Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Verizon Communications Inc., (Verizon or the Company) is one of the world’s leading providers of communications services. Our domestic wireless business, operating as Verizon Wireless, provides wireless voice and data products and services across the United States (U.S.) using one of the most extensive and reliable wireless networks. Our wireline business provides communications services, including voice, broadband data and video services, network access, nationwide long-distance and other communications products and services, and also owns and operates one of the most expansive end-to-end global Internet Protocol (IP) networks. Stressing diversity and commitment to the communities in which we operate, we have a highly diverse workforce of approximately 223,900 employees.
In the sections that follow we provide information about the important aspects of our operations and investments, both at the consolidated and segment levels, and discuss our results of operations, financial position and sources and uses of cash. In addition, we highlight key trends and uncertainties to the extent practicable. The content and organization of the financial and non-financial data presented in these sections are consistent with information used by our chief operating decision makers for, among other purposes, evaluating performance and allocating resources. We also monitor several key economic indicators as well as the state of the economy in general, primarily in the United States where the majority of our operations are located, in evaluating our operating results and assessing the potential impacts of these trends on our businesses. While most key economic indicators, including gross domestic product, affect our operations to some degree, we historically have noted higher correlations to non-farm employment, personal consumption expenditures and capital spending, as well as more general economic indicators such as inflationary or recessionary trends and housing starts.
Our results of operations, financial position and sources and uses of cash in the current and future periods reflect our focus on the following strategic imperatives:
Revenue Growth — To generate revenue growth we are devoting our resources to higher growth markets such as the wireless voice and data markets, the broadband and video markets, and the provision of strategic services to business markets, rather than to the traditional wireline voice market. During 2008, revenues from these higher growth markets offset continuing declines in the traditional voice mass market, and we reported consolidated revenue growth of 4.2%. We continue developing and marketing innovative product bundles to include local, long-distance, wireless and broadband services for consumer and general business retail customers. We anticipate that these efforts will help counter the effects of competition and technology substitution that have resulted in access line losses, and will enable us to continue to grow consolidated revenues.
Market Share Gains — In our wireless business, our goal is to be the market leader in providing wireless voice and data communication services in the United States. To gain market share, we are focused on providing the highest network reliability and new and innovative products and services such as Mobile Broadband and our Evolution-Data Optimized (EV-DO) service. We also continue to expand our wireless data, messaging and multi-media offerings for both consumer and business customers. During 2008,
- our total number of customers increased 9.7% to 72.1 million; and
- average revenue per customer per month (ARPU) from service revenues increased by 1.2% to $51.59 from increased use of our messaging and other data services.
With our acquisition of Alltel Corporation (Alltel) in January 2009, we became the largest wireless provider in the U.S. as measured by the total number of customers.
In our wireline business, our goal is to become the leading broadband provider in every market in which we operate. During 2008,
- we passed 12.7 million premises with our high-capacity fiber optics network operated under the FiOS service mark;
- we added 660,000 net wireline broadband connections, for a total of 8,673,000 connections; and
- we added approximately 975,000 net new FiOS TV customers, for a total of 1,918,000 FiOS TV customers.
With FiOS, we have created the opportunity to increase revenue per customer as well as improve retention and profitability as the traditional fixed-line telephone business continues to decline as customers migrate to wireless, cable and other newer technologies. We are also focused on gaining market share in the enterprise business by the deployment of strategic service offerings — including expansion of our VoIP and international Ethernet capabilities, the introduction of video and web-based conferencing capabilities, and enhancements to our virtual private network portfolio. In 2008, revenues from strategic services grew 16.1%.
Profitability Improvement — Our goal is to increase operating income and margins. In 2008,
- operating income rose 8.4% compared to 2007;
- income before provision for income taxes, discontinued operations and extraordinary item rose 2.8% compared to 2007; and
- operating income margin rose 4% to 17.3% compared to 2007.
To position our company for sustainable, long-term profitability, we are directing our capital spending primarily toward higher growth markets. High-speed wireless data services, fiber optics to the premises, as well as expanded services to enterprise customers, are examples of these growth markets. During 2008, capital expenditures were $17,238 million compared with capital expenditures of $17,538 million in 2007, excluding discontinued operations. We expect 2009 capital expenditures, excluding amounts related to the acquisition of Alltel, to be lower than 2008 capital expenditures.
Operational Efficiency — While focusing resources on revenue growth and market share gains, we are continually challenging our management team to lower expenses, particularly through technology-assisted productivity improvements, including self-service initiatives. The effect of these and other efforts, such as real estate consolidations, call center routing improvements, the formation of a centralized shared services organization, and centralizing information technology and marketing efforts, has led to changes in our cost structure as well as maintaining and improving operating income margins. With our deployment of the FiOS network, we expect to realize savings annually in our ongoing operating expenses as a result of efficiencies gained from fiber network facilities. As the deployment of the FiOS network gains scale and installation and automation improvements occur, average costs per home connected are expected to decline.
Customer Service — Our goal is to be the leading company in customer service in every market we serve. We view superior product offerings and customer service experiences as a competitive differentiator and a catalyst to growing revenues and gaining market share. We are committed to providing high-quality customer service and continually monitoring customer satisfaction in all facets of our business. We believe that we have the most loyal customer base of any wireless service provider in the United States, as measured by customer churn.
Performance-Based Culture — We embrace a culture of accountability, based on individual and team objectives that are performance-based and tied to Verizon’s strategic imperatives. Key objectives of our compensation programs are pay-for-performance and the alignment of executives’ and shareowners’ long-term interests. We also employ a highly diverse workforce, since respect for diversity is an integral part of Verizon’s culture and a critical element of our competitive success.
We create value for our shareowners by investing the cash flows generated by our business in opportunities and transactions that support the aforementioned strategic imperatives, thereby increasing customer satisfaction and usage of our products and services. In addition, we use our cash flows to repurchase shares and maintain and grow our dividend payout to shareowners. Reflecting continued strong cash flows and confidence in Verizon’s business model, Verizon’s Board of Directors increased the Company’s quarterly dividend 6.2% during the third quarter of 2007 and 7.0% during the third quarter of 2008. During 2008, we repurchased $1,368 million of our common stock as part of our previously announced share buyback program. Net cash provided by operating activities — continuing operations for the year ended December 31, 2008 of $26,620 million increased by $311 million from $26,309 million for the year ended December 31, 2007.