Verizon Communications Reports Strong 3Q Earnings Highlighted by Continued Gains in Wireless and Broadband
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- 7 cents in diluted earnings per share; 66 cents per share before special items (non-GAAP measure)
- 5.4 percent growth in adjusted consolidated operating revenues (non-GAAP)
- 1.9 million net customer additions, up 14.6 percent; 49.3 million total customers, up 17.0 percent; churn (customer turnover) of 1.3 percent
- Total quarterly revenues of $8.4 billion, up $1.0 billion, or 14.2 percent -- the 13th consecutive quarter of double-digit year-over-year revenue growth increases
- Continued strong operating income margin of 21.8 percent
- 4.5 million total broadband connections (DSL and Verizon FiOS data lines), including a company-record 389,000 net new broadband connections
- Average monthly revenue per residential customer up 4.6 percent to $51.61
- Data revenues up 10.9 percent to $2.2 billion
- Full-year 2005 revenues expected to increase from 5.5 percent to 5.8 percent over 2004
- 2005 capital spending guidance of about $15.3 billion reiterated
- 2006 capital spending expected to be relatively flat compared with 2005, excluding MCI, or approximately $15.4 billion to $15.7 billion
- The company plans to pass an additional 3 million homes and businesses with FiOS in 2006
Notes: Reclassifications of prior-period amounts have been made to reflect comparable results excluding Verizon's Hawaii wireline and directory operations, which were sold in the second quarter 2005. Growth percentages cited above compare third quarter 2005 with third quarter 2004. See the schedules accompanying this news release and www.verizon.com/investor for reconciliations to generally accepted accounting principles (GAAP) for the non-GAAP financial measures included in this announcement. Discontinued operations in the prior-year periods presented include the operations of Verizon Information Services Canada.
NEW YORK - Verizon Communications Inc. (NYSE:VZ) today reported third-quarter 2005 earnings of $1.9 billion, or 67 cents per diluted share, highlighted by continued strong results at Verizon Wireless, sustained overall revenue and customer growth, and a company record for net new wireline broadband connections.
Third-quarter earnings included a net gain of $37 million, or 1 cent per share, related to the sale of a New York City office building and related relocation costs, as well as tax benefits of $115 million, or 4 cents per share, largely offset by asset impairments at Verizon's leasing operations and other costs of $131 million, or 5 cents per share.
Earnings before these special items (non-GAAP measure) were $1.8 billion, or 66 cents per share. This compares with $1.8 billion, or 65 cents per share, in earnings before special items in the third quarter 2004.
Continued Strong Quarterly Revenues
Consolidated operating revenues were $19.0 billion in the third quarter 2005. On a comparable basis (non-GAAP, excluding revenues in both periods from operations that Verizon sold earlier this year), consolidated operating revenues increased 5.4 percent from $18.1 billion in the third quarter 2004.
The company said it expects full-year 2005 revenues to be from 5.5 percent to 5.8 percent higher than in 2004 -- tightening the range of previously announced guidance of 5 percent to 6 percent.
Third-quarter total revenues at Verizon Wireless increased 14.2 percent, or $1.0 billion, to $8.4 billion when compared with the third quarter 2004, driven by strong growth in total customers and demand for data services. This is the 13th consecutive quarter of double-digit year-over-year revenue percentage increases at Verizon Wireless.
Operating revenues on a comparable basis at Domestic Telecom were $9.4 billion in the third quarter 2005, a 0.7 percent decrease compared with the third quarter 2004. Domestic Telecom revenues in the third quarter 2005 were flat with the second quarter 2005 on a comparable basis.
Combined revenues from wireline and wireless data services were $2.8 billion in the third quarter 2005, a 23.3 percent increase compared with the third quarter 2004.
In the third quarter 2005, consolidated total operating expenses increased 5.4 percent to $15.4 billion, compared with third-quarter 2004 total operating expenses of $14.6 billion.
Financial and Operational Strength
"This was a very strong quarter both financially and operationally, as we delivered both revenue and earnings growth," said Ivan Seidenberg, Verizon chairman and chief executive officer. "We are executing well on our new product initiatives and seeing great response from the marketplace. Our revenues continue to grow as we have changed our revenue mix, stabilizing traditional wireline revenues while continuing great wireless growth.
