Management’s Discussion and Analysis of Financial Condition and Results of Operations – As Adjusted

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.

Segment earnings before interest, taxes, depreciation and amortization (Segment EBITDA), which is presented below, is a non-GAAP measure and does not purport to be an alternative to operating income as a measure of operating performance. Management believes that this measure is useful to investors and other users of our financial information in evaluating operating profitability on a more variable cost basis, as it excludes the depreciation and amortization expenses related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to Verizon's competitors. Segment EBITDA is calculated by adding back depreciation and amortization expense to segment operating income.

Verizon Wireless Segment EBITDA service margin, also presented below, is calculated by dividing Verizon Wireless Segment EBITDA by Verizon Wireless service revenues. Verizon Wireless Segment EBITDA service margin utilizes service revenues rather than total revenues. Service revenues exclude primarily equipment revenues in order to reflect the impact of providing service to the wireless customer base on an ongoing basis. Verizon Wireline EBITDA margin is calculated by dividing Wireline EBITDA by total Wireline revenues.

It is management's intent to provide non-GAAP financial information to enhance the understanding of Verizon's GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the corresponding GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies. You can find additional information about our segments in Note 14 to the consolidated financial statements.

Domestic Wireless

Our Domestic Wireless segment provides wireless voice and data services and equipment sales across the United States. 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 excluding the results of operations of the Alltel Divestiture Markets through the date the divestitures were completed (see “Acquisitions and Divestitures”).

Operating Revenue and Selected Operating Statistics

(dollars in millions, except ARPU)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

Years Ended December 31,

 

2010

 

 

 

2009

 

 

 

2008

 

 

 

2010 vs. 2009

 

2009 vs. 2008

Service revenue

$

55,629

 

 

$

52,046

 

 

$

42,602

 

 

 

$

3,583

 

6.9

 

%

 

$

9,444

 

22.2

 

%

Equipment and other

 

7,778

 

 

 

8,279

 

 

 

6,696

 

 

 

 

(501

)

(6.1

)

 

 

 

1,583

 

23.6

 

 

Total Operating Revenue

$

63,407

 

 

$

60,325

 

 

$

49,298

 

 

 

$

3,082

 

5.1

 

 

 

$

11,027

 

22.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total customers ('000)

 

94,135

 

 

 

89,172

 

 

 

72,056

 

 

 

 

4,963

 

5.6

 

 

 

 

17,116

 

23.8

 

 

Retail customers ('000)

 

87,535

 

 

 

85,445

 

 

 

70,021

 

 

 

 

2,090

 

2.4

 

 

 

 

15,424

 

22.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total customer net additions (excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

acquisitions and divestitures) ('000)

 

4,839

 

 

 

5,656

 

 

 

5,779

 

 

 

 

(817

)

(14.4

)

 

 

 

(123

)

(2.1

)

 

Retail customer net additions (excluding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

acquisitions and divestitures) ('000)

 

1,977

 

 

 

4,369

 

 

 

5,752

 

 

 

 

(2,392

)

(54.7

)

 

 

 

(1,383

)

(24.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total churn rate

 

1.33

 

%

 

1.41

 

%

 

1.25

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail postpaid churn rate

 

1.02

 

%

 

1.07

 

%

 

0.96

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service ARPU

$

50.46

 

 

$

50.53

 

 

$

51.55

 

 

 

$

(0.07

)

(0.1

)

 

 

$

(1.02

)

(2.0

)

 

Retail service ARPU

 

51.56

 

 

 

50.89

 

 

 

51.84

 

 

 

 

0.67

 

1.3

 

 

 

 

(0.95

)

(1.8

)

 

Total data ARPU

 

17.73

 

 

 

15.11

 

 

 

12.85

 

 

 

 

2.62

 

17.3

 

 

 

 

2.26

 

17.6

 

 

2010 Compared to 2009

The increase in Domestic Wireless' total operating revenue during 2010 compared to 2009 was primarily due to growth in service revenue.

Service revenue

Service revenue increased during 2010 compared to 2009 primarily due to an increase in total customers since January 1, 2010, as well as continued growth in our data ARPU, partially offset by a decline in voice ARPU.

