Business Context and Reporting Period
This summary covers the Form 10-Q filed by Verizon Communications Inc. for the quarterly period ended September 30, 2008. Verizon is a leading global provider of communications services, operating through two primary reportable segments: Wireline (voice, broadband, video, and data services) and Domestic Wireless (wireless voice and data services). The reporting period reflects significant strategic activity, including the completion of the Rural Cellular acquisition, the pending $28.1 billion acquisition of Alltel, and the spin-off of local exchange assets in Maine, New Hampshire, and Vermont.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Operating Revenues | $24,752 million | $72,709 million | $69,629 million |
| Operating Income | $4,173 million | $13,052 million | $12,155 million |
| Net Income | $1,669 million | $5,193 million | $4,449 million |
| Diluted EPS (Continuing Ops) | $0.59 | $1.82 | $1.53 |
| Operating Margin (9 Months) | 18.0% (vs. 17.5% in 2007) | ||
| Capital Expenditures (9 Months) | $12,575 million | ||
| Free Cash Flow (9 Months) | $6,503 million (Operating Cash Flow $19,078m - CapEx $12,575m) | ||
| Total Debt (Long-term + Current) | $44,775 million (Sep 30, 2008) | ||
| Cash and Cash Equivalents | $696 million (Sep 30, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 4.1% in Q3 and 4.4% for the nine-month period compared to 2007. This growth was driven primarily by the Domestic Wireless segment, which saw a 12.5% revenue increase due to a 12.5% rise in data revenues and an 11.2% increase in customers.
- Wireline Decline: Wireline revenues decreased 1.7% in Q3 and 1.6% for the nine-month period, attributed to declines in traditional voice services and access lines, partially offset by growth in broadband and strategic business services.
- Profitability: While Q3 operating income decreased slightly ($4,173 million vs. $4,210 million in 2007) due to merger integration and severance costs, operating income for the nine-month period increased 7.4% to $13,052 million.
- Debt Levels: Total debt increased significantly due to borrowings to finance the Alltel debt purchase ($4.8 billion) and the Rural Cellular acquisition ($1.5 billion assumed debt, refinanced shortly after). The debt-to-debt-plus-equity ratio rose to 46.8% from 38.1% at year-end 2007.
- Customer Metrics: Domestic Wireless added approximately 2.1 million net total customers in Q3, reaching 70.8 million total customers. Wireline added 129,000 net broadband connections and 233,000 net FiOS TV customers in Q3.
Guidance, Outlook, and Risks
- Strategic Acquisitions: Verizon is pursuing the acquisition of Alltel Corporation (aggregate value ~$28.1 billion), targeting completion by year-end 2008 subject to regulatory approval. The company also completed the acquisition of Rural Cellular Corporation in August 2008.
- Dividend and Buybacks: The Board increased the quarterly dividend by 7.0% to $0.460 per share. During the nine months ended September 30, 2008, the company repurchased $1,369 million of common stock.
- Regulatory and Market Risks:
- Regulatory Approval: The Alltel merger is subject to regulatory approvals and a potential $500 million termination fee.
- Competition: Intense competition in wireline voice markets and technology substitution (VoIP, wireless) continue to drive access line losses.
- Interest Rates: While over two-thirds of the debt portfolio is fixed, deteriorating credit market conditions could increase borrowing costs for future refinancing.
- Legal Proceedings: Ongoing class action suits regarding intelligence-gathering activities and environmental audits regarding hazardous substance reporting.
- Unusual Items: The period included $265 million in pretax severance, pension, and benefit charges, and $115 million in merger integration costs related to the MCI acquisition. A $103 million charge was recorded for the spin-off of New England operations.
Investor Verification Checklist
- Alltel Merger Status: Verify the timeline and regulatory hurdles for the $28.1 billion Alltel acquisition and the associated $500 million termination fee risk.
- Wireline Churn: Monitor the rate of access line losses and the effectiveness of FiOS broadband and video services in offsetting traditional voice revenue declines.
- Debt Refinancing: Assess the impact of rising interest rates on the company's ability to refinance the $7.55 billion credit facility and other maturing debt.
- Capital Allocation: Review the balance between heavy capital expenditures ($12.6 billion in 9 months) for network expansion (including $9.4 billion in 700 MHz spectrum) and shareholder returns (dividends and buybacks).
- Minority Interest: Note the significant minority interest expense ($4,459 million for 9 months) attributable to Vodafone's stake in Verizon Wireless, which impacts net income available to common shareholders.