Verizon delivers continued earnings and operational growth in 1Q

Strong results demonstrate ability to compete effectively as company remains focused on network leadership and developing new markets

1Q 2016 highlights

(PDF of financial tables)

• Consolidated: $1.06 in earnings per share (EPS), compared with $1.02 per share in 1Q 2015.
• Wireless: 640,000 retail postpaid net additions; continued low 0.96 percent retail postpaid churn.
• Wireline: 5.0 percent Fios revenue growth; 98,000 Fios internet and 36,000 Fios video net additions.

NEW YORK – As Verizon Communications Inc. (NYSE, Nasdaq: VZ) continues to grow its customer base and gain revenues in new markets, the company today reported first-quarter 2016 earnings of $1.06 per share, an increase of 3.9 percent compared with first-quarter 2015.

 “Verizon’s strong first-quarter results demonstrate our capacity to compete effectively, while executing on our plan of continued network leadership and seeding new growth markets in mobile video and the Internet of Things,” said Chairman and CEO Lowell McAdam.

Since the beginning of the year, Verizon has moved to strengthen America’s best networks by announcing its intention to acquire XO Communications’ fiber-optic network business and an agreement to deploy a new fiber platform in Boston. Both will support a mix of new technologies, including 5G wireless services.

Verizon also completed its sale of local landline businesses in California, Florida and Texas on April 1. The company used the proceeds to pay down debt in second-quarter 2016. In addition, Verizon recently announced plans to expand its video platform by adding unique content from Hearst and AwesomenessTV, and through a joint venture with Hearst to acquire Complex Media.

Consolidated results

• Total operating revenues in first-quarter 2016 were $32.2 billion, a 0.6 percent increase compared with first-quarter 2015. Excluding AOL (non-GAAP), which was not part of Verizon a year ago, total operating revenues declined 1.5 percent. AOL had its highest first-quarter revenues in the last five years.
• New revenue streams from IoT (Internet of Things) are growing, with revenues of approximately $195 million in first-quarter 2016, a year-over-year increase of about 25 percent.
• Cash flows from operating activities totaled $7.4 billion in first-quarter 2016. This compares with $10.2 billion in last year’s first quarter, which included $2.4 billion related to a one-time transaction to monetize wireless tower assets. With capital expenditures totaling $3.4 billion in first-quarter 2016, free cash flow (non-GAAP, cash flow from operations less capital expenditures) totaled $4.0 billion. Verizon continues to anticipate consolidated capital expenditures of between $17.2 billion and $17.7 billion in 2016.
• Operating income was $7.9 billion, and operating income margin was 24.7 percent. Consistent with last year’s first quarter, EBITDA (non-GAAP, earnings before interest, taxes, depreciation and amortization) totaled $12.0 billion and the consolidated EBITDA margin (non-GAAP) was 37.2 percent in first-quarter 2016.

Verizon Wireless posts another quarter of profitable growth

In first-quarter 2016, Verizon Wireless posted a balance of quality connections growth and margin expansion.

Wireless highlights

• Verizon reported 640,000 retail postpaid net additions in first-quarter 2016, a seasonally low-volume quarter. These net adds exclude all wholesale connections, including IoT. At the end of first-quarter 2016, Verizon had 112.6 million retail connections, a 3.7 percent year-over-year increase, and 107.2 million retail postpaid connections, a 4.4 percent year-over-year increase.
• Customer retention remained high, with retail postpaid churn at a low 0.96 percent in first-quarter 2016, a year-over-year improvement of 7 basis points.
• Segment operating income was $7.9 billion, and segment operating income margin was 35.8 percent. In first-quarter 2016, Verizon Wireless generated $10.2 billion in EBITDA (non-GAAP), a year-over-year increase of 1.7 percent. Segment EBITDA margin (non-GAAP) was 46.2 percent, compared with 44.8 percent in first-quarter 2015.
• Total revenues were $22.0 billion in first-quarter 2016, a decline of 1.5 percent compared with first-quarter 2015 as more customers continued to choose unsubsidized device payment plans. Service revenues plus installment billings increased 1.6 percent, comparing first-quarter 2016 with first-quarter 2015.
• The percentage of phone activations on installment plans grew to 68 percent in first-quarter 2016, compared with 67 percent in fourth-quarter 2015. The company expects this percentage to grow to 70 percent in second-quarter 2016. About 48 percent of postpaid phone customers are on an unsubsidized pricing plan, and service revenue declines are expected to flatten when this base exceeds 50 percent. Verizon expects the decline in service revenues to slow throughout the year and ultimately turn positive by the end of 2017.
• The composition of the 640,000 retail postpaid net adds was strong: Verizon added 452,000 4G smartphones to its postpaid base in first-quarter 2016. Due to declines in 3G and basic phones, postpaid phone net adds were a negative 8,000. Tablet net adds totaled 507,000 in the quarter.
• Verizon ended first-quarter 2016 with a total of 73.8 million smartphones. This is 85 percent of the total phone base, with 4G devices more than 81 percent of the retail postpaid connections base.
• Growth in 4G device adoption is driving increased data and video usage. Approximately 92 percent of Verizon’s total data traffic is on the LTE network. Overall data traffic on LTE has increased by approximately 50 percent year over year.
• Wireless capital expenditures totaled $2.2 billion in first-quarter 2016 and are expected to ramp up throughout the year.

