Verizon Delivers Double-Digit Adjusted Earnings Growth and Strong Cash Flows in Second Quarter
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2Q 2015 HIGHLIGHTS
(PDF of Financial Tables)
- $1.04 in earnings per share (EPS), compared with $1.01 per share and 91 cents in adjusted EPS (non-GAAP) in 2Q 2014.
- 1.1 million net retail postpaid connections added in the quarter; retail postpaid churn of 0.90 percent, the lowest in three years; 109.5 million total retail connections; 103.7 million total retail postpaid connections.
- 5.3 percent year-over-year increase in total revenues; 34.0 percent operating income margin.
- 56.1 percent segment EBITDA margin on service revenues (non-GAAP), and 43.9 percent segment EBITDA margin on total revenues (non-GAAP).
- 10.0 percent year-over-year increase in FiOS revenues; 72,000 FiOS Internet and 26,000 FiOS Video net additions.
- 4.5 percent year-over-year increase in consumer revenues.
NEW YORK – Reporting second-quarter 2015 results today, Verizon Communications Inc. (NYSE, Nasdaq: VZ) announced double-digit percentage growth in year-over-year quarterly earnings on an adjusted basis (non-GAAP) and continued strong cash flows.
“Verizon has delivered another quarter of strong financial and operational results, based on consistent network reliability and superior value that continues to attract new customers,” said Chairman and CEO Lowell McAdam. “In the second quarter, we again balanced quality Verizon Wireless connections growth with low churn and profitability, and we announced and completed our acquisition of AOL. We’re now poised to offer customers exciting new over-the-top (OTT) mobile video services, and we look forward to a very positive second half of 2015.”
The company reported $1.04 in EPS in second-quarter 2015, compared with $1.01 per share in second-quarter 2014.
There were no non-operational adjustments to second-quarter 2015 per-share results; second-quarter-2014 results included a 10-cent-per-share non-operational gain related to the sale of spectrum licenses.
Second-quarter 2015 earnings of $1.04 per share compares with 91 cents per share in adjusted EPS (non-GAAP) in second-quarter 2014 – an increase of 14.3 percent.
Consolidated Revenue Growth, Strong Cash Flow
On a consolidated basis, Verizon generated top-line revenue growth driven by wireless and FiOS, with emerging revenue streams from the Internet of Things (IoT) and telematics, and continued strong cash flow.
- Total operating revenues in second-quarter 2015 were $32.2 billion, a 2.4 percent increase compared with second-quarter 2014. Excluding second-quarter 2014 revenues from a business that has since been sold, the comparable year-over-year growth rate (non-GAAP) would have been 2.8 percent.
- New revenue streams from IoT and telematics totaled approximately $165 million in second-quarter 2015 and about $320 million year to date.
- Cash flow from operating activities increased to $18.9 billion in first-half 2015, compared with $14.8 billion in first-half 2014. This year’s cash flow has included a non-recurring $2.4 billion related to the monetization of tower assets in the first quarter.
- Excluding the tower-transaction impact, free cash flow (non-GAAP, cash flow from operations less capital expenditures) totaled $8.4 billion in first-half 2015. Verizon continues to expect full-year 2015 capital expenditures to range between $17.5 billion and $18.0 billion.
In second-quarter 2015, Verizon announced and completed the acquisition of AOL Inc. to further drive the company’s expansion into digital media, including its OTT mobile video strategy. This acquisition closed June 23, and Verizon’s balance sheet at the end of the quarter includes the assets and liabilities of AOL. Verizon’s second-quarter income statement does not reflect any results from AOL operations since these were immaterial for the last seven days of the quarter. AOL financial results will be fully included in Verizon’s third-quarter 2015 results.
Verizon’s $5 billion accelerated share repurchase program was completed in early June, resulting in an overall reduction of 101.6 million shares.
