Verizon's Second-Quarter Results Marked by Sector-Leading Revenue Growth and Solid Cash Flow
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- Verizon Wireless: 1.2 million net retail customer additions, up 10 percent from last year's quarter (1.3 million total net customer additions); record-low churn; strong margins; service revenue up 14.7 percent from last year's quarter; customer total at 34.6 million
- Long Distance: 1.4 million net additional long-distance lines in the quarter; total long-distance lines, 14.6 million, a 36.1 percent year-over-year increase
- DSL (digital subscriber lines): 1.9 million billed lines, up 101,000 since last quarter
- Diluted earnings per share (EPS): 12 cents in fully diluted EPS, compared with a loss of 78 cents per share in second quarter 2002
- EPS before special items: 69 cents, compared with 77 cents in EPS before special items in second quarter 2002
- Debt Reduction: Net debt (total debt less cash and cash equivalents) reduced by $3.7 billion since year-end 2002 to $48.1 billion
- Free Cash Flow (cash from operating activities less capital expenditures and dividends):
$3.6 billion in first half of year
- Reiterated 2003 guidance, with additional net debt reduction; new Verizon Wireless guidance of net retail customer additions for 2003 of more than 4 million
Note: The schedules accompanying this news release provide reconciliations to generally accepted accounting principles (GAAP) for all non-GAAP financial measures mentioned in this announcement.
NEW YORK -- Verizon Communications Inc. (NYSE:VZ) today announced second quarter 2003 fully diluted EPS of 12 cents, or 69 cents before special items. The results reflect growth from the net addition of 1.3 million Verizon Wireless customers and 1.4 million long-distance lines, and continued strong operational and cash-management results.
Verizon's reported earnings were $0.3 billion in the quarter, compared with a reported loss of $2.1 billion in the second quarter 2002.
Second quarter 2003 special items totaled $1.6 billion, or 56 cents per share. The components were charges of: $0.9 billion, or 33 cents per share, as a result of Verizon's decision to sell its consolidated interest in Grupo Iusacell; $0.4 billion, or 16 cents per share, for severance, pension and other benefits, including costs associated with a July 10 labor arbitration ruling; and $0.2 billion, or 7 cents per share, related to other special items, such as the early redemption of debt.
Excluding these items, Verizon's second-quarter earnings were $1.9 billion, or 69 cents per share.
Verizon's second-quarter results reflect the reclassification of Iusacell to discontinued operations in the current and prior periods, as a result of the decision to sell Iusacell. As announced July 1, the results for Verizon's directory publishing unit since the beginning of the year are being reported using the amortization method of accounting.
Verizon reported operating revenues of $16.8 billion for the quarter, a 0.5 percent increase from the second quarter 2002. However, last year's second quarter included $246 million in revenue generated by 1.27 million switched access lines that Verizon has since sold. Excluding the effect of these access line sales, revenues increased 2.0 percent in the second quarter 2003. Growth rates of both reported revenues and revenues excluding the effects of the access line sales include $101 million attributable to the change in directory accounting, since the amortization method more evenly distributes revenues and expenses for Verizon's directory unit this year compared with last year.
Verizon Wireless' second-quarter consolidated operating revenues include a double-digit, year-over-year increase for the fourth consecutive quarter. Verizon Wireless total revenues grew 14.3 percent to $5.5 billion, from $4.8 billion in the second quarter of 2002. Service revenues grew 14.7 percent, to $5.0 billion, compared with the second quarter of 2002.
Domestic Telecom reported quarterly revenues for all long-distance services of $0.9 billion, a growth rate of 17.2 percent, compared with the second quarter 2002. A significant component of this total, interLATA long-distance revenue, grew at a 27 percent rate. Domestic Telecom's overall total operating revenues declined 3.4 percent compared with second quarter 2002, to $9.9 billion in the second quarter 2003.
While the mix of Verizon's consolidated revenues has shifted, the company continued to maintain margins (as defined in the accompanying financial schedules) in the second quarter 2003. Margins were 41.2 percent in this year's second quarter, compared with 41.4 percent in last year's second quarter.
Expenses and Cash Flow
Verizon reported operating expenses of $14.1 billion in the second quarter 2003, virtually flat compared with the second quarter 2002. On a comparable basis, operating expenses increased 4.6 percent in the second quarter 2003, driven by significantly lower pension income net of other post-retirement benefit costs. The expenses for the comparable quarter of the prior year included a $374 million net expense credit associated with pensions and post-retirement benefits, compared with a $72 million net expense credit for the second quarter 2003.