Fios remains the growth driver in wireline segment

In the wireline segment, Fios fiber-optic-based services remain the driver of revenue growth and now represent about 81 percent of consumer revenues.

Wireline highlights

• Verizon added 98,000 net new Fios internet connections and 36,000 net new Fios video connections in first-quarter 2016. Total Fios revenues grew 5.0 percent, to $3.5 billion, comparing first-quarter 2016 with first-quarter 2015, including consumer Fios revenue growth of 4.7 percent.
• In first-quarter 2016, consumer revenues were $4.0 billion, an increase of 0.8 percent compared with first-quarter 2015.
• Segment operating income was $0.6 billion, and segment operating income margin was 6.3 percent. In first-quarter 2016, wireline generated $2.2 billion in EBITDA (non-GAAP), a year-over-year increase of 1.2 percent. Segment EBITDA margin (non-GAAP) was 23.4 percent, compared with 22.7 percent in first-quarter 2015.
• By the end of first-quarter 2016, about 78 percent of consumer Fios internet customers subscribed to data speeds of 50 megabits per second or higher. Customer demand remained strong for Custom TV, which represented about 38 percent of Fios video sales in the quarter.
• During the first quarter, Verizon Enterprise Solutions entered into new agreements with or began servicing a number of clients, including 1-800-Flowers, the Commonwealth of Virginia, Dana Holding Corporation, the Florida Sheriffs Association, Promeditec, PSE&G, South Australia Health & Medical Research Institute, and Wyndham Worldwide.

Details of non-operational items and other impacts

Verizon’s first-quarter 2016 earnings of $1.06 per share included a non-cash pre-tax loss of $165 million for a pension mark-to-market adjustment. Verizon expects settlement accounting to impact each of the remaining quarters in 2016. Additionally, the company recognized a pre-tax gain of $142 million on a spectrum license transaction.

On an after-tax basis, the loss on settlement accounting and the gain on the spectrum transaction each amounted to approximately 2 cents per share, effectively offsetting each other in first-quarter 2016. For comparability, there were no special items of a non-operational nature in first-quarter 2015.

Wireline results for first-quarter 2016 included the operations sold to Frontier on April 1. Verizon recognized a full-quarter benefit of about 3 cents per share due to these assets being classified as held for sale in first-quarter 2016, compared with 2 cents per share recognized in first-quarter 2015.

For illustrative purposes on a preliminary basis, excluding operations sold to Frontier, recast total wireline revenues (non-GAAP) were approximately $8.0 billion in first-quarter 2016. This is comparable to first-quarter 2015. Recast wireline segment EBITDA margin (non-GAAP) for first-quarter 2016 was approximately 19 percent without these operations, which were more profitable than the remaining properties.

Verizon will provide nine quarters of historical financials for the wireline segment, excluding these properties, later in second-quarter 2016.

In early April 2016, Verizon used proceeds from the Frontier transaction together with cash on hand to complete tender offers and early redemptions for $10.7 billion in debt, which enabled the company to retire higher-cost debt and achieve lower borrowing costs. Verizon reiterates that by 2018-2019 the company expects to return to its credit-rating profile prior to the acquisition of Vodafone’s indirect 45 percent interest in Verizon Wireless in early 2014.

Earnings outlook

Verizon continues to expect full-year 2016 adjusted earnings to be at a level comparable to the company’s strong full-year 2015 adjusted earnings. However, given the status of labor contract negotiations, there will be pressure on second-quarter earnings due to the timing of cost reductions.

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.

Forward-looking statements

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.