Verizon Communications Reports Strong Yearly Operational Growth and Gives Outlook for 2003

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FOURTH-QUARTER HIGHLIGHTS

  • 964,000 Verizon Wireless net customer additions, excluding acquisitions; 32.5 million total customers
  • 566,000 long-distance net customer additions, for a total of 10.4 million -- making Verizon the U.S.'s third largest long-distance carrier for consumers
  • 148,000 new net digital subscriber lines (DSL), for a total of 1.8 million lines

2002 HIGHLIGHTS

  • Met or exceeded year-end targets for revenue growth, diluted EPS (earnings per share), capital expenditures, debt management, and long-distance and DSL customers
  • Total debt reduced by $10.2 billion, to $54.1 billion from $64.3 billion, a 15.9 percent decrease
  • Net debt (total debt less cash and cash equivalents) reduced by $10.7 billion, to $52.6 billion from $63.3 billion, a 16.9 percent decrease; commercial paper reduced 83.6 percent, to $2.1 billion from $12.8 billion
  • $4.8 billion in free cash flow (cash from operating activities less capital expenditures of $12.0 billion, capitalized non-network software and dividends)

2003 GUIDANCE

  • EPS of $2.70 to $2.80, after offsets from reduced pension income, reduced income from 2002 access line sales, and expensing stock options
  • Comparable revenue growth of 0 to 2 percent
  • Capital expenditures (including capitalized non-network software) of $12.5 to $13.5 billion
  • Net debt of $49 to $51 billion

NEW YORK -- Verizon Communications Inc. (NYSE:VZ) today announced fourth-quarter 2002 diluted EPS of 83 cents, or 79 cents before special items, on the strength of comparable quarterly revenue growth and expense reduction, and continued strong sales of wireless, long-distance, DSL and bundled product offerings.

For the fourth quarter, Verizon's reported earnings were $2.3 billion, or 83 cents per share, including a net of $99 million, or 4 cents per share, in special items. Nearly $1.2 billion in gains, primarily associated with $1.1 billion in tax benefits, were largely offset by after-tax charges totaling $1.1 billion, including $604 million primarily for pension and benefit costs related to prior force reductions, $292 million for costs related to the bankruptcy of Genuity Inc., $129 million for merger transition costs, and $42 million in other items. This is the final quarter that Verizon will incur transition costs.

Reported operating revenues were $17.2 billion, and operations and support expenses were $11.0 billion in the fourth quarter 2002. Revenues, operating expenses and statistics described on a comparable basis exclude special gains and charges and the effects of the sale of 1.27 million switched access lines during third quarter 2002, and include the consolidation of Telecomunicaciones de Puerto Rico, Inc. (PRTC) and the deconsolidation of CTI Holdings S.A. beginning in 2002.

Fourth-quarter operating revenues, on a comparable basis, increased 1.5 percent to $17.2 billion from $17.0 billion, including a double-digit increase for the second consecutive quarter in Verizon Wireless revenues, which grew 16.3 percent to $5.2 billion, from $4.4 billion in the fourth quarter of 2001. Fourth-quarter operations and support expenses, on a comparable basis, declined 3.5 percent to $9.6 billion, from $9.9 billion in fourth quarter 2001.

Also today, Verizon Wireless will withdraw its registration statement for an initial public offering of equity securities, filed with the Securities and Exchange Commission, given the ongoing strong cash flow at Verizon Wireless and the lack of significant funding requirements that need to be addressed.

A Year of Great Progress

Chief Executive Officer Ivan Seidenberg said, "We achieved great progress in 2002. Our business model proved strong enough to carry us through a very difficult economic environment and allowed us to anticipate and adapt to the unprecedented technological changes in our industry. Throughout the year, we have focused on execution, generating cash flow and maintaining operational excellence, and we delivered on our financial and operational targets. While conserving capital, we met customer demands through product and packaging innovations and by using advanced technology to efficiently provide more capabilities through our world-class wireline and wireless networks."

Seidenberg added, "Our wireless, long-distance and DSL businesses continue to position Verizon well in growth markets. We have built an excellent foundation for 2003. Our continuing product innovation, combined with the quality of our customer service and the sophistication, scope and reliability of our networks, has Verizon poised for more customer growth in the year ahead."