"By maintaining our focus on cost control, we have again delivered stable margins, and we see significant opportunities for further efficiencies and cost reductions. At the same time, we are continuing to make investments in wireless, broadband and Enterprise -- those areas where customers are ready and willing to buy our services."
Verizon Wireless Sustains Industry-Leading Performance
In the third quarter 2005, Verizon Wireless added 1.9 million net new customers -- significantly more than its nearest competitor. Wireless has added more than 7 million net new customers over the past 12 months and now has a total of 49.3 million customers nationwide.
Total churn rate, a key measure of customer loyalty, was 1.3 percent for the third quarter 2005, down from 1.5 percent in the third quarter 2004. Churn in the retail post-paid segment -- a base of 45.7 million customers -- was 1.08 percent in the third quarter 2005.
Wireless operating income margin was 21.8 percent in the third quarter 2005, driven by industry-leading lows for cash expense-per-customer, even as the company added another high volume of customers in the quarter and absorbed the unfavorable impacts of approximately $44 million related to Hurricanes Katrina and Rita.
EBITDA margin at Verizon Wireless was 41.5 percent in the quarter. (EBITDA -- or earnings before interest, taxes, depreciation and amortization -- is a non-GAAP measure that adds depreciation and amortization to operating income; EBITDA margin is calculated by dividing EBITDA by wireless service revenues.)
Wireline Trends Improve in Key Markets
Revenues from broadband and other high-value wireline services contributed to a 4.6 percent increase, to $51.61, in the average revenue per month per Verizon residential wireline customer in the third quarter 2005, compared with the third quarter 2004. This is the sixth consecutive quarter of sequential increases in this measure.
Strong demand for wireline broadband services and high-capacity business data services contributed to $2.2 billion in total wireline data revenues in the third quarter 2005, a 10.9 percent increase from $1.9 billion in comparable revenues in the third quarter 2004.
In the third quarter 2005, revenues from wireline network access services were $3.1 billion, a 2.9 percent increase from the third quarter 2004, and revenues from long-distance services, including regional toll services, were $1.1 billion, a 2.3 percent increase from the third quarter 2004. Long-distance lines totaled 18.15 million at the end of the third quarter 2005, a 6.6 percent increase from the comparable total at the end of the third quarter 2004.
Also in the third quarter 2005, Verizon added a net of 389,000 wireline broadband connections, which is a company record and represents the total for both DSL and FiOS, Verizon's recently introduced next-generation, fiber-optic-based service.
Verizon has a total of 4.5 million wireline broadband connections -- a growth rate of 42.3 percent from the third quarter 2004.
Regarding continued wireline broadband deployment, the company said it plans to pass an additional 3 million homes and businesses with FiOS data services next year -- for a total of 6 million homes and businesses passed by year-end 2006.
Growth in Total Customer Connections
Verizon's total customer connections -- which include wireline switched access lines, wireless customers, and wireline and wireless customers using broadband connections (EV-DO, DSL or FiOS) -- increased to 103.5 million at the end of the third quarter 2005. This is an increase of 5.3 percent compared with the third quarter 2004, and an increase of 1.3 million customer connections compared with the end of the second quarter 2005.
Switched access lines totaled 49.7 million at the end of the third quarter 2005, a decline of 6.2 percent compared with the end of the third quarter 2004. This has been more than offset by the increases of 42.3 percent in wireline broadband connections and 17.0 percent in total wireless customers over the same period.
Capital Spending Detailed, Debt Reduced
Cash Flows From Operating Activities (CFFO) were $15.3 billion in the first nine months of 2005, compared with $15.5 billion in the first nine months of 2004.
In the first nine months of 2005, net cash used in investing activities was $13.6 billion, and net cash used in financing activities was $3.3 billion. Investing activities included $11.6 billion in capital expenditures, predominantly focused on growth markets.
Regarding capital expenditures, Verizon Wireless has invested $5.0 billion in the first nine months of 2005. The company expects wireless capital expenditures to total approximately $6.5 billion in 2005, including about $600 million for deployment of its nationwide broadband EV-DO (Evolution-Data Optimized) network.
