Verizon Reports Strong First-Quarter 2006 Results
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- Diluted earnings per share (EPS) of 56 cents, or 60 cents per share before special items (non-GAAP measure)
- Reported revenues of $22.7 billion, up 25.1 percent from first quarter 2005; operating income of $3.9 billion, up 14.0 percent from first quarter 2005
- $6.1 billion cash flow from operating activities; $0.4 billion in share repurchases
- 1.7 million net customer additions, up 2.9 percent from first quarter 2005; 53.0 million total customers, up 16.7 percent from first quarter 2005
- Continued industry record-setting low churn (customer turnover) of 1.18 percent, retail postpaid churn of 0.92 percent
- Total revenues up 18.8 percent from first quarter 2005; EBITDA margin (non-GAAP) of 44.5 percent; data ARPU up 79 percent from first quarter 2005
- 541,000 net new broadband connections (DSL and FiOS data customers) in first quarter 2006; 5.7 million total broadband connections, up 47.1 percent from first quarter 2005
- 6.3 million consumer and small business accounts enrolled in Verizon Freedom service packages, up from 4.7 million in first quarter 2005
- Data revenues of $3.9 billion in the quarter, up 89.7 percent from first quarter 2005, including results from Verizon Business domestic and global operations
- Integration of the former MCI ahead of plan, resulting in first-quarter synergies exceeding expectations in network traffic migration, systems integration and workforce reductions
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. 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.
NEW YORK -- Verizon Communications Inc. (NYSE:VZ) today reported strong financial and operational results for the first quarter 2006. Verizon Wireless continued to lead the industry in profitable growth and customer loyalty, and Verizon's wireline business sustained industry-leading levels of broadband customer growth and, after the completion of the MCI, Inc. merger, greatly expanded its global presence in business and government markets.
For the first quarter 2006, Verizon reported earnings of $1.6 billion, or 56 cents per diluted share, compared with $1.8 billion, or 63 cents per share, in the first quarter 2005. Reported earnings in the first quarter 2006 reflect 4 cents per share in special items for employee relocations and merger integration costs, the early extinguishment of debt, and the cumulative effect of an accounting change. Before these special items (non-GAAP), Verizon's earnings were 60 cents per share in the first quarter 2006.
Consolidated operating revenues in the first quarter 2006 were $22.7 billion, a 25.1 percent increase compared with the first quarter 2005; consolidated total operating expenses were $18.9 billion, a 27.6 percent increase compared with the first quarter 2005; and consolidated operating income was $3.9 billion, a 14.0 percent increase compared with the first quarter 2005. Reported results include MCI subsequent to the close of the merger on Jan. 6, 2006.
On a pro-forma basis (non-GAAP), comparing first quarter 2006 with first quarter 2005, adjusted earnings per share decreased 3.3 percent, adjusted operating revenues increased 3.1 percent and adjusted operating income increased 13.5 percent. Adjusted operating income margins would have been 17.2 percent in first quarter 2006, compared with 15.6 percent in first quarter 2005. Pro-forma adjusted information presents the combined operating results of Verizon and the former MCI on a comparable basis.
'Driving Revenue Growth'
"Our financial performance in the first quarter was on target, and we are focused on driving revenue growth in each of our business segments," said Ivan Seidenberg, Verizon chairman and CEO. "Our goal is simple: Given the quality of our superior networks and customer service, we expect Verizon Wireless and our wireline segment -- Verizon Telecom and Verizon Business -- to lead the industry, not necessarily in size but in profitable growth.
"Verizon Wireless is already there, and this quarter it has once again enhanced its position as the industry leader in terms of network reliability and customer loyalty. Verizon Telecom is taking the necessary steps to ramp up revenue growth from fiber-based FiOS data and TV services, and Verizon Business is already seeing revenue growth in strategic IP-based business services.
"This quarter also demonstrates Verizon's continued focus on delivering increased value to shareowners as well as to customers. We have repurchased shares, and we are divesting operations that are not core to our strategy of building network-based businesses that create new markets and drive profitable growth."
Wireless Continues to Surpass Own and Industry Records
Verizon Wireless continued to surpass performance milestones previously set by the company and the industry with record net customer additions and profitability for a first quarter, and an all-time industry low churn among major carriers.