Verizon CFO Fran Shammo said, “We are committed to building the business for future growth. In the first half of this year, we invested approximately $18 billion in spectrum licenses and capital for future network capacity. We also invested more than $4 billion to acquire new capabilities with the AOL transaction, which supports our longer-term video strategy. In addition, we returned more than $9 billion to our shareholders in the form of dividends and share repurchases. Meanwhile, we’ve kept our leverage ratio essentially unchanged, and we remain on track with our deleveraging plan.”
Regarding consolidated revenue outlook, Verizon expects a higher year-over-year growth rate in third-quarter 2015 than in second-quarter 2015. For the full year, the company estimates consolidated revenue growth of at least 3.0 percent. These growth estimates exclude revenue from AOL.
Verizon Wireless Delivers Quality Customer Growth and Profitability
In second-quarter 2015, Verizon Wireless continued to deliver quality connections growth, low churn and strong profitability.
Wireless Financial Highlights
- Total revenues were $22.6 billion in second-quarter 2015, up 5.3 percent year over year. Service revenues totaled $17.7 billion, down 2.2 percent year over year, while equipment revenues increased to $3.9 billion in second-quarter 2015 from $2.4 billion in second-quarter 2014 as more customers chose to buy new devices with installment pricing.
- Service revenues plus installment billings increased 2.3 percent year over year. The percentage of phone activations on installment plans was about 49 percent in second-quarter 2015, compared with 39 percent in first-quarter 2015 and only 18 percent in second-quarter 2014. Verizon expects the percentage of phone activations on installment plans to continue to increase and will likely be around 60 percent in third-quarter 2015.
- In second-quarter 2015, wireless operating income margin was 34.0 percent, up from 32.5 percent in second-quarter 2014. Segment EBITDA margin on service revenues was 56.1 percent, compared with 50.3 percent in second-quarter 2014. Segment EBITDA margin on total revenues was 43.9 percent, compared with 42.3 percent in second-quarter 2014.
Wireless Operational Highlights
- Verizon Wireless had 1.1 million retail postpaid net additions in second-quarter 2015, nearly twice the net additions in first-quarter 2015. At the end of second-quarter 2015, the company had 109.5 million retail connections, a 4.7 percent year-over-year increase, and 103.7 million retail postpaid connections, a 5.2 percent year-over-year increase. These totals do not include wholesale or IoT connections.
- The quality of the net additions remained strong: Verizon added 842,000 4G smartphones to its postpaid customer base in second-quarter 2015. Postpaid phone net adds totaled 321,000 as net smartphone adds of 588,000 were partially offset by a net decline of 266,000 basic phones. Tablet net adds totaled 852,000 in the quarter, and net prepaid devices declined by 126,000.
- 4G devices now constitute approximately 73 percent of the retail postpaid connections base, with the LTE network handling about 87 percent of total wireless data traffic in second-quarter 2015. Overall traffic on LTE has essentially doubled in the past year.
- About 7.2 percent of Verizon’s retail postpaid base upgraded to a new device in second-quarter 2015. In the past year, the number of 4G smartphones in Verizon’s customer base has increased by 17.8 million, to 61.6 million, an increase of about 40 percent. The company continues to see opportunities to upgrade its base of about 16 million basic phone and 9 million 3G smartphone customers to 4G devices.
- At 0.90 percent in second-quarter 2015, retail postpaid churn improved both sequentially and year over year. Low churn is an indicator of high customer loyalty, and this was Verizon’s lowest churn rate in three years.
- Verizon’s network densification plans are on schedule. These plans include deployment of small cells, DAS (distributed antenna system) nodes and in-building solutions.
Wireline Consumer Revenue Growth Driven by FiOS
In the wireline segment, Verizon reported continued strong revenue growth for consumer services.
Wireline Financial Highlights
- In second-quarter 2015, consumer revenues were $4.0 billion, an increase of 4.5 percent compared with second-quarter 2014. Consumer revenues have now grown by at least 4 percent for 12 consecutive quarters, with FiOS revenues representing 79 percent of the total.