Verizon's free cash flow was $3.6 billion for the first six months of 2003, compared with $2.0 billion in the same period last year. Cash from operations was $11.0 billion through the first six months of 2003, compared with $10.1 billion through the first six months of 2002.
Verizon CEO Ivan Seidenberg said, "Our second-quarter results are strong and sustainable. This is underscored by Verizon Wireless' continued industry-leading financial and operational results, and Verizon's continued strong growth in selling bundled packages of local, long-distance and broadband services.
"We have demonstrated our ability to retain share in traditional markets and capture share in new markets," Seidenberg added. "We are making efficient use of our advanced network capabilities, and combining that with a focus on customer service, innovation and operational excellence. Our cash flow continues to be excellent, and we have made the necessary investments to maintain margins and to retain and capture market share in the future."
Seidenberg reiterated Verizon's 2003 guidance of $2.70 to $2.80 in adjusted EPS, 0 to 2 percent comparable revenue growth, and $12.5 billion to $13.5 billion in capital expenditures. Also, Verizon is now targeting a further $3 billion to $4 billion reduction in net debt -- from a range of $49 billion to $51 billion, to $46 billion to $47 billion -- based on continued strong operational performance, the use of proceeds from non-strategic asset sales and the deconsolidation of Iusacell's $0.8 billion debt.
In second quarter 2003, net debt was reduced to $48.1 billion, from $51.8 billion at year-end 2002. Total debt was $48.9 billion at the end of the second quarter 2003, reduced from $53.3 billion at year-end 2002.
Verizon also announced that Verizon Wireless expects a total of more than 4 million net retail customer additions in 2003.
Business Segment Highlights
(Note: Current and prior periods exclude the effects of access lines sold in 2002.)
The company indicated that bargaining to renew the labor contracts that expire at midnight on Aug. 2 continues. These labor contracts affect more than 78,000 Domestic Telecom employees in Northeast and mid-Atlantic states. While the range of issues in these negotiations reflects complex marketplace realities, the company is hopeful that new contracts can be negotiated by the contract deadline. In the event an agreement is not reached on time, Verizon said it has contingency plans in place to provide the necessary customer service and operational support.
Regarding second quarter 2003 highlights, Domestic Telecom reported a 36.1 percent year-over-year increase in long-distance lines served. Verizon, the nation's third largest long-distance carrier for consumers, served 14.6 million long-distance lines at the end of the second quarter 2003, an increase of 1.4 million lines in the quarter. More than 58 percent of these lines are in states where Verizon has obtained long-distance authorization over the past three and a half years.
During the second quarter 2003, Verizon Freedom plans were launched for consumers in Maryland, West Virginia, California, Texas and Washington, D.C. -- and similar plans for businesses were launched in Massachusetts and New York. Verizon Freedom plans, introduced last summer, continue to 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.
Nearly 24 percent of Verizon consumers now subscribe to a package of Verizon services, including either local service plus enhanced calling features or local service plus broadband, long distance or wireless services.
Other Domestic Telecom second-quarter highlights include:
- Billed DSL service grew to a total of 1.9 million lines, up 101,000 since last quarter. Approximately 67 percent of Verizon's 56.8 million access lines are qualified to receive DSL service. As previously announced, the company expects to qualify 80 percent of its access lines by year-end through the continued deployment of DSL technology.
- Voice-grade access line equivalents (access lines plus equivalent data circuits) grew to
137.6 million, up 3.6 percent compared with the second quarter 2002.
- Total revenues for high-capacity and digital-data services were $1.8 billion in the second quarter, down slightly from the year-earlier period, with increased demand for high-speed services such as ATM, Frame Relay, SONET and DSL, offset by a lessened demand for low-speed services.
- Building on the company's presence in two-thirds of the nation's top 100 markets, Verizon has signed approximately 500 contracts with large-business customers as part of its Enterprise Advance initiative launched in the fourth quarter 2002. Offerings include advanced data networking, such as Gigabit Ethernet and Dense Wave Division Multiplexing, which Verizon now provides on a nationwide basis since gaining all necessary long-distance approvals earlier this year.
