Verizon Communications Third-Quarter Revenues Increase 6.7%, to a Record $18.2 Billion; Wireless Revenues Up 23%
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- Total Company: Earnings of 64 cents in diluted earnings per share, or 65 cents per share before one special item (non-GAAP); 6.7 percent, or $1.1 billion, growth in operating revenues; $5.6 billion in cash flows from operating activities, a $0.3 billion increase; $1.3 billion free cash flow (non-GAAP, cash from operating activities less capital expenditures and dividends); 19.8 percent consolidated operating income margin (operating income divided by operating revenues)
- Wireless: 1.7 million net customer additions, an industry record for the second consecutive quarter; 42.1 million total customers; 23.0 percent growth in total revenues; company-record average revenue per customer; 22.5 percent operating income margin; churn (customer turnover) of 1.5 percent per month
- Wireline: 11.5 percent growth in total data revenues; 8.7 percent growth in long-distance revenues; 309,000 net additions of broadband DSL (digital subscriber lines); 3.3 million total DSL lines; broadband, data, long-distance and Enterprise (large business) services contribute to Domestic Telecom's second sequential quarter of revenue growth
Notes: Growth percentages cited above compare third-quarter 2004 with third-quarter 2003. 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 quarterly periods presented include the operations of Verizon Information Services Canada, following a third-quarter 2004 agreement to sell this business.
NEW YORK - Showing continued strong revenue growth, Verizon Communications Inc. (NYSE:VZ) today reported third-quarter 2004 earnings of $1.8 billion -- 64 cents per diluted share, or 65 cents per share before one special item.
Quarterly consolidated operating revenues topped $18 billion for the first time in the company's history -- increasing 6.7 percent to $18.2 billion, compared with $17.1 billion in the third quarter 2003.
Also for the first time, Verizon Wireless contributed more than 40 percent of Verizon's total revenues. The nation's leading wireless company grew revenues 23.0 percent to $7.3 billion, compared with $5.9 billion in the third quarter 2003.
This marks Verizon Wireless' ninth consecutive quarter of double-digit, year-over-year revenue increases, and the third consecutive quarter that increases totaled more than $1 billion compared with the previous year's quarter.
Overall, Verizon's growth businesses -- wireless, long-distance, broadband, data and Enterprise services -- accounted for 55 percent of third-quarter 2004 revenues. This compares with 49 percent of third-quarter 2003 revenues. Over the past year, revenues from these businesses have grown by 20.8 percent.
Domestic Telecom operating revenues were $9.6 billion in the third quarter 2004, a 2.1 percent decrease compared with the third quarter 2003 and a slight increase compared with the second quarter 2004. The segment's third-quarter results included an 8.7 percent increase in revenues from all long-distance services, which were $1.1 billion compared with $1.0 billion in the third quarter 2003, and an 11.5 percent increase in total data revenues, which were $2.0 billion compared with $1.8 billion in the third quarter 2003.
"Verizon has posted record revenues and another quarter of strong profitability. We are steadily building momentum and accelerating our transformation into an industry-leading wireless and broadband company," said Ivan Seidenberg, Verizon chairman and CEO. "Our wireless business has been a driver of overall revenue growth and a model of sustained excellence in terms of network quality, product innovation and customer satisfaction.
"As our business shifts from traditional narrow-band services and related markets, we are encouraged by the pace at which our overall revenue mix is evolving toward higher-growth services. We continue to see the benefits of cost controls and productivity improvements in our stable margins and cash flows, and we have the strongest balance sheet since our company was formed."
Continued Record Wireless Growth
Verizon Wireless added 1.7 million net new customers, the largest quarterly customer increase in the history of the company, which was formed in April 2000. The total number of customers grew 16.9 percent year-over-year to 42.1 million, including 40.2 million retail customers.
As the company attracts new customers in record numbers, Verizon Wireless continues to produce industry-leading operational and profitability results. Average monthly churn, a key gauge of customer satisfaction, was 1.5 percent and continued to be the lowest in the industry among major carriers that have reported. Average monthly service revenue per customer increased 3.1 percent year-over-year to $51.58.
Wireless' operating income margin of 22.5 percent in the third quarter 2004 compares with 18.9 percent in the third quarter 2003. Quarterly operating income grew 46.4 percent year-over-year to $1.6 billion.
Wireless' EBITDA margin in the third quarter was 43.7 percent, the third consecutive quarter above 40 percent. (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.)