- Total FiOS revenues grew 10.0 percent, to $3.4 billion, comparing second-quarter 2015 with second-quarter 2014.
- Wireline operating income margin was 5.3 percent in second-quarter 2015, up from 2.6 percent in second-quarter 2014. Segment EBITDA margin (non-GAAP) was 23.5 percent in second-quarter 2015, compared with 23.4 percent in second-quarter 2014.
Wireline Operational Highlights
- In second-quarter 2015, Verizon added 72,000 net new FiOS Internet connections and 26,000 net new FiOS Video connections. Verizon had totals of 6.8 million FiOS Internet and 5.8 million FiOS Video connections at the end of the second quarter, representing year-over-year increases of 8.1 percent and 6.4 percent, respectively.
- FiOS Internet penetration (subscribers as a percentage of potential subscribers) was 41.4 percent at the end of second-quarter 2015, compared with 40.1 percent at the end of second-quarter 2014. In the same periods, FiOS Video penetration was 35.7 percent, compared with 35.3 percent.
- Verizon saw higher-than-anticipated demand for its new Custom TV packages, with more than one-third of FiOS Video gross customer additions opting for Custom TV and migration demand from existing customers. While Custom TV adoption has an initial negative impact on revenue growth, it is expected to improve profitability.
- By the end of second-quarter 2015, 64 percent of consumer FiOS Internet customers subscribed to FiOS Quantum, which provides speeds ranging from 50 to 500 megabits per second. The highest rate of growth is in the 75-megabit-per-second tier, to which 23 percent of FiOS customers subscribe.
- Evolving its wireline network, Verizon continues to replace portions of its residential copper network with fiber optics to provide customers with a more reliable and resilient infrastructure. In second-quarter 2015, Verizon migrated 51,000 customers who had been using copper connections, toward a full-year goal of 200,000.
- Verizon Enterprise Solutions helped clients around the globe manage risk, improve customer experience, and drive growth and business performance in the second quarter. The company deployed innovative enterprise-grade network, cloud, security, IoT, mobility and other business solutions for some of the world’s leading brands, including Scripps Networks Interactive, Lear Corporation, CDK Global, Inc., Aurubis and Allstate; energy clients Marathon Petroleum Corporation, Peninsula Lighting Company and PSE&G; healthcare clients Bright! Now Dental, Inovalon and Moda Health; and public sector clients U.S. Department of the Interior and the State of California.
Wireline results include operations being sold to Frontier Communications Corp. in the non-contiguous states of California, Florida and Texas. This is part of Verizon’s network evolution, to better enable the company to focus wireline efforts on the East Coast. Verizon’s consolidated balance sheet will reflect these operations as assets held for sale until the transaction’s closing, targeted for first-half 2016.
NOTE: See the accompanying schedules and www.verizon.com/about/investors for reconciliations to generally accepted accounting principles (GAAP) for non-GAAP financial measures cited in this document.
In this communication we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. 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, along with those discussed in our filings with the Securities and Exchange Commission (the “SEC”), could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements: adverse conditions in the U.S. and international economies; the effects of competition in the markets in which we operate; material changes in technology or technology substitution; disruption of our key suppliers’ provisioning of products or services; changes in the regulatory environment in which we operate, including any increase in restrictions on our ability to operate our networks; breaches of network or information technology security, natural disasters, terrorist attacks or acts of war or significant litigation and any resulting financial impact not covered by insurance; our high level of indebtedness; an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations or adverse conditions in the credit markets affecting the cost, including interest rates, and/or availability of further financing; material adverse changes in labor matters, including labor negotiations, and any resulting financial and/or operational impact; significant increases in benefit plan costs or lower investment returns on plan assets; changes in tax laws or treaties, or in their interpretation; changes in 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; and the inability to implement our business strategies.