management’s discussion and analysis
of financial condition and results of operations

Segment Results of Operations (1 of 2)

We have two reportable segments, Verizon 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 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 expense related primarily to capital expenditures and acquisitions that occurred in prior years, as well as in evaluating operating performance in relation to our 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 primarily exclude 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. You can find additional information about our segments in Note 13 to the consolidated financial statements.

Verizon Wireless

Our Verizon Wireless segment, primarily comprised of Cellco Partnership doing business as Verizon Wireless, is a joint venture formed in April 2000 by the combination of the U.S. wireless operations and interests of Verizon and Vodafone. Verizon owns a controlling 55% interest in Verizon Wireless and Vodafone owns the remaining 45%. Verizon Wireless provides wireless voice and data services across one of the most extensive wireless networks in the United States and has the largest 3G and 4G LTE networks of any U.S. wireless service provider.

We provide these services and equipment sales to consumer, business and government customers in the United States on a postpaid and prepaid basis. Postpaid customers represent individual lines of service for which a customer pays in advance a monthly access charge in return for a monthly voice and/or data service allowance, and use of any services beyond the allowances is billed monthly in arrears. Our prepaid service enables individuals to obtain wireless data and voice services without a long-term contract or credit verification by paying in advance.

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

Years Ended December 31,

 

2011

 

 

 

2010

 

 

 

2009

 

 

2011 vs. 2010

 

2010 vs. 2009

Retail service

$

56,660

 

 

$

53,308

 

 

$

50,760

 

 

$

3,352

 

6.3

 

%

 

$

2,548

 

5.0

 

%

Other service

 

2,497

 

 

 

2,321

 

 

 

1,286

 

 

 

176

 

7.6

 

 

 

 

1,035

 

80.5

 

 

Service revenue

 

59,157

 

 

 

55,629

 

 

 

52,046

 

 

 

3,528

 

6.3

 

 

 

 

3,583

 

6.9

 

 

Equipment and other

 

10,997

 

 

 

7,778

 

 

 

8,279

 

 

 

3,219

 

41.4

 

 

 

 

(501

)

(6.1

)

 

Total Operating Revenue

$

70,154

 

 

$

63,407

 

 

$

60,325

 

 

$

6,747

 

10.6

 

 

 

$

3,082

 

5.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Connections (’000):(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total connections(2)

 

107,798

 

 

 

102,246

 

 

 

96,495

 

 

 

5,552

 

5.4

 

 

 

 

5,751

 

6.0

 

 

Retail customers

 

92,167

 

 

 

87,535

 

 

 

85,445

 

 

 

4,632

 

5.3

 

 

 

 

2,090

 

2.4

 

 

Retail postpaid customers

 

87,382

 

 

 

83,125

 

 

 

80,495

 

 

 

4,257

 

5.1

 

 

 

 

2,630

 

3.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net additions in period (’000):(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total connections(2)

 

5,419

 

 

 

5,517

 

 

 

4,935

 

 

 

(98

)

(1.8

)

 

 

 

582

 

11.8

 

 

Retail customers

 

4,624

 

 

 

1,977

 

 

 

4,369

 

 

 

2,647

 

133.9

 

 

 

 

(2,392

)

(54.7

)

 

Retail postpaid customers

 

4,252

 

 

 

2,529

 

 

 

3,987

 

 

 

1,723

 

68.1

 

 

 

 

(1,458

)

(36.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Churn Rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail customers

 

1.26

 

%

 

1.38

 

%

 

1.41

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail postpaid customers

 

0.95

 

%

 

1.02

 

%

 

1.07

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ARPU:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail service

$

52.69

 

 

$

51.51

 

 

$

50.85

 

 

$

1.18

 

2.3

 

 

 

$

0.66

 

1.3

 

 

Retail postpaid

 

54.34

 

 

 

53.14

 

 

 

52.29

 

 

 

1.20

 

2.3

 

 

 

 

0.85

 

1.6

 

 

Retail postpaid data

 

21.70

 

 

 

18.78

 

 

 

15.75

 

 

 

2.92

 

15.5

 

 

 

 

3.03

 

19.2

 

 

(1) As of end of period.
(2) The number of Total connections for 2011 reflects a reduction of 869,000 Wholesale and Other Connections from previously reported numbers.
(3) Excluding acquisitions and adjustments.