This was the 15th consecutive quarter of double-digit, year-over-year revenue growth. It was also the eighth consecutive quarter that the company added more than 1.5 million customers, the fifth consecutive quarter with EBITDA margins above 40 percent and the 13th consecutive quarter of year-over-year growth in gross customer additions.
Verizon Wireless added 1.7 million net new customers in the first quarter 2006, for a total of 53.0 million customers nationwide, representing a 16.7 percent increase from the first quarter last year. At the end of the first quarter 2006, the company was the fastest growing in the industry in terms of customers, adding a net of 7.6 million new customers in the past 12 months.
Verizon Wireless continued to set new records for the company and the industry for low customer churn, a key measure of customer loyalty. For the first quarter 2006, total churn was a record-low 1.18 percent, and churn among the company's retail postpaid customers was 0.92 percent, another record.
Verizon Wireless revenues grew 18.8 percent to $8.8 billion in the first quarter 2006, driven by continued strong customer growth and demand for data services. At $872 million, wireless data revenues accounted for nearly 11.5 percent of total wireless service revenues in the quarter.
Wireless operating income margins were 24.0 percent in the quarter, reflecting the company's ability to maintain industry-leading cost efficiency even as it added the most retail customers.
Wireless EBITDA margins were 44.5 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.)
Robust Wireline Broadband Growth
Verizon's wireline business added 541,000 net broadband connections in the first quarter. Verizon now has 5.7 million wireline broadband connections, which includes both DSL and FiOS, Verizon's next-generation, fiber-optic-based service. Verizon has added nearly 1.2 million net wireline broadband connections over the past six months and 1.8 million net broadband connections over the past year, a growth rate of 47.1 percent comparing the first quarter 2006 with the first quarter 2005.
Strong sales of Verizon Freedom packages, which offer local wireline services with various combinations of long-distance and Internet access, were instrumental in retaining retail wireline customers. More than 6.3 million Verizon Freedom packages were in service to mass market (residential and small business) customers by the end of the first quarter 2006, an increase of 1.6 million since the end of the first quarter 2005 and 0.8 million since year-end 2005.
Following the MCI merger, Verizon's wireline business segment includes both Verizon Telecom and Verizon Business operations. Total wireline operating revenues were $12.5 billion in the first quarter 2006, an increase of 33.3 percent compared with the first quarter 2005 on an adjusted basis (non-GAAP) -- excluding revenues from operations sold in 2005. Total wireline operating expenses were $11.4 billion in the first quarter 2006, a 40.6 percent increase compared with the first quarter 2005 on the same basis.
Successful Launch of Verizon Business
The MCI integration is on plan, and Verizon Business is ahead of plan to achieve the $550 million target in merger synergies this year. Approximately $50 million in merger synergies were realized in the first quarter 2006, and this is expected to ramp up to total $150 million by the end of the second quarter. A total of $400 million in synergies is expected in the second half of the year. Synergies include reducing the workforce by approximately 3,500 in 2006, and to date the company is about a third of the way toward this target.
Network traffic migration and systems integration plans are ahead of plan, including the migration of more than 80 percent of the voice traffic from the legacy Verizon Global Network Services network and 68 percent of all IP (Internet protocol) traffic onto the Verizon Business network. Systems integration includes consolidation of systems for the unit's sales force and product catalogs.
Since its launch in January, Verizon Business has rolled out a steady stream of new products and services that demonstrate immediate benefits for large business and government customers. For example, simultaneous with its formal market entry, Verizon Business unveiled integrated wireless and wireline offerings designed to enhance workforce mobility and provide reliable backup for customer data networks.
Verizon Business has capitalized on this initial momentum by expanding Verizon's Ethernet access services in key cities in the U.S., Europe and the Asia-Pacific region, and integrating these services with Private IP, the business unit's fastest-growing service.
Strong Cash Flow, Share Repurchases
Cash Flows from Operating Activities were $6.1 billion in the first quarter 2006, compared with $3.9 billion in the first quarter 2005, primarily due to lower external distributions from the Verizon Wireless partnership, lower pension contributions in the first quarter 2006 and the absence of the tax payments that were made in the first quarter 2005 related to 2004 asset sales.
First-quarter capital expenditures were $4.1 billion in 2006, including an increase in wireline investment primarily driven by the inclusion of MCI, compared with $3.6 billion in 2005.