In wireline, Verizon has invested $6.2 billion in the first nine months of 2005, including startup and deployment capital for FiOS data and video services. The company expects wireline capital expenditures to total approximately $8.3 billion in 2005.
The company is reiterating total 2005 capital spending guidance of an approximate 15 percent increase over 2004's $13.3 billion total to about $15.3 billion, and it is announcing that capital expenditures in 2006 are expected to be in the range of $15.4 billion to $15.7 billion. This excludes investments related to the integration of MCI, Inc., pending completion of the merger around the beginning of 2006.
Verizon's total debt at the end of the third quarter 2005 was $39.4 billion, compared with $41.8 billion at the end of the second quarter 2005 and $40.5 billion at the end of the third quarter 2004. The company expects that the end-of-year 2005 debt level should be approximately the same as the third-quarter level.
Earnings Comparisons and Special Items
As noted above, reported earnings were 67 cents per share in the third quarter 2005 and 64 cents per share in the third quarter 2004.
Third-quarter 2005 earnings were 66 cents per share before the net gain on the sale of a New York City office building and related relocation costs to Verizon Center in New Jersey, tax benefits, asset impairment and other costs. The tax benefits include $94 million related to prior-year investment losses that became recognizable in 2005 and a $21 million tax benefit related to repatriation of prior-year foreign earnings. Asset impairment and other charges relate to a $125 million expense pertaining to Verizon's leasing operations for aircraft leases involved in recent airline bankruptcy proceedings and $6 million for the early retirement of debt.
Third-quarter 2004 earnings were 64 cents per share before charges of $20 million, or 1 cent per share relating to pension settlements.
Business Segment Highlights
Following are third-quarter 2005 highlights from Verizon's four business segments.
- By the end of the third quarter, the company was deploying or selling FiOS fiber-to-the-premises (FTTP) broadband services in 15 states, passing a cumulative 2.5 million homes and businesses. The company remains on track to pass 3 million homes and businesses by the end of the year with FiOS data services. The earnings dilution from FiOS is about 10 cents a share for the year to date.
- In the 35 markets where Verizon has been actively selling FiOS data services for more than six months, market penetration is approximately 12.4 percent -- an improvement over DSL penetration rates over longer timeframes.
- Verizon introduced FiOS TV services in the third quarter in Keller, Texas. FiOS TV contains a collection of all-digital programming with more than 330 channels, and more on the way.
- Approximately 62 percent of Verizon residential customers have purchased local services in combination with either Verizon long-distance or a Verizon broadband connection, or both. This compares with approximately 52 percent in the third quarter 2004. In addition, Verizon now has nearly 300,000 customers who receive a Verizon DirecTV bundle.
- Approximately 5.0 million Verizon Freedom packages were in service to residential and business customers by the end of the third quarter 2005, an increase of 0.8 million since the end of the third quarter 2004. Verizon Freedom plans help retain and win back customers by offering local services with various combinations of long-distance, wireless and Internet access, available on one bill.
- Consumer revenues of $3.8 billion were essentially flat compared with last year's third quarter, while business revenues of $2.8 billion decreased 1.6 percent and wholesale revenues of $2.2 billion decreased 1.5 percent.
- Wholesale voice connections -- which includes resale, Unbundled Network Element-Platform (UNE-P) and end-to-end wholesale voice services provided under commercial agreements -- totaled 5.8 million at the end of the third quarter 2005, down 12.3 percent from the end of the third quarter 2004. At the same time, continued growth from sales of wholesale special access products -- such as high-speed DS1 and DS3 circuits -- contributed to the $2.2 billion in quarterly wholesale revenues, an increase of $18 million compared with the second quarter 2005.
- Wireline total operating expenses were $8.1 billion in the third quarter 2005, essentially flat compared with last year's third quarter.
- Verizon's Enterprise Solutions Group continued to build on its successful Enterprise Advance initiative by rolling out its next generation IP VPN (Internet Protocol Virtual Private Network) services in the top 100 U.S. markets -- entering several markets, such as San Francisco and Milwaukee, for the first time. Third-quarter sales included contracts with the state of Maryland and Masterbrand Cabinets in Indiana.