2011 Compared to 2010

The increase in Verizon Wireless’ total operating revenue during 2011 compared to 2010 was primarily due to growth in service and equipment revenue.

Connections

Total connections increased during 2011 compared to 2010 primarily due to an increase in retail postpaid customer gross additions as well as ongoing improvements in our retail customer churn rate, both of which we believe were primarily the result of the strength of the devices in our product portfolio, including the Apple iPhone 4 and 4S and our line-up of 3G and 4G Android and other 4G LTE capable devices, as well as the reliability of our network, partially offset by a year-over-year decline in net additions from wholesale and other connections.

Total connections represent the total of our retail customers and wholesale and other connections. Wholesale and other connections include customers from our reseller channel as well as connections from non-traditional wireless-enabled devices, such as those used to support vehicle tracking, telematics services and machine-to-machine connections.

Retail (non-wholesale) customers are customers directly served and managed by Verizon Wireless that use its branded services. Retail postpaid customers represent individual lines of service for which a customer pays in advance a monthly access charge in return for a monthly voice and/or data service allowance, and use of any services beyond the allowances is billed in arrears. Churn is the rate at which customers disconnect individual lines of service. We expect to continue to experience retail customer growth based on the strength of our product offerings and network service quality.

Service revenue

Service revenue increased during 2011 compared to 2010 primarily due to the above-mentioned increase in total connections during the year, as well as continued growth in data revenue, partially offset by a decline in voice revenue.

Total data revenue was $23.6 billion and accounted for 40.0% of service revenue during 2011 compared to $19.6 billion and 35.1% during 2010. Total data revenue continues to increase as a result of the increased penetration of our data offerings, in particular for higher-tier data service plans which provide our customers with access to web and e-mail via their wireless device. We have also experienced growth in data revenues from the use of internet data devices such as tablets, USB modems and Jetpacks. Voice revenue decreased as a result of continued declines in retail postpaid voice ARPU, as discussed below, partially offset by an increase in the number of customers. We expect that total service revenue and total data revenue will continue to grow as we grow our customer base and increase the penetration of our data offerings as a larger proportion of our customers use smartphones and other data-capable devices.

The increases in retail service ARPU (the average revenue per user per month from retail customers) and retail postpaid ARPU (the average revenue per user per month from retail postpaid customers) during 2011 compared to 2010 were due to a continued increase in our retail postpaid data ARPU, offset by a decline in our retail postpaid voice ARPU. Retail postpaid data ARPU increased as a result of continued growth in the proportion of our customer base using smartphones, which grew to 43.5% of our retail postpaid customers as of December 31, 2011 compared to 28.1% at December 31, 2010. However, both retail postpaid ARPU and retail postpaid data ARPU growth were adversely impacted by the growing proportion of our customers using internet data devices and customers optimizing the value of their data packages for these devices. Internet data devices represented 8.1% of our retail postpaid customer base as of December 31, 2011 compared to 7.0% at December 31, 2010. In addition, our retail postpaid voice ARPU was $32.64 during 2011, representing a decline of $1.72, or 5.0%, compared to 2010 primarily due to the ongoing impact of our retail customers seeking to optimize the value of our voice minute bundles.

Other service revenue includes revenue from wholesale and other connections as well as third party roaming revenue. Other service revenue increased during 2011 compared to 2010 as a result of year-to-date growth in wholesale and other connections, partially offset by a decrease in third party roaming revenue.

Equipment and Other Revenue

Equipment and other revenue increased during 2011 compared to 2010 due to an increase in the sales volume of smartphones to new and upgrading customers. Partially offsetting these increases was a decrease in the sales volume for basic phones in both periods.

2010 Compared to 2009

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

Connections

Total connections increased during 2010 compared to 2009 due to the increase during the year in customer net additions from our reseller channel as a result of the 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, as well as connections from non-traditional wireless-enabled devices, partially offset by the decline in retail customer net additions. 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 due to 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 in January 2009 (see ’Acquisitions and Divestitures”).