Total debt increased to $43.1 billion, compared with $39.0 billion at year-end 2005, primarily due to the assumption of MCI debt. Verizon either redeemed or refinanced the MCI debt in the first quarter 2006, resulting in an expected $190 million in interest expense savings in 2006.
In the first quarter 2006, Verizon repurchased 11.6 million shares at a cost of $0.4 billion. As previously announced, the company has a target of $1 billion in share repurchases in 2006.
Business Segment Highlights
Following are first-quarter 2006 highlights for Verizon's business segments.
- Verizon Wireless again added the most retail customers in the industry during the first quarter. Retail net additions were 1.6 million of the company's 1.7 million total net additions, an increase of 3.1 percent over first quarter of 2005. The company now has
50.7 million retail customers of a total 53.0 million customers.
- Service revenues (which do not include taxes and regulatory fees) increased 16.0 percent to $7.6 billion for the first quarter 2006. Average monthly service revenue per customer (ARPU) was $48.67, down 0.7 percent from the similar period in 2005.
- Verizon Wireless continued to set the industry standard for cost efficiency, delivering the lowest cash expense. Cash expense per customer declined 6.6 percent year-over-year to $26.99 per month, the second-lowest quarterly level in the company's history.
- Data services revenues more than doubled year-over-year, contributing $872 million. In the first quarter, 11.5 percent of service revenues came from data services, up from 6.3 percent the previous year. Data ARPU increased 79 percent from first quarter 2005. The company now has 26.1 million data customers -- a 47 percent increase compared with first quarter 2005.
- Verizon Wireless continued to increase the popularity of its national 3G EV-DO high-speed network, adding more broadband services and devices for both business and consumers. At the end of the first quarter, 6.2 million customers had broadband-capable devices.
- For business, the company introduced a pay-as-you-go option for BroadbandAccess, which lets customers sign on for 24-hour sessions from laptops embedded with EV-DO capabilities; Field Force Manager, a location-based service for small and medium-sized businesses to map the location of field workers, dispatch jobs and receive reports; and GlobalEmail for e-mail access in more than 50 countries. GlobalEmail is currently available on the Samsung i830, which allows international travelers to keep one phone and one phone number to stay connected via calls and e-mail. Other new business devices included Palm's Treo 700, the first Windows Mobile-based Treo smartphone, and additional laptops and PDAs with EV-DO embedded capabilities.
- For consumers, the company launched broadband V CAST Music in January, and already has expanded its library to 1 million songs from artists at major music labels and at independent providers. V CAST Music is the world's most comprehensive mobile music service, allowing customers to download music over the air, to transfer their existing digital music collection from the PC to their wireless phones, and to identify a song title and artist by holding their phone near music that's playing and launching identity software. The company now has three V CAST music-enabled phones. The company also launched VZ Navigator, with audible turn-by-turn instructions, mapping and the ability to find more than 14 million points of interest.
- Get It Now services continued to grow to an industry-leading 9.6 billion text messages exchanged during the first quarter; more than 171 million picture and video messages exchanged; and nearly 45 million downloads of games, exclusive content, ringtones and ringback tones.
- During the first quarter, the company continued to expand and diversify its distribution channels by making its prepaid service available at Wal-Mart locations nationwide. Customers now can purchase Verizon Wireless service and equipment at 2,100 Verizon Wireless Communications stores, including stores in Circuit City and BJ's, and from 12,000 additional retail locations, including Verizon Wireless agents throughout the U.S. and national retailers such as Best Buy and Costco.
- By the end of the first quarter, the company was selling FiOS fiber-to-the-premises (FTTP) broadband data services in 15 states, passing a total of 3.6 million homes and businesses. In markets where Verizon has been selling FiOS data services for at least six months, the average penetration rate was 9 percent at the six-month mark in each market, well on the way toward achieving the company's goal of 30 percent penetration in five years. Earnings dilution from FiOS was 6 cents per share in the first quarter 2006.
- Verizon has franchises covering more than 1 million households in nine states for FiOS video services. The company has begun selling FiOS TV in select markets in seven of these states.
- In Florida, Texas and Virginia markets where Verizon has been selling FiOS TV for at least four months, Verizon's penetration levels range from 9 percent to 12 percent, already halfway towards the company's goal of from 20 percent to 25 percent penetration in five years. Verizon launched FiOS TV in Keller, Texas, in September 2005 and has 24 percent penetration there.