The decline in retail customer net additions during 2010 compared to 2009 was due to a decrease in retail customer gross additions, as well as an increase in churn for our retail prepaid base in part attributable to a marketplace shift in customer activations during the first half of the year toward unlimited prepaid offerings of the type being sold by a number of resellers. Retail (non-wholesale) customers are customers who are directly served and managed by Verizon Wireless and who buy its branded services. However, we expect to continue to experience retail customer growth based on the strength of our product offerings and network service quality. Our total churn rate during 2010 compared to 2009 improved as a result of successful customer retention efforts. Churn is the rate at which customers disconnect individual lines of service.

Total customer net additions decreased during 2010 compared to 2009 due to the decline in retail customer net additions described above partially offset by the cumulative increase during the year in customer net additions from our reseller channel as a result of the marketplace shift in customer activations mentioned above.

Customers from acquisitions and adjustments at December 31, 2010 included approximately 106,000 net customers, after conforming adjustments, that we acquired in a transaction with AT&T. Customers from acquisitions at December 31, 2009 included approximately 11.4 million total customer net additions, after conforming adjustments and the impact of required divestitures, which resulted from our acquisition of Alltel on January 9, 2009.

Total data revenue was $19.6 billion and accounted for 35.1% of service revenue during 2010 compared to $15.6 billion and 29.9% during 2009. Total data revenue continues to increase as a result of the increased penetration of data offerings, in particular for e-mail and web services resulting in part from increased sales of smartphone and other data-capable devices. Voice revenue decreased as a result of continued declines in our voice ARPU, as discussed below, partially offset by an increase in the number of customers. We expect that total service revenue and data revenue will continue to grow as we grow our customer base, increase the penetration of our data offerings and increase the proportion of our customer base using smartphone and other data-capable devices.

The decline in service ARPU during 2010 compared to 2009 was due to a continued reduction in voice revenue per customer and the impact of changes in our customer mix as a result of increased reseller customer net additions, partially offset by an increase in data ARPU. Total voice ARPU declined $2.69, or 7.6%, due to the ongoing impact of customers seeking to optimize the value of our voice minute bundles. Total data ARPU increased as a result of continued growth and penetration of our data offerings, resulting in part from the above mentioned increase in sales of our smartphone and other data-capable devices. Retail service ARPU, the average revenue per user from retail customers, increased during 2010 due to increases in our penetration of data offerings, which more than offset declines in our voice revenues.

Equipment and Other Revenue

Equipment and other revenue decreased during 2010 compared to 2009 due to a decrease in the number of equipment units sold as a result of a decrease in customer gross additions.

2009 Compared to 2008

Domestic Wireless' total operating revenue increased during 2009 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 increased during 2009 compared to 2008 primarily due to the inclusion of service revenue as a result of the 11.4 million net new customers, after conforming adjustments and the impact of required divestitures, which we acquired in connection with the acquisition of Alltel. Since January 1, 2009, service revenue also increased as a result of an increase in total customers from sources other than customer acquisitions, as well as continued growth from data services.

The decline in retail customer net additions during 2009 compared to 2008 was due to an increase in churn partially offset by an increase in customer gross additions due to the expansion of our sales and distribution channels as a result of the acquisition of Alltel. The decrease in total customer net additions for 2009 was due to the above mentioned decline in retail customer net additions, partially offset by an increase in customer gross additions from our reseller channels, primarily during the fourth quarter of 2009. 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, primarily attributable to economic conditions.

Total data revenue during 2009 was $15.6 billion and accounted for 29.9% of service revenue compared to $10.6 billion and 24.9% during 2008. Total data revenue continues to increase as a result of increased use of Mobile Broadband, e-mail and messaging.

Service ARPU and retail service ARPU declined during 2009 compared to 2008 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 $3.28, or 8.5% during 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 sought to optimize the value of our offerings. Total data ARPU increased by $2.26, or 17.6% during 2009 compared to 2008 as a result of the increased usage of our data services.

Customer acquisitions during 2008 included approximately 650,000 total customer net 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 increased during 2009 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 customer gross 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.