- Retail customers constitute nearly 96 percent of the company's total. Retail gross additions increased 5.8 percent over the third quarter 2004. Retail net additions increased 19.7 percent and accounted for 98.5 percent of all net additions in the quarter.
- Service revenues (which do not include taxes and regulatory fees) were $7.3 billion in the third quarter 2005, up 13.8 percent compared with the third quarter 2004. Average monthly service revenue per customer increased 1.4 percent from the second quarter 2005 and decreased 2.8 percent from the third quarter 2004 to $50.13.
- Data services revenue for the third quarter 2005 climbed to 8.4 percent of service revenues, contributing $613 million, as sales of high-speed and broadband 3G (third generation) data services to businesses and consumers continue to gain. The company now has 21.6 million data customers -- a 48.1 percent increase compared with a year ago.
- As the industry leader in wireless broadband deployment, Verizon Wireless continued to extend the reach of its national 3G EV-DO high-speed network. During the third quarter, the company expanded its broadband network coverage to now include more than 170 major metropolitan areas, as well as 84 major airports. This is the largest wireless broadband network in the U.S. and is currently available to more than 140 million Americans coast to coast.
- The growth and speed of the company's national broadband network drove new initiatives to make wireless broadband more widely available for customers. The company announced partnerships with the top three laptop manufacturers -- Dell, HP and Lenovo -- to embed EV-DO capabilities into the next generation of notebook computers. The company also announced with Microsoft and Palm a new Windows Mobile-based Treo that will run on the Verizon Wireless broadband network.
- The company introduced new music-capable handsets for a total of six. Using memory cards, customers can transfer music, photos and video clips from PCs to these wireless phones. The new handsets also offer V CAST, the nation's first 3G consumer multimedia service, delivering crystal clear video, movies, 3D games and music clips to 3G handsets, as well as built-in digital cameras, camcorders and Bluetooth technology for hands-free communication. More than 1.6 million of the company's customers had broadband-capable devices at the end of the quarter.
- Popularity of the company's Get it Now services continued to climb, with an industry-leading 5.9 billion text messages during the third quarter. In addition, customers exchanged nearly 110 million picture and video messages and had nearly 34 million downloads of games, exclusive content, ringtones and ringback tones.
- During the third quarter, the company continued to expand its distribution channels. Customers may purchase Verizon Wireless service and equipment at Best Buy, Costco, 1,900 Verizon Wireless Communications stores including stores in Circuit City, and 6,000 Verizon Wireless agents nationwide.
- Verizon Wireless ranked highest in call quality or shared highest honors in more regions than any other U.S. wireless provider in the J.D. Power and Associates 2005 Wireless Call Quality Performance StudySM. The company also received J. D. Power awards for customer satisfaction and providing an excellent retail sales experience.
- Verizon Information Services (VIS) revenue of $857 million decreased 2.9 percent for the third quarter 2005 compared with the third quarter 2004, primarily due to reduced domestic print advertising revenue. However, reductions in total operating expenses have resulted in an improved operating income margin.
- VIS' domestic online directory and search service, SuperPages.com, achieved growth of 12.7 percent in gross revenues compared with the third quarter of 2004.
- Third-quarter revenues of $572 million represented an increase of 15.3 percent from the third quarter 2004. The increase primarily reflects favorable foreign exchange impacts in the Dominican Republic, as well as wireless growth in Puerto Rico.
NOTE: This press release contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The following important factors could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements: materially adverse changes in economic and industry conditions and labor matters, including workforce levels and labor negotiations, and any resulting financial and/or operational impact, in the markets served by us or by companies in which we have substantial investments; material changes in available technology; technology substitution; an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations; the final results of federal and state regulatory proceedings concerning our provision of retail and wholesale services and judicial review of those results; the effects of competition in our markets; the timing, scope and financial impacts of our deployment of fiber-to-the-premises broadband technology; the ability of Verizon Wireless to continue to obtain sufficient spectrum resources; changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; a significant change in the timing of, or the imposition of any government conditions to, the closing of our business combination transaction with MCI, Inc., if consummated; actual and contingent liabilities in connection with the MCI transaction; and the extent and timing of our ability to obtain revenue enhancements and cost savings following the MCI transaction.