- Approximately 80 percent of FiOS video customers are "triple play" customers -- receiving wireline, Internet access and TV services from Verizon.
- Verizon now has 415,000 customers who receive a Verizon DirecTV bundle, up 66,000 from year-end 2005.
- Data revenues, which totaled $3.9 billion in the first quarter, now make up approximately 30 percent of Verizon's overall wireline revenues.
- Total switched access lines in service were 48.0 million at the end of the first quarter 2006, a 6.9 percent decline compared with the first quarter 2005. Among Verizon residential retail customers, gains in wireline broadband connections more than offset losses in traditional access lines for the second consecutive quarter.
- Verizon Business aggressively interconnected the Verizon and MCI enterprise networks, resulting in the largest ultra-long haul network in the U.S. and the world's largest wholly-owned, facilities-based, global network. This expanded reach provides the ability to manage Verizon Business' global network in a cost-effective manner with high service quality.
- In addition to new enterprise wireless data services, Verizon Business offerings during the quarter included an extension of its next-generation suite of Internet telephony services, the addition of VoIP (voice over Internet protocol) to its contact center service suite, the unveiling of a new remote IP application management service, the introduction of industry-leading service-level commitments for its Managed IP PBX (private branch exchange) services, and a new set of "application aware" network tools to help businesses improve the performance of their IP networks and associated business applications.
- Verizon Business secured substantial new business as well as completing additional agreements with existing customers. New agreements include helping B/E Aerospace, the world's leading manufacturer of cabin interior products for commercial aircraft and business jets, to transition from a traditional data environment to an advanced IP communications system using Verizon Business Private IP. In addition, B/E Aerospace will rely on Verizon Business for Dedicated Internet, CPE (customer premises equipment), Net Conferencing and advanced voice services. Fiserv, Inc., a leading provider of information management systems and services to the financial and health benefits industries, added Verizon Ethernet access to its nationwide Private IP networking capabilities.
- Internationally, Verizon Business' new customers include Leaf International, a confectionery producer, and Crystal Group, one of the biggest garment manufacturers in Hong Kong. Leaf International contracted for communications infrastructure and services across 28 sites in Europe, including Verizon Business Private IP as well as Internet access and voice. Crystal Group selected Verizon Business based on Verizon's global coverage and flexibility. Longstanding customers who renewed business or signed new contracts include Acer and IBM.
Information Services and International:
In December 2005, Verizon announced that it is exploring divesting Verizon Information Services (VIS) through a spin-off, sale or other strategic transaction. However, since this process is still ongoing, VIS' results of operations, financial position and cash flows remain in continuing operations. In April 2006, Verizon announced that definitive agreements were reached to sell its Verizon International interests in the Dominican Republic, Puerto Rico and Venezuela. Since Verizon committed to the divestitures after the end of the first quarter 2006, the operations are included in the International segment as continuing operations for the first quarter 2006.
- VIS' first-quarter operating revenues were $837 million compared with $881 million in the first quarter of 2005, a 5.0 percent decline, primarily driven by reductions in domestic print advertising revenue.
- In the first quarter, VIS' domestic online directory and search service, SuperPages.com, achieved revenue growth of 7.1 percent compared with the first quarter of 2005, and Internet yellow pages searches increased 81.8 percent over the same period.
- Verizon International's first-quarter revenues of $697 million represented an increase of 34.8 percent from the first quarter 2005. The increase primarily reflected the impact from the sale of directory publishing rights in Puerto Rico.
- Verizon International's first-quarter segment income was $439 million, compared with $351 million in the first quarter 2005. This increase of $88 million, or 25.1 percent, was primarily driven by the sale of directory publishing rights in Puerto Rico.
Verizon Communications Inc. (NYSE:VZ), a Dow 30 company, is a leader in delivering broadband and other communication innovations to wireline and wireless customers. Verizon operates America's most reliable wireless network, serving 53 million customers nationwide; one of the most expansive wholly-owned global IP networks; and one of the nation's premier wireline networks, serving mass market and wholesale customers. Based in New York, Verizon has a diverse workforce of more than 250,000 and generates annual consolidated operating revenues of approximately $90 billion. For more information, visit www.verizon.com.
NOTE: This news 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; the timing of the closings of the sales of our Latin American and Caribbean properties; and the extent and timing of our ability to obtain revenue enhancements and cost savings following our business combination with MCI, Inc.