In the fourth quarter, Verizon saw gains in EBITDA margins on a comparable basis. (EBITDA is determined by adding depreciation and amortization to operating income; EBITDA margin is calculated by dividing EBITDA by total operating revenues, or service revenues for Verizon Wireless.) Verizon's consolidated EBITDA margin was 44.4 percent in the quarter, a 290 basis-point improvement over fourth quarter 2001. Verizon Wireless' EBITDA margin was 40.1 percent, a 520 basis-point improvement over the prior year's quarter. The EBITDA margin at Verizon's largest business unit, Domestic Telecom, was 45.1 percent in the quarter, a 270 basis-point improvement over fourth quarter 2001.

This also marked the eighth consecutive quarter that Domestic Telecom has reduced its operations and support expenses over the prior-year period. On a comparable basis with the fourth quarter 2001, these expenses decreased by 7.1 percent, to $5.5 billion, in the fourth quarter 2002. Year-over-year on a comparable basis, these expenses were reduced by $1.3 billion in 2002.

Customer Growth

Operationally in the fourth quarter, Verizon Wireless added 964,000 customers on a net basis, 34.8 percent more than in the prior year's quarter. Verizon added 566,000 long-distance customers on a net basis to become the nation's third-largest provider of consumer long-distance service, with 10.4 million customers. Net additions of DSL lines exceeded 148,000 in the quarter, for a year-end total of 1.8 million lines and a year-over-year increase of 50 percent.

For the year, the total number of customers increased by 3.1 million, including acquisitions, for Verizon Wireless and 3 million for Verizon long distance. Nearly 570,000 customers subscribe to the Verizon "Veriations" package plans that were introduced less than six months ago. These plans bundle local services with various combinations of long distance, wireless and Internet access in a discounted package available on one bill.

Year-End Financials: Strong Cash Management

Verizon's 2002 earnings, before special items, were $8.4 billion, or $3.05 a share, compared to $8.2 billion, or $3.00 a share, in 2001. On a comparable basis, operating revenues were flat for the year, at $67.0 billion, while operating expenses declined 1.4 percent to $51.2 billion, from $51.9 billion in 2001.

Total debt decreased 15.9 percent to $54.1 billion at year-end 2002, compared to $64.3 billion at year-end 2001. Verizon reduced commercial paper by $10.7 billion in 2002, to $2.1 billion at year-end 2002 compared to $12.8 billion at year-end 2001. Net debt was $52.6 billion at year-end 2002, which was at a lower level than the company's guidance.

Free cash flow improved by $7.8 billion for the year, aided by improved cash from operations and by reductions in capital expenditures, which totaled $12.0 billion in 2002 compared to $17.4 billion in 2001.

At year-end 2002, Verizon recorded a balance sheet adjustment for additional minimum liability (AML), in accordance with FAS 87 accounting rules. AML is the difference between the funded status and the accrued benefit obligation for each pension plan, determined on a plan-by-plan basis. Verizon's adjustment increased its employee benefit liabilities by $1.3 billion. This non-cash adjustment was recorded as an after-tax reduction in shareowners' investment of approximately $811 million.

Seidenberg said, "We produced strong cash-management results in 2002, and we expect to continue this trend in 2003. Our guidance reflects a view that while the effects of the economic downturn may persist, we will be in a position to further reduce debt and operating expense. At the same time, we expect to stabilize revenue declines in certain markets, use our new nationwide long-distance capabilities to make inroads into the business market, and grow revenues in consumer markets through continued product and packaging innovation for wireline, wireless, long-distance and DSL services."

2003 Guidance

Revenue growth, on a comparable basis, is anticipated to be 0 to 2 percent in 2003.

The company anticipates that operational growth will contribute from 6 to 18 cents in EPS -- offset 41 to 43 cents by reduced pension income of 30 to 32 cents, reduced income from 2002 access line sales of 9 cents, and an accounting change of 2 cents to expense stock options. This results in a 2003 EPS target of $2.70 to $2.80, compared to last year's $3.05.

Capital expenditures, including capitalized non-network software, are targeted in the $12.5 to $13.5 billion range, compared to $13.1 billion in equivalent expenditures in 2002.

