Verizon Communications Reports Third-Quarter Earnings Highlighted by Strong Customer Growth, Solid Cash Flow
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- Verizon Wireless: 1.3 million retail net customer additions, up 12.5 percent from last year's quarter (1.4 million total net customer additions); strong revenue growth of 18.2 percent over last year's quarter; strong margins; total customers at 36.0 million
- Long-Distance: 1.3 million net additional long-distance lines; 15.9 million total lines; growth of 27 percent since year-end 2002
- DSL (digital subscriber lines): 185,000 net additional lines; 2.1 million total lines; growth of 27 percent since year-end 2002
- Diluted Earnings Per Share (EPS): 64 cents in fully diluted EPS, compared with $1.60 per share in third quarter 2002 (last year's quarter included net special gains)
- EPS Before Special Items (non-GAAP measure): 67 cents, compared with 77 cents in EPS before special items in third quarter 2002
- Debt Reduction: Net debt (non-GAAP, gross debt less cash and cash equivalents) reduced by $7.1 billion since year-end 2002 to $44.7 billion
- Free Cash Flow (non-GAAP, cash from operating activities less capital expenditures and dividends): $5.0 billion in first nine months of 2003
Note: 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 mentioned in this announcement.
NEW YORK - Verizon Communications Inc. (NYSE:VZ) today announced third quarter 2003 fully diluted EPS of 64 cents, or 67 cents before one special item, supported by strong revenues and customer additions from wireless, long-distance, DSL and other growth initiatives.
Reported earnings were $1.8 billion in the third quarter, compared with $4.4 billion in last year's third quarter when Verizon recorded net special gains and tax benefits from sales of businesses.
Third quarter 2003 earnings were $1.9 billion before special items, compared with $2.1 billion in third quarter 2002. The third quarter 2003 reflects a special item of $0.1 billion relating to pension settlements during the quarter for employees who received lump-sum distributions under voluntary separation plans.
Fifth Consecutive Quarter of Revenue Growth
Verizon posted its fifth consecutive quarter of year-over-year revenue growth, as the company's overall revenue mix continued to shift to growth areas such as wireless.
Total third-quarter reported operating revenues of $17.2 billion were up slightly from the third quarter 2002. Last year's total included revenues from Domestic Telecom access lines that the company has since sold. Excluding revenues from these access lines, Verizon's third quarter 2003 revenues of $17.2 billion represented a 1 percent increase from $17.0 billion in third quarter 2002.
Also for the fifth consecutive quarter, Verizon Wireless posted double-digit, year-over-year revenue increases. Verizon Wireless' service revenues grew 14.9 percent, to $5.3 billion, from $4.6 billion in the third quarter of 2002. Verizon Wireless' total revenues grew 18.2 percent in the third quarter 2003, to $5.9 billion, from $5.0 billion in the third quarter 2002. The additional increase in total revenue was driven by growth in equipment and other revenues.
Third-quarter Domestic Telecom revenues were $9.9 billion -- a decline of 4.1 percent compared with third quarter 2002 and essentially flat compared with second quarter 2003. Revenues from long-distance increased 17.2 percent to $1.0 billion in third quarter 2003, compared with third quarter 2002.
Customer Additions and Marketing Success
The overall revenue gain was supported by significant customer additions in growth markets, as well as successful new marketing initiatives, which also offset competitive pressures on revenues in other areas of Domestic Telecom.
Verizon Wireless added 1.4 million net subscribers in the third quarter, the highest quarterly increase in the company's history, bringing its customer total to 36.0 million. Verizon Wireless sustained strong performance across-the-board, delivering record quarterly results for net additions, average revenue per user and profitability, as well as continued low churn levels.
In the third quarter, Verizon also added a net of 1.3 million long-distance lines and 185,000 DSL lines. Verizon now serves 15.9 million long-distance lines and 2.1 million DSL lines, with both totals increasing by 27 percent since year-end 2002.
In the large-business market, Verizon has entered into more than 800 Enterprise Advance contracts since late last year, signing nearly 330 contracts in the third quarter.