In the second quarter 2003, Verizon Wireless continued its consistent, industry-leading performance, delivering strong profitability, strong ARPU (average revenue per user) and strong customer growth in the quarter. Retail gross additions were up 3.5 percent over the prior year. The total number of customers grew 14.2 percent, while churn levels were the lowest in the company's history.
The retail customer base grew 15 percent year over year, and represented more than 96 percent of the base, or 33.4 million of the company's 34.6 million total customers, at the end of the quarter. Retail net customer additions in the quarter -- up more than 10 percent over the second quarter 2002 -- were 1.2 million of the company's approximately 1.3 million net additions.
Retail churn, as well as total churn for both retail and reseller, was 1.7 percent. The retail post-pay segment -- which is more than 90 percent of the company's base -- had a churn rate of 1.4 percent for the second quarter.
Other Verizon Wireless highlights include:
- Average monthly service revenue per subscriber was more than $49, up 1.2 percent over the prior-year quarter and up more than $2 over the first quarter 2003.
- The company's low-cost structure continued to lead the industry, as cash expense per subscriber increased only 1.2 percent over the prior-year quarter, even with the record volume of new subscribers. The percentage of operating income before depreciation and amortization, divided by service revenues, remained strong at 38.7 percent.
- Quarterly operating income before depreciation and amortization increased 14.5 percent year over year to $1.9 billion.
- Virtually all of the company's national network, the most extensive in the country, is now equipped with Express Network 1XRTT service, providing higher data speeds and improved efficiency of spectrum use to accommodate growth in overall usage as well as in popular data services. The network now is poised for the company's launch of EVDO, which will enable the next generation of higher data speeds, in two cities this fall.
- Demand for the company's data and text services continued to build in the quarter. Text messaging grew to more than 300 million billed text messages a month, and 1.4 billion in the first half of this year. Usage on the company's Express Network has significantly increased over the preceding quarter. And the company's Get It Nowsm BREW-based downloadable ringtones, games and exclusive content grew to 2.5 million revenue-generating downloads a month and 170 unique applications.
- The company continued to strengthen its position in the business market segment and now serves 70 percent of Fortune 100 companies and half of the Fortune 500, with nearly 25 percent of the wireless business market share. Driving this growth is the expanding suite of Wireless Office services launched earlier this year for voice tools, data access and customized solutions for the latest PDA, laptop and Blackberry devices on the company's national 1XRTT Express Network.
- The company launched its easy-to-use picture messaging service for sending photos, with text and voice recordings added, to other Verizon Wireless handsets, or to any e-mail address. The service is available on the company's LG VX 6000 handset, one of the only camera phones in the market with a zoom control feature.
- Leading the industry on the issue of Wireless Local Number Portability (WLNP), the company announced plans for consumer-friendly porting of phone numbers when WLNP takes effect in November. The company called on the rest of the industry to adopt its plan and the Federal Communications Commission to issue its stamp of approval.
(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) revenues for the second quarter 2003 increased
12.1 percent compared with the same period last year, and operating income before depreciation and amortization for the second quarter 2003 increased 15 percent over 2002. These growth rates primarily reflect the accounting change mentioned above, as well as VIS' commitment to cost containment through process improvement and system consolidation.
- VIS' electronic product, SuperPages.comTM, continues to achieve strong domestic growth, as demonstrated by a 37 percent increase in revenue and a 25 percent increase in searches, when comparing the second quarter 2003 with the second quarter 2002.
- Second-quarter revenues were $509 million, compared with $570 million in the second quarter 2002. The revenue decline was largely the result of declining foreign exchange rates in the Dominican Republic.
- Verizon continued to see strong International wireless subscriber growth, as the total number of wireless subscribers served by Verizon's International investments increased nearly 3 million compared with second quarter 2002, representing a 10.1 percent growth rate.
NOTE: The financial tables associated with this news release can be found on Verizon's Investor Web.
A Fortune 10 company, 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 137.6 million access line equivalents and
34.6 million Verizon Wireless customers. Verizon is the third largest long-distance carrier for U.S. consumers, with 14.6 million long-distance lines, and the company is also the largest directory publisher in the world, as measured by directory titles and circulation. With approximately $67 billion in annual revenues and 221,000 employees, Verizon's global presence extends to the Americas, Europe and Asia. For more information on Verizon, 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 or labor conditions, including 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.