The company expects to once again generate significant free cash flow, which will continue to be utilized in its debt reduction program. Year-end net debt is targeted to decline to approximately $49 to $51 billion.

Accounting for Asset Retirement Obligations

Effective Jan. 1, 2003, Verizon has adopted new accounting rules (SFAS 143) for recognizing the costs of legal obligations associated with the retirement of fixed assets. Verizon has not yet finalized the impact of adopting SFAS 143 but expects to record a one-time net income benefit of approximately $2 billion in the first quarter 2003 and an ongoing annual net income benefit of approximately 1 to 2 cents per share.

Reported Results for 2002

For the year, reported earnings were $4.1 billion, or $1.49 a share, including a net charge of $4.3 billion, or $1.56 a share. This net charge includes special gains of $4.0 billion related to the sales of assets and tax benefits. These gains were more than offset by charges, including $5.7 billion in investment-related items associated with Genuity, CANTV in Venezuela and other interests; $1.3 billion related to severance, pension and benefit costs; nearly $0.5 billion for the cumulative effects of an accounting change; merger transition costs of $0.3 billion; and other items totaling $0.5 billion.

Reported operating revenues and operations and support expenses were $67.6 billion and $42.0 billion, respectively, for the year.

Business Segment Highlights

Following are fourth-quarter and year-end 2002 highlights from Verizon's four business segments.

Domestic Telecom:

Current and prior periods exclude the 1.27 million switched access lines sold during the third quarter of 2002.

  • More than half of Verizon's 10.4 million long-distance customers are in states in the former Bell Atlantic territory, and long-distance market share among consumers is more than 35 percent in New York and Massachusetts. Verizon has 2.7 million long-distance customers in New York and Connecticut, nearly 1 million customers in both Massachusetts and Pennsylvania, and nearly 500,000 customers in New Jersey.

  • ONE-BILL service, which provides Verizon local, long-distance and wireless charges on a single monthly bill, is now available in 20 of the 29 states where Verizon provides wireline services, with more than 150,000 customers enrolled in the service.

  • In November, Verizon's Enterprise Services Group launched its Enterprise Advance initiative to interconnect the company's local networks and provide large business and government customers with advanced communications services. Initial sales were generated based on the new regional availability of frame relay and SONET (Synchronous Optical Network) services that provide reliable high-speed transport.

  • Data services revenues grew to more than $1.85 billion in the quarter, driven by nearly 7 percent quarterly growth over the same period last year for data transport services and 9.2 percent growth for the year. Annual data revenue reached nearly $7.3 billion.

  • In the network services market, special access revenues increased 9.5 percent in the quarter, to $1.38 billion. For the year, special access revenues grew 11.6 percent, to $5.5 billion.

  • Domestic access line equivalents increased 4.5 percent to 135.8 million, compared to the fourth quarter 2001.

Verizon Wireless:

  • Verizon Wireless continued its focus on quality, profitable growth. The company's strong fourth-quarter performance was due to its continued low churn, low-cost structure, increasing average revenue per user (ARPU) and strong demand for Verizon Wireless branded products.

  • Retail net adds in the quarter were 929,000, up 18.4 percent over the fourth quarter 2001. The company also added 6,000 new customers from property acquisitions and 35,000 from reseller operations. The company's retail customer base grew 14.7 percent year-over-year to 31.4 million of the company's 32.5 million total customers.

  • Monthly service revenue per subscriber increased to more than $49 for the quarter, up 6 percent over the prior year's quarter.

  • The company continued to lead the industry in low-cost structure as cash expense per subscriber decreased more than 2 percent for the quarter and 1 percent for the year. EBITDA margin increased for the quarter and the year, to 40.1 percent and 39.1 percent, respectively.

  • Retail churn for both the quarter and for 2002 continued to decrease year-over-year. Including post-pay and pre-pay, retail churn was 2.1 percent in the quarter and for the year. Churn in the retail post-pay segment, which is 91 percent of the company's base, was even lower -- at 1.8 percent for the fourth quarter and the year. Total churn, including retail and resellers, was 2.1 percent in the quarter, and 2.3 percent for the year.

