Verizon reports 2Q results, reflecting continued strong operations while advancing key strategic and financial initiatives
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2Q 2016 highlights
- Consolidated: 17 cents in earnings per share (EPS); adjusted EPS (non-GAAP) of 94 cents, excluding significant non-operational items related to pension and benefit re-measurements and early debt redemption and tender offers, and a gain on sale of local landline businesses
- Wireless: 615,000 retail postpaid net additions; continued low 0.94 percent retail postpaid churn.
- Wireline: 3.7 percent Fios revenue growth; $500 million in anticipated cash savings over the term of new labor contracts.
NEW YORK – Verizon Communications Inc. (NYSE, Nasdaq: VZ) today reported second-quarter earnings reflecting strong profitability and customer retention at Verizon Wireless, a repositioning of the wireline network footprint and cost structure, and scaling of new growth markets in mobile video and the Internet of Things (IoT).
Second-quarter 2016 EPS of 17 cents compared with $1.04 per share in second-quarter 2015. Adjusted second-quarter 2016 earnings (non-GAAP) of 94 cents per share excluded significant non-operational items related to mark-to-market pension and benefit re-measurements, early debt redemption and tender offers, and a gain from the sale of local landline businesses. Also, earnings were negatively impacted by about 7 cents per share in second-quarter 2016 by a seven-week work stoppage in wireline.
“Verizon’s second quarter shows that the company continues to deliver strong results while evolving operations and advancing a strategy to sustain network leadership, build new ecosystems and deliver the promise of the digital world to customers”
Chairman and CEO Lowell McAdam
In first-half 2016, Verizon Wireless added a net of 1.3 million postpaid connections, while stabilizing wireless service revenue declines, maintaining strong customer retention, densifying networks in major markets and advancing 5G deployment. Verizon also completed the sale of local landline businesses in three states, and it negotiated new labor contracts that will generate approximately $500 million in cash savings over the term of the contracts.
During second-quarter 2016, Verizon converted its go90 application to the AOL platform, supporting the ability to expand and monetize mobile video offerings. In June the company also announced an agreement to acquire Telogis to expand its global telematics offerings.
Yesterday, Verizon announced it had entered into a definitive agreement to acquire Yahoo’s operating business for approximately $4.8 billion, in a transaction expected to close in first-quarter 2017.
McAdam said, “By acquiring Yahoo, we are scaling up to be a major competitor in mobile media. Yahoo is a complementary business to AOL, giving us market-leading content brands and a valuable portfolio of online properties and mobile applications that attract over 1 billion monthly active consumer views. We expect this acquisition to put us in a great position as a top global mobile media company and give us a significant source of revenue growth for the future.”
Total operating revenues in second-quarter 2016 were $30.5 billion, a 5.3 percent decrease compared with second-quarter 2015. Excluding second-quarter 2015 revenues from divested local landline businesses and second-quarter 2016 revenues from AOL, which was not part of Verizon a year ago, total operating revenues on a comparable basis (non-GAAP) would have declined 3.5 percent year over year. AOL delivered strong revenue growth in second-quarter 2016.
- New revenue streams from IoT continue to grow, with revenues of approximately $205 million in second-quarter 2016, a year-over-year increase of about 25 percent.
- Cash flows from operating activities totaled $5.4 billion in second-quarter 2016. The total of $12.8 billion through first-half 2016 is down $6.1 billion from first-half 2015, driven by a one-time $2.4 billion benefit related to a transaction to monetize wireless tower assets in 2015, a change in Verizon’s method of monetizing device payment plan receivables and an increase in cash taxes in 2016.
- In second-quarter 2016, Verizon strengthened its balance sheet by executing tender offers and early redemptions to repay approximately $10.7 billion in debt.
- Operating income was $4.6 billion in second-quarter 2016, and operating income margin was 14.9 percent. Net income was $0.9 billion in second-quarter 2016. EBITDA (non-GAAP, earnings before interest, taxes, depreciation and amortization) totaled $8.5 billion and the consolidated EBITDA margin (non-GAAP) was 28.0 percent in second-quarter 2016.
