Management’s Discussion and Analysis
of Financial Condition and Results of Operations

SEGMENT RESULTS OF OPERATIONS (1 OF 3)

We have two reportable segments, Domestic Wireless and Wireline, which we operate and manage as strategic business units and organize by products and services. We measure and evaluate our reportable segments based on segment operating income. The use of segment operating income is consistent with the chief operating decision maker’s assessment of segment performance. You can find additional information about our segments in Note 14 to the consolidated financial statements.

Domestic Wireless

Our Domestic Wireless segment, which includes the operations of Alltel subsequent to the completion of the acquisition, provides wireless voice and data services and equipment sales across the U.S. This segment primarily represents the operations of the Verizon joint venture with Vodafone, operating as Verizon Wireless. We own a 55% interest in the joint venture and Vodafone owns the remaining 45%. All financial results included in the tables below reflect the consolidated results of Verizon Wireless.

Operating Revenue and Selected Operating Statistics

(dollars in millions, except ARPU)

Years Ended December 31,

2009

 

2008

 

% Change

 

2008

 

2007

 

% Change

 

Service revenue

$

53,497

 

$

42,635

 

 

25.5

 

$

42,635

 

$

38,016

 

 

12.2

 

Equipment and other

 

8,634

 

 

6,697

 

 

28.9

 

 

6,697

 

 

5,866

 

 

14.2

 

Total Operating Revenue

$

62,131

 

$

49,332

 

 

25.9

 

$

49,332

 

$

43,882

 

 

12.4

 

                                     

Total customers ('000)

 

91,249

 

 

72,056

 

 

26.6

 

 

72,056

 

 

65,707

 

 

9.7

 

Retail customers ('000)

 

87,523

 

 

70,021

 

 

25.0

 

 

70,021

 

 

63,735

 

 

9.9

 

                                     

Total customer net additions (including

acquisitions and adjustments) ('000)

 

19,193

 

 

6,349

 

 

nm

 

 

6,349

 

 

6,655

 

 

(4.6

)

Retail customer net additions (including

acquisitions and adjustments) ('000)

 

17,502

 

 

6,286

 

 

nm

 

 

6,286

 

 

6,923

 

 

(9.2

)

                                     

Total churn rate

 

1.44%

 

 

1.25%

 

 

15.2

 

 

1.25%

 

 

1.21%

 

 

3.3

 

Retail postpaid churn rate

 

1.09%

 

 

0.96%

 

 

13.5

 

 

0.96%

 

 

0.91%

 

 

5.5

 

                                     

Service ARPU

$

50.77

 

$

51.59

 

 

(1.6

)

$

51.59

 

$

50.96

 

 

1.2

 

Retail service ARPU

 

51.00

 

 

51.88

 

 

(1.7

)

 

51.88

 

 

51.57

 

 

0.6

 

Total data ARPU

 

15.20

 

 

12.89

 

 

17.9

 

 

12.89

 

 

9.90

 

 

30.2

 

nm - not meaningful

Domestic Wireless’s total operating revenue during 2009 increased by $12,799 million, or 25.9%, compared to 2008, primarily due to the inclusion of the operating results of Alltel, as well as growth in our service revenue from sources other than the acquisition of Alltel.

Service revenue

Service revenue in 2009 increased by $10,862 million, or 25.5%, compared to 2008, primarily due to the inclusion of service revenue as a result of the 13.2 million net new customers, after conforming adjustments, which we acquired in connection with the acquisition of Alltel. Since January 1, 2009, service revenue also increased as a result of a 5.9 million, or 8.2%, increase in total customers from sources other than customer acquisitions, as well as continued growth from data services.

Excluding retail customer acquisitions, Domestic Wireless added 4.6 million net retail customers during 2009, compared to approximately 5.8 million in 2008. The decline in net retail customer additions for 2009 was due to an increase in churn, compared to 2008, partially offset by an increase in gross customer additions due to the expansion of our sales and distribution channels as a result of the acquisition of Alltel. Excluding customer acquisitions, Domestic Wireless added approximately 5.9 million net total customers in 2009, compared to approximately 5.8 million in 2008. The increase in net total customer additions for 2009 was due to an increase in gross customer additions from our reseller channels, primarily during the fourth quarter of 2009, partially offset by the above mentioned changes in net retail customer additions. The increases in our total and retail postpaid churn rates were primarily a result of increased disconnections of Mobile Broadband service and business share lines, which we believe are primarily attributable to current economic conditions.