  • Quarterly EBITDA increased more than 34 percent to $1.9 billion, while EBITDA for the year was up more than 15 percent to $6.9 billion. Service revenues for the quarter grew almost 17 percent to $4.7 billion, with total revenues up more than 16 percent to $5.2 billion. For the year, service revenues and total revenues each grew nearly 11 percent to $17.7 billion and $19.3 billion, respectively.

  • Coupled with this growth, the company reduced its capital expenditures in 2002 to $4.4 billion from $5.0 billion in 2001, excluding capitalized non-network software.

  • The company continued to invest in its premier network to preserve quality and gain new efficiencies. Network usage increased more than 45 percent in 2002 over 2001, while efficiency as measured by percentage of capital expenditures to revenue, capital expenditures per minutes of use and cost per minutes of use continued to improve.

  • Demand for the company's data and text services continued to increase in the quarter. The company also launched more data-friendly devices with color screens, 1X speeds, and Get It Now capability for downloading games, entertainment and other applications. Text messaging continued to grow dramatically, with the number of billed messages increasing more than 43 percent over the prior quarter.

  • Product innovation in the fourth quarter included a suite of services for corporate customers that enables them to receive alerts from and access and navigate their corporate e-mail and voice mail using their wireless phones and voice commands.

International:

Reflects deconsolidation of CTI to the equity method and consolidation of PRTC in both the current and prior periods.

  • Fourth-quarter revenues were $731 million, bringing full-year revenues to $3.0 billion, compared to $813 million and $3.2 billion in the fourth quarter and full-year 2001, respectively. The revenue decline reflects weak economic conditions and declining foreign exchange rates. Operating income improved 6.6 percent in the quarter, to $146 million, due primarily to cost reductions driven by improved productivity.

  • The number of proportionate wireless customers in Verizon's core Americas properties grew by 12.8 percent to 3.0 million, compared to the prior year. Total proportionate wireless customers served by Verizon's International investments is now 8.7 million, compared to 8.9 million in 2001. Adjusted for assets sold during 2002, total proportionate wireless subscribers grew 12 percent.

  • During 2002, International successfully implemented roaming agreements that enable customers of Verizon affiliates in Canada, Mexico and Puerto Rico to have seamless roaming services on the Verizon Wireless network when they are in the United States.

  • During the fourth quarter, Verizon sold its 5.4 percent interest in Cable & Wireless plc. The transaction, which is part of the company's continuing efforts to sell non-strategic assets, resulted in proceeds of approximately $281 million. The impact of this sale has been removed from Verizon's International segment results and from Verizon's income before non-recurring items.

Information Services:

  • Fourth-quarter revenues from Verizon's directory publishing and electronic commerce operations of $1.4 billion decreased 3.8 percent primarily due to the impact of changes in publication dates. Revenues for 2002 of $4.3 billion were down slightly compared to 2001, reflecting the sale of certain wireline properties and related directories as well as reduced affiliate revenue.

  • Revenues from SuperPages.com, Verizon's domestic Internet directory service, grew 43.3 percent and 63.7 percent over the fourth quarter and the year, respectively, as Information Services continues to be the dominant leader in online directory services. SuperPages.com yellow pages searches grew 28.7 percent and 82.4 percent over the fourth quarter and the year, respectively.

NOTE: The financial tables associated with this news release can be found on Verizon's Investor Web site.

Verizon Communications (NYSE:VZ) is one of the world's leading providers of communications services. Verizon companies are the largest providers of wireline and wireless communications in the United States, with 135.8 million access line equivalents and 32.5 million Verizon Wireless customers. Verizon is also the largest directory publisher in the world. With more than $67 billion in annual revenues and 229,500 employees, Verizon's global presence extends to 33 countries in the Americas, Europe, Asia and the Pacific. For more information on Verizon, visit www.verizon.com.

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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: the duration and extent of the current economic downturn; materially adverse changes in economic or labor conditions 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; our ability to satisfy regulatory merger conditions; the ability of Verizon Wireless to continue to obtain sufficient spectrum resources; our ability to recover insurance proceeds relating to equipment losses and other adverse financial impacts resulting from the terrorist attacks on Sept. 11, 2001; and 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.

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