Verizon Wireless highlights
Verizon reported 615,000 retail postpaid net additions in second-quarter 2016. These net adds exclude wholesale device and wholesale IoT connections. At the end of second-quarter 2016, Verizon had 113.2 million retail connections, a 3.3 percent year-over-year increase. Verizon’s industry-leading retail postpaid connections base grew 3.9 percent to 107.8 million, and prepaid connections totaled 5.4 million.
- Customer retention remained at industry-leading levels, with retail postpaid churn at a low 0.94 percent in second-quarter 2016, a year-over-year increase of 4 basis points, as strong retention in the phone base was offset by increased churn in tablets.
- Segment operating income was $8.0 billion, and segment operating income margin was 36.9 percent. In second-quarter 2016, Verizon Wireless generated $10.3 billion in segment EBITDA (non-GAAP), a year-over-year increase of 3.8 percent. Segment EBITDA margin (non-GAAP) was 47.5 percent, compared with 43.9 percent in second-quarter 2015.
- Total revenues were $21.7 billion in second-quarter 2016, a decline of 4.0 percent compared with second-quarter 2015, as more customers continued to choose unsubsidized device payment plans. Service revenues plus device payment plan billings increased 2.3 percent, to $19.1 billion, comparing second-quarter 2016 with second-quarter 2015.
- The percentage of phone activations on device payment plans was 67 percent in second-quarter 2016, compared with 68 percent in first-quarter 2016. The company expects this percentage to remain consistent with recent experience. About 53 percent of postpaid phone customers are on an unsubsidized pricing plan, compared with 48 percent in first-quarter 2016, which has flattened service revenue declines. Verizon Wireless is on track to exit 2017 with positive growth in service revenue.
- At the end of second-quarter 2016, Verizon Wireless had a total of about 31.8 million device payment plan phone connections, representing about 37 percent of the postpaid phone base.
- The composition of the 615,000 retail postpaid net adds was strong: Verizon added 462,000 4G smartphones to its postpaid base in second-quarter 2016. Net phone additions increased sequentially to 86,000, as the net gain in 4G phones was offset by a net decline in basic and 3G phones. Tablet net adds totaled 356,000 in the quarter. Net prepaid devices declined by 30,000, a significant improvement sequentially and year over year, primarily due to new prepaid pricing plans.
- Verizon ended second-quarter 2016 with a total of 74.6 million smartphone connections. This is about 86 percent of the total phone base, with 4G devices at 82.5 percent of the retail postpaid connections base.
- Growth in 4G device adoption continues to drive increased data and video usage. Approximately 93 percent of Verizon’s total data traffic is on the LTE network. Overall data traffic on LTE has increased by about 44 percent year over year.
Total revenues for Fios fiber-optic-based services grew 3.7 percent, to $2.8 billion, comparing second-quarter 2016 with second-quarter 2015. The work stoppage impacted Fios connection growth, resulting in net declines of 13,000 Fios internet connections and 41,000 Fios video connections in second-quarter 2016. Verizon made significant progress in working through a backlog of Fios installations in June and has since returned to its normal run rate of Fios connection growth.
- Fios revenue growth has been driven by a larger customer base and consumer demand for higher internet speeds. Approximately 11 percent of the company’s Fios internet base has opted for speeds of 100 megabits per second or higher. Customer demand remains strong for Custom TV, which represented nearly 40 percent of Fios video sales in second-quarter 2016.
- The work stoppage negatively impacted wireline operating income. The segment reported an operating loss of $463 million in second-quarter 2016 and operating margin of negative 5.9 percent, while generating $1.1 billion in segment EBITDA (non-GAAP), a year-over-year decrease of 26.5 percent. Segment EBITDA margin (non-GAAP) was 14.0 percent, compared with 18.7 percent in second-quarter 2015.
- Related to improving margins, Verizon made changes in its cost structure and expects benefits from the new labor contracts to be realized during the remainder of 2016 and into the future.
- During the second quarter, Verizon Enterprise Solutions entered into new agreements or began work with a number of clients, including American Automobile Association, Anthem, Bencom B.V., Catalent Pharma Solutions, Cisco, Ingles Markets, Inc., Kinder Morgan, L.L. Bean, McDermott Will & Emery, McGraw-Hill Global Education Holdings, LLC, SunSource, TeleTech and Tetra Tech.