Total data revenue was $16,014 million and accounted for 29.9% of service revenue in 2009, compared to $10,651 million and 25.0%, respectively, in 2008. Total data revenue continues to increase as a result of increased use of Mobile Broadband, e-mail and messaging. We expect that data revenue will continue to increase as a result of recent strong sales of 3G smartphone devices and continued introductions of new data-capable 3G smartphone and multimedia devices.

The declines in service ARPU and retail service ARPU were due to the inclusion of customers acquired in connection with the acquisition of Alltel, as well as continued reductions in voice ARPU, partially offset by an increase in total data ARPU. Total voice ARPU declined $3.13, or 8.1%, in 2009, compared to 2008, due to the on-going impact of bundled plans and increases in the proportion of customers on our Family Share plans as customers seek to optimize the value of our offerings. Total data ARPU increased by $2.31, or 17.9%, in 2009, compared to 2008, as a result of the increased usage of our data services.

Domestic Wireless’s total operating revenue increased by $5,450 million, or 12.4%, in 2008 compared to 2007, primarily due to continued strong growth in service revenue. Service revenue during 2008 increased by $4,619 million, or 12.2%, compared to 2007, primarily caused by an increase in data revenue in 2008 compared to 2007, and a 6.3 million or 9.7% increase in total customers in 2008.

Excluding retail customer acquisitions, Domestic Wireless added approximately 5.8 million net retail customers during 2008, compared to approximately 6.9 million during 2007. On the same basis, Domestic Wireless added approximately 5.8 million net total customers during 2008, compared to approximately 6.6 million during 2007. The declines in both net retail customer additions and net total customer additions in 2008 compared to 2007 were due to an increase in our churn, partially offset by a slight increase in gross customer additions. The increases in both total and retail postpaid churn rates were primarily a result of customer-favorable policy changes which removed barriers to early contract termination and an increase in the rate of disconnections for our Mobile Broadband service.

Total data revenue was $10,651 million and accounted for 25.0% of service revenue in 2008, compared to $7,386 million and 19.4%, respectively, in 2007 as a result of the continued increase in the number of customers using our data services, as well as increased usage of our messaging services and non-messaging services, such as Mobile Broadband, e-mail, data transport and newer location-based data services such as VZ Navigator.

The increases in service ARPU and retail service ARPU in 2008 compared to 2007 were primarily due to an increase of 30.2% in total data ARPU as a result of the increased usage of our data services, partially offset by continued dilution of voice ARPU.

Customer acquisitions during 2008 included approximately 650,000 net total customer additions, after conforming adjustments, acquired from Rural Cellular Corporation (Rural Cellular). As a result of an exchange with AT&T consummated on December 22, 2008, Domestic Wireless transferred a net of approximately 122,000 total customers.

Equipment and Other Revenue

Equipment and other revenue in 2009 increased by $1,937 million, or 28.9%, compared to 2008 primarily due to an increase in the number of both data and phone equipment units sold, partially offset by a decrease in the average revenue per unit. The increase in the number of equipment units sold was a result of both the increase in gross customer additions as well as an increase in the number of units sold to existing customers upgrading their wireless devices. Other revenues increased primarily due to the inclusion of the operating results of Alltel and an increase in our cost recovery rate.

Equipment and other revenue in 2008 increased by $831 million, or 14.2%, compared to 2007, primarily as a result of an increase in the number of upgrades for data devices combined with higher average equipment revenue per device for phone devices, partially offset by lower average equipment revenue per device for data devices sold through our direct channel, in part driven by promotions during 2008. Other revenue also increased because of increased cost recovery surcharges and regulatory fees, as a result of the increase in customer base combined with an increase in our cost recovery rate.