For consumers, Verizon has introduced Verizon Freedom plans in 12 markets, covering more than 80 percent of consumer access lines, since the end of January. For small businesses, the company has also rolled out Verizon Freedom for Business plans in six markets, covering more than 60 percent of business access lines, since May. Verizon Freedom plans help retain and win back customers by offering local services with various combinations of long-distance, wireless and Internet access in a discounted bundle available on one bill.
Competitive Position Improves
Verizon CEO Ivan Seidenberg said, "Verizon continues to improve its competitive position. In the third quarter, we again made significant progress in gaining share in growth markets, and Verizon Wireless -- which has been our template for success in new areas of our business -- is again proving to be the premium company in the industry.
"The composition of our overall revenues continues to shift to newer, non-traditional sources, fueled by high levels of customer and revenue growth in wireless, long-distance and broadband," Seidenberg added. "At the same time, we have maintained operating margins in traditional markets, and Verizon businesses continue to generate excellent cash flow."
Expenses, Debt and Cash Flow
Verizon reported total operating expenses of $13.9 billion in the third quarter 2003. In the third quarter 2002, reported total operating expenses were $11.1 billion and included an offset related to the company's sales of businesses. On an adjusted basis, primarily excluding this offset, total operating expenses increased 6.9 percent, from $12.9 billion in the third quarter 2002 to $13.8 billion in the third quarter 2003. This increase was primarily driven by a reduction of $422 million in pension income net of other post-retirement benefit costs when comparing third quarter 2003 with the prior year's quarter.
On Sept. 23, Verizon detailed additional third-quarter Domestic Telecom expenses, including increased weather-related repair expenses and contingency costs to maintain operational readiness during recent labor negotiations. These costs were offset on an EPS basis by non-operational benefits from Verizon's International and Information Services business units in the third quarter.
Net debt was reduced to $44.7 billion at the end of the third quarter 2003, from $51.8 billion at year-end 2002. Gross debt was $45.5 billion at the end of the third quarter 2003, down $7.8 billion from $53.3 billion at year-end 2002.
Verizon's free cash flow was $5.0 billion for the first nine months of 2003, compared with $4.2 billion in the first nine months of 2002. In these same periods, respectively, cash from operations was $16.3 billion and $16.1 billion; cash used in investing activities was $6.9 billion and $0.9 billion; and cash used in financing activities was $10.0 billion and $10.4 billion. Cash used in investing activities was lower in 2002 primarily because of the receipt of proceeds from sales of businesses and a wireless spectrum refund.
Business Segment Highlights
(Note: Current and prior periods exclude the effects of access lines sold in 2002.)
- Verizon has increased its long-distance access lines by 4.2 million since the third quarter 2002, a 35.4 percent increase.
- Approximately 44 percent of Verizon's residential customers have purchased local services in combination with either Verizon long-distance or Verizon DSL, or both.
- Voice-grade access line equivalents (access lines plus equivalent data circuits) grew to 139.4 million, up 3.3 percent compared with the third quarter 2002.
- Total revenues for high-capacity and data services were $1.8 billion in the third quarter, down slightly from the year-earlier period. Increased demand for high-speed services was offset by a lessened demand for lower-speed services.
- Domestic Telecom's continued focus on expense control and operational excellence produced several year-over-year improvements in key metrics, including a 3.6 percent increase in repair productivity, a 42 percent reduction in uncollectibles, and a 3.7 percent decrease in cash expenses when excluding the impact of lower pension income net of other post-retirement benefit costs. As previously announced, Verizon is currently offering fourth-quarter voluntary separation programs to most union and management employees to reduce ongoing expenses, primarily in the Domestic Telecom segment.
- As of the end of the third quarter, approximately 74 percent of Verizon's 56.2 million access lines qualified for DSL service -- and the company remains on track to meet its 80 percent target by year-end.
- Verizon Wireless' retail customer base grew nearly 14 percent year over year and represented 34.6 million of the company's 36 million total customers at the end of the third quarter. Retail gross additions were up 8.8 percent over the third quarter 2002, while retail net additions were up 12.5 percent -- totaling approximately 1.3 million of the company's 1.4 million net additions.
- Continued low churn drove record net-add performance. Retail churn, as well as total churn for resale and wholesale, was just under 1.9 percent. In the retail post-pay segment -- which is more than 90 percent of the company's base -- churn was 1.4 percent for the third quarter.