Details of non-operational items and other impacts
Verizon’s second-quarter 2016 earnings of 17 cents per share included a non-cash after-tax loss of $2.2 billion, or 54 cents per share, generated by pension and other post-employment retirement benefits, primarily associated with a re-measurement triggered by the new labor contracts, the sale of local landline businesses to Frontier and settlement accounting.
On Verizon’s balance sheet, pension and employee benefit obligations were reduced by a net of $1.6 billion, driven primarily by actuarial valuations associated with new labor contracts and the Frontier transaction, which were partially offset by the mark-to-market re-measurements and assets transferred to Frontier. Year-to-date unfunded employee benefit obligations have been reduced by $1.9 billion.
Second-quarter 2016 EPS also includes non-operational expenses of $1.1 billion after taxes, or 27 cents per share, in connection with early debt redemption and tender offers. Additionally, Verizon recognized an after-tax gain of $139 million, or 3 cents per share, on the Frontier transaction.
There were no adjustments to second-quarter 2015 earnings.
Earnings outlook and forward-looking items.
Verizon expects the following:
- 2016 adjusted earnings to be at a level comparable to 2015, excluding the 7-cent-per-share impact of the 2016 work stoppage;
- Consolidated adjusted EBITDA margin consistent with full-year 2015;
- Consolidated capital spending between $17.2 billion and $17.7 billion;
- A minimum pension funding requirement of approximately $550 million in 2016;
- An effective tax rate for financial reporting purposes in the range of 35 percent to 36 percent;
- Growth in consolidated revenue for full-year 2017 consistent with GDP growth for that year; and
- A return, by 2018-2019, to the company’s credit-rating profile prior to the acquisition of Vodafone’s indirect 45 percent interest in Verizon Wireless in early 2014.
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.
Important Additional Information and Where to Find It
Yahoo! Inc. (“Yahoo”) will be filing with the Securities and Exchange Commission (the “SEC”) a proxy statement regarding the proposed sale of Yahoo’s operating business to Verizon Communications Inc. (“Verizon”) and related transactions, the definitive version of which will be sent or provided to Yahoo stockholders. BEFORE MAKING ANY VOTING DECISION, YAHOO’S STOCKHOLDERS ARE STRONGLY ADVISED TO READ YAHOO’S PROXY STATEMENT IN ITS ENTIRETY (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) WHEN IT BECOMES AVAILABLE AND ANY OTHER DOCUMENTS FILED WITH THE SEC IN CONNECTION WITH THE PROPOSED TRANSACTIONS OR INCORPORATED BY REFERENCE THEREIN BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTIONS. Investors and stockholders will be able to obtain (when available) a free copy of Yahoo’s proxy statement, any amendments or supplements to the proxy statement, and other documents filed by Yahoo with the SEC (when available) in connection with the proposed transactions for no charge at the SEC’s website at www.sec.gov, on the Investor Relations page of Yahoo’s website investor.yahoo.net or by writing to Investor Relations, Yahoo! Inc., 701 First Avenue, Sunnyvale, CA 94089.
Yahoo and its directors and executive officers, as well as Verizon and its directors and executive officers, may be deemed participants in the solicitation of proxies from Yahoo’s investors and stockholders in connection with the proposed transactions. Information concerning the ownership of Yahoo securities by Yahoo’s directors and executive officers is included in their SEC filings on Forms 3, 4 and 5, and additional information is also available in Yahoo’s annual report on Form 10-K for the year ended December 31, 2015, as amended, and Yahoo’s proxy statement for its 2016 annual meeting of stockholders filed with the SEC on May 23, 2016. Information about Verizon’s directors and executive officers is set forth in Verizon’s annual report on Form 10-K for the year ended December 31, 2015 and Verizon’s proxy statement for its 2016 annual meeting of stockholders filed with the SEC on March 21, 2016. Information regarding Yahoo’s directors, executive officers and other persons who may, under the rules of the SEC, be considered participants in the solicitation of proxies in connection with the proposed transactions, including their respective interests by security holdings or otherwise, also will be set forth in the definitive proxy statement relating to the proposed transactions when it is filed with the SEC. These documents may be obtained free of charge from the sources indicated above.