Operating Expenses

(dollars in millions)

Years Ended December 31,

2009

 

2008

 

% Change

 

2008

 

2007

 

% Change

 

Cost of services and sales

$

19,749

 

$

15,660

 

 

26.1

 

$

15,660

 

$

13,456

 

 

16.4

 

Selling, general and administrative expense

 

17,847

 

 

14,273

 

 

25.0

 

 

14,273

 

 

13,477

 

 

5.9

 

Depreciation and amortization expense

 

7,030

 

 

5,405

 

 

30.1

 

 

5,405

 

 

5,154

 

 

4.9

 

Total Operating Expenses

$

44,626

 

$

35,338

 

 

26.3

 

$

35,338

 

$

32,087

 

 

10.1

 

Cost of Services and Sales

Cost of services and sales includes costs to operate the wireless network as well as the cost of roaming and long distance, the cost of data services and applications and the cost of equipment sales. Cost of services and sales in 2009 increased by $4,089 million, or 26.1%, compared to 2008. The increase was primarily due to higher wireless network costs, including the effects of operating an expanded wireless network as a result of the acquisition of Alltel. This increase includes network usage for voice and data services, use of data services and applications such as e-mail and messaging provided by third party vendors, operating lease expense related to a larger number of cell sites, as well as salary and benefits as a result of an increase in network-related headcount. These increases were partially offset by a decrease in roaming costs that was realized primarily by moving more traffic to our own network as a result of the acquisition of Alltel. Cost of equipment increased by $2,382 million or 24.5% compared to 2008, primarily due to the increase in the number of both data and phone equipment units sold as well as an increase in the average cost per equipment unit.

Cost of services and sales in 2008 increased by $2,204 million, or 16.4%, compared to 2007 primarily due to higher wireless network costs as a result of increased network usage for voice and data services, increased use of data services and applications, such as messaging, e-mail and VZ Navigator, increased data roaming as well as increased payments related to network-related leases as a result of an increase in the number of leased cell sites. Cost of equipment increased by $1,543 million or 18.9%, in 2008 compared to 2007, primarily attributable to an increase in the number of equipment upgrades by customers combined with an increase in average equipment cost per device as a result of an increase in the sale of higher-cost advanced wireless devices.

Selling, General and Administrative Expense

Selling, general and administrative expense in 2009 increased by $3,574 million, or 25.0%, compared to 2008. This increase was primarily due to a $1,052 million increase in salary and benefits as a result of a larger employee base after the acquisition of Alltel, as well as a $997 million increase in sales commission expense, primarily in our indirect channel as a result of increases in both equipment upgrades leading to contract renewals and gross customer additions, as well as an increase in the average commission per unit. We also experienced increases in other selling, general and administrative expenses primarily as a result of supporting a larger customer base as a result of our acquisition of Alltel.

Selling, general and administrative expense in 2008 increased by $796 million, or 5.9%, compared to 2007 primarily caused by an increase in sales commission expense of $302 million, primarily from an increase in equipment upgrades in our indirect channel, as well as higher advertising and promotion expense, bad debt expense and regulatory fees. The increases in selling, general and administrative expense were partially offset by a decrease in salary and benefits related expense.

Depreciation and Amortization Expense

Depreciation and amortization expense in 2009 increased by $1,625 million, or 30.1%, compared to 2008 primarily driven by depreciable property and equipment and finite-lived intangible assets acquired from Alltel which are not being divested, including its customer lists, as well as growth in depreciable assets during 2009.

Depreciation and amortization expense increased by $251 million, or 4.9%, in 2008 compared to 2007, primarily caused by an increase in depreciable assets.

Operating Income

(dollars in millions)

Years Ended December 31,

2009

 

2008

 

% Change

 

2008

 

2007

 

% Change

 

Operating Income

$

17,505

 

$

13,994

 

 

25.1

 

$

13,994

 

$

11,795

 

 

18.6

 

Operating income in 2009 increased by $3,511 or 25.1%, compared to 2008 and increased by $2,199 million, or 18.6%, in 2008 compared to 2007, as a result of the impact of factors described in connection with operating revenue and operating expenses above.

Non-recurring or non-operational items not included in Domestic Wireless’s operating income totaled $954 million in 2009 for merger integration and acquisition costs primarily related to the acquisition of Alltel.