Continued Solid Margins
On a consolidated basis, Verizon's operating income margin rose to 19.8 percent in the third quarter 2004, compared with 18.7 percent in the third quarter 2003. When adjusted to exclude the special and non-recurring items described later in this release as well as net pension and OPEB (other post-retirement benefit) impact, Verizon's consolidated operating income margin would have been 21.0 percent in the third quarter 2004 and 19.0 percent in the third quarter 2003 (non-GAAP measures).
Domestic Telecom's operating income margin was 14.7 percent in the third quarter 2004, compared with 16.3 percent in the third quarter 2003. When adjusted to exclude the items listed above, Domestic Telecom's operating income margin would have been 16.3 percent in the third quarter 2004 and 15.1 percent in the third quarter 2003 (non-GAAP measures).
Consistent with past practice, Verizon believes that excluding the impact of net pension and OPEB expenses or credits enhances comparability and provides a better picture of operating cost management.
Wireline Broadband Growth
Verizon added a net of 309,000 broadband DSL lines in the third quarter 2004 for a total of 3.3 million DSL lines in service, representing 1.1 million net additions over the past year. The company also began rolling out FiOS fiber-optic-based services in the third quarter 2004.
Revenues from DSL contributed to Verizon's total data revenues of $2.0 billion in the third quarter 2004. Data revenues represented 21 percent of Domestic Telecom's total operating revenues in the quarter, up from 18 percent in the third quarter 2003.
Cash Flows, Debt
Cash flows from operating activities were $5.6 billion in the third quarter 2004, an increase of 5.5 percent compared with $5.3 billion in the third quarter 2003. Net cash used in investing activities was $3.1 billion, and net cash used in financing activities was $2.5 billion in the third quarter 2004.
Free cash flow was $1.3 billion for the third quarter of 2004, and $3.2 billion for the first nine months of the year. This compares with $1.4 billion for the third quarter of 2003, and $4.9 billion for the first nine months of 2003. Impacts on cash flow in 2004 have included severance payments associated with a 21,000-employee voluntary separation program, as well as increased capital investments compared with 2003 to fund broadband growth initiatives.
Total debt at the end of the third quarter 2004 was $40.5 billion, a reduction of 10.7 percent compared with $45.4 billion at year-end 2003.
Reported operating expenses increased 5.3 percent compared with the third quarter 2003, to $14.6 billion in the third quarter 2004.
When adjusted for special and non-recurring items, operating expenses were also $14.6 billion in the third quarter 2004, an increase of 6.1 percent from comparable expenses in the third quarter 2003 (non-GAAP measures). This increase was driven by the negative impact of $268 million related to pension and OPEB costs, and by costs associated with Verizon's growth businesses. Expenses for last year's third quarter included additional Domestic Telecom labor and weather-related repair costs, partially offset by non-operational expense benefits in other business units.
In Domestic Telecom, wage and salary expenses again decreased by more than $200 million year-over-year due to last year's voluntary separation program. These savings were used to fund increases in sales and marketing expenses and other operating costs in the growth areas of the wireline segment.
Earnings Comparisons and Special Items
Reported earnings were 64 cents per share in both the third quarter 2004 and the third quarter 2003.
Before a $20 million (1 cent per share) special item related to pension settlements, third-quarter 2004 earnings were 65 cents per share. Third-quarter 2003 earnings were 67 cents per share before one special item of $81 million (3 cents per share), also related to pension settlements.
Business Segment Highlights
Following are third-quarter 2004 highlights from Verizon's four business segments.
- Operating revenues of $9.6 billion in the third quarter 2004 were up slightly compared with the second quarter 2004, marking the second consecutive quarter of operating revenue increases. Revenues in the consumer, business and wholesale lines of business all increased in the third quarter 2004 compared with the second quarter 2004.
- Domestic Telecom's cash expenses, excluding net pension and OPEB expenses (non-GAAP), were $5.9 billion in the third quarter 2004, a 3.5 percent decrease from the third quarter 2003.
- Revenues for all long-distance services, including traditional intra-region toll services, increased 8.7 percent compared with third quarter 2003, to $1.1 billion in the quarter. The company had 17.3 million long-distance lines in service as of the end of the quarter, an increase of 525,000 lines compared with the second quarter 2004.
- Approximately 53 percent of Verizon residential customers have purchased local services in combination with either Verizon long-distance or Verizon DSL, or both. This compares with 41 percent in the third quarter 2003.
- The average revenue per month per Verizon residential wireline customer increased by 4.4 percent in the third quarter 2004, compared with the third quarter 2003.
- Approximately 4.2 million Verizon Freedom packages were in service to residential and business customers as of the end of the quarter. 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.