- Average monthly service revenue per subscriber was more than $50, up 1 percent over the prior-year quarter. Service revenue for the quarter was $5.3 billion, up 14.9 percent.
- The company's low-cost structure continued to lead the industry, as cash expense per subscriber decreased slightly over the prior-year quarter and over the prior sequential quarter, a particularly significant achievement given the record volume of new subscribers.
- Quarterly operating income margin remained strong at 18.9 percent. Quarterly operating income increased 15.9 percent year over year to a record $1.1 billion.
- The company launched several innovative features and network services in the third quarter, including nationwide Get Pix picture messaging; nationwide Push to Talk; and, in San Diego and Washington, D. C., Broadband Access, the first broadband wide area wireless data network in major U.S. cities.
- Demand for these and for the company's existing data services continued to build in the quarter. Text messaging grew to more than 400 million text messages a month, and more than 1 billion for the quarter, and Get It NowSM BREW-based downloadable ringtones, games and exclusive content grew to 4 million downloads a month. In the less than three months since its debut, picture messaging service grew to 2 million picture messages a month in the third quarter, and the company's Push to Talk feature has more than 100,000 subscribers to date, on price plans starting at $60. At the end of the quarter, the company had nearly 10 million revenue-generating data subscribers. Data usage on the company's NationalAccess 1X data network has significantly increased over the preceding quarter. Data services now account for more than 2 percent of the company's total service revenue.
- The company continued to improve its already strong position in the business market segment, due to the reliability and reputation of its voice and data network, and its expanding VZOffice suite of solutions designed to meet enhanced voice and remote connectivity needs of business customers.
(Note: Effective Jan. 1, 2003, Verizon changed its accounting for recognizing directory revenues and direct expenses from the publication-date method to the amortization method. The publication-date method recognizes revenues and expenses when directories are distributed. Under the amortization method, which is increasingly becoming the industry standard, revenues and expenses are recognized over the life of the directory, which is usually 12 months. This change results in a more even distribution of revenue and expenses throughout the year, and does not impact cash flow. As required by GAAP, the previous year's results have not been adjusted for this change.)
- Verizon Information Services (VIS) revenue for the third quarter 2003 decreased 12 percent compared with the same period in 2002, primarily due to the change from the publication-date method to the amortization method of accounting. Using comparable accounting, third quarter 2003 revenues declined 4.9 percent compared with the same period last year; however, on a book-to-book basis, including print and electronic revenue, ongoing operations were relatively flat compared with the same period last year.
- In the third quarter, VIS reported pretax operating expense reductions of $141 million, primarily as a result of selling directory businesses in Europe.
- VIS' domestic Internet directory, SuperPages.com™, continues to achieve strong growth as demonstrated by a 31 percent increase in revenue and a 42 percent increase in searches over third quarter 2002.
- Equity in earnings of unconsolidated businesses increased to $397 million, compared with $210 million in the third quarter 2002. A large portion of the increase was driven by additional Italian tax benefits from a reorganization at Vodafone Omnitel, in which Verizon has an equity investment.
- Third-quarter revenues were $446 million, compared with $538 million in the third quarter 2002 -- primarily the result of declining foreign exchange rates in the Dominican Republic.
- Verizon's International investments continued to experience strong wireless growth, with total subscribers increasing by nearly 3 million compared with third quarter 2002 to more than 32 million customers worldwide.
NOTE: The financial tables associated with this news release can be found on Verizon's Investor Web site.
A Fortune 10 company, Verizon Communications (NYSE:VZ) is one of the world's leading providers of communications services, with approximately $67 billion in revenues and 221,000 employees. Verizon companies are the largest providers of wireline and wireless communications in the United States, with more than 139 million access line equivalents and 36 million Verizon Wireless customers. Verizon is the third largest long-distance carrier for U.S. consumers, with nearly 16 million long-distance lines. The company is also the largest directory publisher in the world, as measured by directory titles and circulation. Verizon's international presence includes wireline and wireless communications operations and investments, primarily in the Americas and Europe. For more information, visit www.verizon.com.
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 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; 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.