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.

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 increased as a result of the increased penetration of our data offerings, in particular for web and e-mail 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.

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 retail postpaid data ARPU. Total retail postpaid voice ARPU declined $2.18, or 6.0%, due to the ongoing impact of customers seeking to optimize the value of our voice minute bundles. Total retail postpaid 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 smartphones 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.

Operating Expenses

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

Years Ended December 31,

 

2011

 

 

 

2010

 

 

 

2009

 

 

2011 vs. 2010

 

2010 vs. 2009

Cost of services and sales

$

24,086

 

 

$

19,245

 

 

$

19,348

 

 

$

4,841

 

25.2

 

%

 

$

(103

)

(0.5

)

%

Selling, general and administrative expense

 

19,579

 

 

 

18,082

 

 

 

17,309

 

 

 

1,497

 

8.3

 

 

 

 

773

 

4.5

 

 

Depreciation and amortization expense

 

7,962

 

 

 

7,356

 

 

 

7,030

 

 

 

606

 

8.2

 

 

 

 

326

 

4.6

 

 

Total Operating Expenses

$

51,627

 

 

$

44,683

 

 

$

43,687

 

 

$

6,944

 

15.5

 

 

 

$

996

 

2.3

 

 

Cost of Services and Sales

Cost of services and sales increased during 2011 compared to 2010 primarily due to higher costs of equipment sales. Cost of equipment sales increased by $4.9 billion driven by increased sales of higher cost smartphones, including Apple’s iPhone 4 and 4S and other data-capable devices. Partially offsetting these increases were decreases in the volume sold and average cost per unit of basic phones. In addition, cost of services increased during 2011 due to higher wireless network costs resulting from an increase in local interconnection costs related to additional Evolution-Data Optimized (EV-DO) capacity to meet expected data usage demands as well as an increase in Ethernet facilities costs that support the 4G LTE network. The increase in cost of services was also impacted by higher roaming costs incurred in markets divested during 2010 and increased data roaming. Partially offsetting these increases was a decrease in costs for long distance and data services and applications.

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 used to support the 4G 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 markets divested during 2010, 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.

Selling, General and Administrative Expense

Selling, general and administrative expense increased during 2011 compared to 2010 primarily due to higher sales commission expense in our indirect channel. Indirect sales commission expense increased $1.2 billion during 2011 compared to 2010 as a result of increases in the average commission per unit, as the mix of units continues to shift toward data devices and more customers activate data services, and increased contract renewals in connection with equipment upgrades.

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.

Depreciation and Amortization Expense

The changes in depreciation and amortization expense during 2011 and 2010 compared to the preceding year were primarily driven by growth in depreciable assets.

Segment Operating Income and EBITDA

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Increase/(Decrease)

Years Ended December 31,

 

2011

 

 

 

2010

 

 

 

2009

 

 

2011 vs. 2010

 

2010 vs. 2009

Segment Operating Income

$

18,527

 

 

$

18,724

 

 

$

16,638

 

 

$

(197

)

(1.1

)

%

 

$

2,086

 

12.5

 

%

Add Depreciation and amortization expense

 

7,962

 

 

 

7,356

 

 

 

7,030

 

 

 

606

 

8.2

 

 

 

 

326

 

4.6

 

 

Segment EBITDA

$

26,489

 

 

$

26,080

 

 

$

23,668

 

 

$

409

 

1.6

 

 

 

$

2,412

 

10.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating income margin

 

26.4

 

%

 

29.5

 

%

 

27.6

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment EBITDA service margin

 

44.8

 

%

 

46.9

 

%

 

45.5

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

The changes in the table above during the periods presented were primarily a result of the factors described in connection with operating revenues and operating expenses above.

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

(dollars in millions)

Years Ended December 31,

 

2011

 

 

2010

 

 

2009

 

Merger integration and acquisition related charges

$

 

$

867

 

$

954

 

Severance, pension and benefit charges

 

76

 

 

 

 

 

Impact of divested operations

 

 

 

(348

)

 

(789

)

Deferred revenue adjustment

 

 

 

235

 

 

(78

)

 

$

76

 

$

754

 

$

87