EPS declined from $1.00 to $0.95. A $1.544B loss on early debt redemptions drove other income/expense to a $1.312B expense, compared with $360M of income in Q2 2018. The first-half debt-redemption loss was also $1.544B, versus $249M in the prior-year period.
- Consumer operating income increased 3.9% in Q2 and 4.2% for the first half. Business operating income decreased 2.7% and 4.3%, respectively.
- First-half operating cash flow declined $597M and free cash flow declined $726M, reflecting working-capital changes, cash taxes and severance payments, as well as higher capital spending. The company also made smaller discretionary pension contributions than in the prior-year period.
- Consumer wireless postpaid churn increased to 0.97% in Q2 from 0.93%; postpaid ARPA rose 2.3%. Fios Internet connections grew 3.1%, while Fios video connections fell 4.8%. In Business, Global Enterprise and Wholesale revenue contracted, while Small and Medium Business revenue grew.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific full-year financial guidance. Management emphasized network investment, customer retention and growth, 4G capacity and 5G deployment. Verizon had launched its 5G Ultra Wideband network in nine markets and targeted commercial availability in more than 30 markets by year-end 2019.
- Investment and strategy: First-half capital expenditures supported fiber, 4G network densification and 5G. Verizon was the high bidder for 1,075 millimeter-wave spectrum licenses and had paid approximately $521M for licenses pending issuance.
- Workforce and pension: Approximately 10,400 employees had separated under a voluntary program by June 30; severance payments were expected to be substantially completed by September. A $96M pension remeasurement gain was recorded for the first half.
- Subsequent event: On July 23, 2019, Verizon completed a real-estate sale-leaseback for gross proceeds of $1.0B, leasing back some properties for an initial two-year term with extension options.
- Contingencies and risks: The company reported no material accruals for pending legal matters and said it could not estimate reasonably possible losses above recorded amounts. It cited approximately 30 patent-infringement actions; certain cases could proceed to trial within 12 months. Risks highlighted include competition, technology substitution, cybersecurity, regulation, indebtedness and financing conditions, labor matters, pension costs and tax changes. Tax audits could materially change unrecognized tax benefits, but a possible range was not estimable.
- Accounting and measures: Lease accounting adoption added substantial assets and liabilities and limits comparability with 2018. Adjusted EBITDA and free cash flow are non-GAAP measures; *Adjusted EBITDA is management’s measure and should be considered with, not instead of, GAAP results.
Important facts for investors to verify
- Whether wireless service growth and Consumer profitability can offset handset-related revenue declines and rising Consumer selling, general and administrative costs.
- Whether weakness in Global Enterprise and Wholesale continues, and whether growth in Small and Medium Business is sufficient to offset it.
- How much of the Q2 earnings decline reflects the one-time debt-redemption loss, and the effect of future financing and debt-management decisions.
- Whether operating cash flow and free cash flow recover as working capital, severance payments and network investment evolve; assess dividend coverage alongside capital spending and debt obligations.
- The financial and operational effects of 5G deployment, spectrum acquisition and lease obligations, including whether rollout targets and expected returns are achieved.
- Developments in patent, environmental and tax matters, and any material change in estimates, contingencies or credit risk in device-payment receivables.