- Resale and Unbundled Network Element-Platform (UNE-P) lines totaled 6.7 million at the end of the third quarter 2004, up from 5.4 million at the end of the third quarter 2003. For UNE-P only, this is a 105,000 increase from the end of the second quarter 2004, which is significantly less than in prior quarters this year. The company had 53.7 million switched wireline access lines in service as of the end of the third quarter 2004.
- During the quarter, Verizon's Enterprise Solutions Group (ESG) won a six-year, $135 million contract from the Commonwealth of Virginia for voice and data services. ESG also made more than 700 sales of Enterprise Advance services in the quarter. To further support Enterprise Advance, Verizon reached agreements with several suppliers, enabling the expansion of its national network to some 40 new markets, bringing the total number to nearly 100.
- Total and retail gross additions, as well as total and retail net additions, were the highest in the company's history. Retail gross additions increased 6.8 percent over the third quarter 2003. Retail net additions increased 24.1 percent to 1.58 million customers of the company's 1.67 million total net additions.
- Over the past year, Verizon Wireless has moved the percentage of retail post-pay customers up from 91 percent to 92 percent of its customer base.
- Churn among retail post-pay customers was 1.3 percent. Verizon Wireless' total and retail churn performance has led the industry this year as the first anniversary of local number portability approaches.
- Service revenues for the quarter were $6.4 billion, up 20.6 percent. The company does not include taxes and regulatory fees in service revenues.
- Verizon Wireless continued its industry-leading cost management, as the company's cash expense per customer decreased 3.2 percent over the prior-year quarter -- a particularly significant achievement given the record-high volume of new customers in the third and preceding quarters.
- Data services usage continued to climb, contributing $300 million, or 4.7 percent, of third-quarter 2004 total service revenues, up from 4.2 percent in the second quarter 2004 and 2.3 percent in the third quarter 2003. More than one-third of the company's base -- 14.6 million customers -- use data services and spend an average of $7 per month on data.
- Contributing to wireless data revenues, 2.6 billion text messages were sent during the quarter, as the company is seeing text-message levels approach 1 billion per month. Additionally, there were 25.5 million picture messages and 26.8 million Get It Now downloads of the more than 500 games, exclusive content and other applications.
- At the end of the quarter, the company significantly expanded its BroadbandAccess service to now include 14 major metropolitan areas and 24 airports, including some of the busiest in the country. The company's broadband network is the largest wireless wide-area broadband service in the nation, and is expected to reach 75 million Americans -- one-third of the company's network -- by year-end. BroadbandAccess enables remote access from laptops and PDAs, offering business users a desktop experience when out of the office. It also will make possible high-resolution multimedia consumer services to the handset in the near future, with the company's planned expansion to more metropolitan areas.
- Wireless continued to fortify the coverage and quality of its distribution system, as it began putting Verizon Wireless-staffed stores in 600 Circuit City outlets across the country, and expanding its indirect channel to 600 Best Buy stores.
- Verizon Information Services (VIS) revenues of $900 million decreased 4.2 percent for the third quarter 2004 compared with the third quarter 2003, primarily due to reduced domestic print advertising revenues. Revenues were relatively flat compared with the second quarter 2004.
- VIS' domestic online directory and search service, SuperPages.com, continues to achieve strong growth, as demonstrated by a 25 percent increase in revenues and a 33 percent increase in searches over the third quarter 2003.
- Last month Verizon announced the sale of Verizon Information Services Canada to Bain Capital for $1.54 billion (Cdn. $1.985 billion). The agreement is subject to regulatory approvals and is expected to be completed by the end of 2004.
- Third-quarter revenues of $496 million represented an increase of 11.2 percent from the third quarter 2003. Revenues reflect operational growth in the Dominican Republic, as well as a prior year revenue adjustment in Puerto Rico, partially offset by declining foreign exchange rates in the Dominican Republic.
- Third-quarter segment income was $319 million, compared with $471 million in the third quarter 2003. This decrease primarily resulted from additional Italian tax benefits in 2003 from a reorganization at Vodafone Omnitel and lower investment sales, partially offset by operational growth at Verizon Dominicana and the prior-year revenue and expense adjustments in Puerto Rico.
- Verizon's 23.1 percent investment in Vodafone Omnitel continues to be a significant contributor to segment results due to higher demand for voice and data services, and favorable foreign currency exchange rates.
A Dow 30 company, Verizon Communications (NYSE:VZ) is one of the world's leading providers of communications services, with approximately $68 billion in annual revenues. Verizon companies are the largest providers of wireline and wireless communications in the United States. Verizon 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: 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 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; 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.