Operating Expenses

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

Years Ended December 31,

 

2010

 

 

2009

 

 

2008

 

 

2010 vs. 2009

 

2009 vs. 2008

Cost of services and sales

$

19,245

 

$

19,348

 

$

15,660

 

 

$

(103

)

(0.5

)

%

 

$

3,688

 

23.6

 

%

Selling, general and administrative expense

 

18,082

 

 

17,309

 

 

14,273

 

 

 

773

 

4.5

 

 

 

 

3,036

 

21.3

 

 

Depreciation and amortization expense

 

7,356

 

 

7,030

 

 

5,405

 

 

 

326

 

4.6

 

 

 

 

1,625

 

30.1

 

 

Total Operating Expenses

$

44,683

 

$

43,687

 

$

35,338

 

 

$

996

 

2.3

 

 

 

$

8,349

 

23.6

 

 

Cost of Services and Sales

Cost of services and sales decreased during 2010 compared to 2009 due to a decrease in the cost of equipment sales, partially offset by an increase in cost of services. Cost of equipment sales decreased by $0.6 billion primarily due to both a decrease in retail customer gross additions and cost reduction initiatives, partially offset by an increase in the average cost per unit. Cost of services increased due to higher wireless network costs driven by increases in local interconnection cost, as a result of both higher capacity needs from increases in data usage as well as costs incurred to transition to Ethernet facilities that will be used to support the LTE network. In addition, the increase in costs of services was impacted by higher roaming costs as a result of increased international roaming volumes, data roaming and roaming costs incurred in the Alltel Divestiture Markets, partially offset by synergies from moving traffic to our own network. Also contributing to higher wireless network costs during 2010 compared to 2009 was an increase in operating lease expense related to our network cell sites.

Cost of services and sales increased during 2009 compared to 2008 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 included 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 $2.1 billion 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.

Selling, General and Administrative Expense

Selling, general and administrative expense increased during 2010 compared to 2009 primarily due to an increase in sales commission expense in our indirect channel, as well as increases in other general and administrative expenses, partially offset by a decrease in advertising and promotional costs. Indirect sales commission expense increased $0.8 billion during 2010 compared to 2009 as a result of increases in both the average commission per unit, as the mix of units continues to shift toward data devices and more customers activate data service, and in contract renewals in connection with equipment upgrades. Other general and administrative expenses such as billing and data processing charges, non-income taxes, and bad debt expense increased primarily as a result of the growth of our customer base. Advertising and promotional costs decreased $0.2 billion during 2010 compared to 2009 primarily due to reductions in media spending.

Selling, general and administrative expense increased during 2009 compared to 2008 primarily due to a $0.9 billion increase in salary and benefits as a result of a larger employee base after the acquisition of Alltel, as well as an $0.8 billion increase in sales commission expense, primarily in our indirect channel as a result of increases in both equipment upgrades leading to contract renewals and customer gross 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.

Depreciation and Amortization Expense

Depreciation and amortization expense increased during 2010 compared to 2009 primarily driven by growth in depreciable assets. Depreciation and amortization expense increased during 2009 compared to 2008 primarily driven by depreciable property and equipment and finite-lived intangible assets acquired from Alltel, including its customer lists, as well as growth in depreciable assets during 2009.

Segment Operating Income and EBITDA

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

Years Ended December 31,

 

2010

 

 

 

2009

 

 

 

2008

 

 

 

2010 vs. 2009

 

2009 vs. 2008

Segment Operating Income

$

18,724

 

 

$

16,638

 

 

$

13,960

 

 

 

$

2,086

 

12.5

 

%

 

$

2,678

 

19.2

 

%

Add Depreciation and amortization expense

 

7,356

 

 

 

7,030

 

 

 

5,405

 

 

 

 

326

 

4.6

 

 

 

 

1,625

 

30.1

 

 

Segment EBITDA

$

26,080

 

 

$

23,668

 

 

$

19,365

 

 

 

$

2,412

 

10.2

 

 

 

$

4,303

 

22.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating income margin

 

29.5

 

%

 

27.6

 

%

 

28.3

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment EBITDA service margin

 

46.9

 

%

 

45.5

 

%

 

45.5

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The increases in Domestic Wireless' Operating income and Segment EBITDA during 2010 and 2009, were primarily as a result of the impact of factors described above.

Non-recurring or non-operational items excluded from Domestic Wireless' Operating income were as follows:

(dollars in millions)

Years Ended December 31,

 

2010

 

 

2009

 

 

2008

 

Merger integration and acquisition costs

$

867

 

$

954

 

$

-

 

Impact of divested operations

 

(348

)

 

(789

)

 

-

 

Deferred revenue adjustment

 

235

 

 

(78

)

 

(34

)

 

$

754

 

$

87

 

$

(34

)