01—Abstract
Summary
Summary of the 10-K filed February 28, 2008. Cited figures are marked; the original filing is the authoritative source.
Verizon Communications (VZ) reported a solid 2007 with consolidated revenues of $93.5 billiona, up 6.0% year over year, and operating income of $15.6 billion, up 16.5%.
The operating income margin expanded to 16.7% from 15.2%, and net income available to common shareowners was $5.5 billionb, or $1.90 per diluted share, roughly flat with 2006 once the prior year's discontinued operations and the 2007 CANTV extraordinary loss are considered. Growth was driven almost entirely by Domestic Wireless (Verizon Wireless, 55% owned), where revenue rose 15.3% to $43.9 billion, the company added about 6.9 million retail customers to reach 63.7 million, and data revenue grew sharply. Wireline revenue was essentially flat at $50.3 billion (down 0.8%), as access-line losses of 7.6% offset gains in FiOS broadband and TV and strategic enterprise services.
For investors, the key tensions are the heavy minority-interest drag (about $5.1 billionc in 2007, mostly Vodafone's 45% stake in Verizon Wireless) and the effective tax rate, which rose to 42.0% from 32.8% largely because of a $610 million charge tied to Vodafone Omnitel distributions. Free cash flow from operations was solid, with cash from continuing operations of $26.3 billion against capital expenditures of $17.5 billion. Management guided 2008 capital spending lower than 2007, reduced total debt by $5.2 billion to $31.2 billion, and repurchased $2.8 billion of stock while raising the quarterly dividend 6.2% to $0.43.
The filing also flags structural risks. Cable operators are the largest competitive threat to the wireline business, wireless substitution and VoIP continue to erode voice lines, and the company faces ongoing regulatory proceedings and litigation, including class actions over alleged government surveillance cooperation. Pending transactions include the spin-off and merger of Maine, New Hampshire and Vermont access lines into FairPoint, expected around March 31, 2008, and the acquisition of Rural Cellular, expected to close in the first half of 2008.
02—Key points
Key Highlights
- Consolidated revenue rose 6.0% to $93.5 billion in 2007, driven by Domestic Wireless revenue growth of 15.3% to $43.9 billion.
- Operating income increased 16.5% to $15.6 billion, lifting the operating margin to 16.7% from 15.2% in 2006.
- Verizon Wireless added about 6.9 million retail customers, ending 2007 with 63.7 million retail and 65.7 million total customers; total data revenue grew 65% to roughly $7.3 billion in retail data.
- Wireline revenue fell 0.8% to $50.3 billion as access-line losses of 7.6% offset growth in FiOS (943,000 TV customers, 8.2 million broadband connections) and strategic enterprise services (up 25.7%).
- Net income available to common shareowners was $5.5 billion ($1.90 diluted EPS), held back by a 42.0% effective tax rate, a $131 million extraordinary loss on the CANTV nationalization, and $5.1 billion of minority interest expense.
- Operating cash flow from continuing operations was $26.3 billion; capital spending was $17.5 billion, with management guiding 2008 capex lower.
- Shareholder returns: $2.8 billion in buybacks in 2007, a new 100 million share authorization through February 2011, and a 6.2% dividend increase to $0.43 per quarter; total debt fell $5.2 billion to $31.2 billion.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2007, Verizon Communications Inc kept $0.06.
- Revenue$93.47B100.0%
- Cost of revenue−$37.55B40.2%
- Gross profit$55.92B59.8%
- Operating costs−$40.34B43.2%
- Operating income$15.58B16.7%
- Interest, other & tax−$10.06B10.8%
- Net income$5.52B5.9%
Where FY2007 revenue went
$93.47B- Cost of revenue: $37.55B, 40% of revenue
- SG&A: $25.97B, 28% of revenue
- Other operating costs: $14.38B, 15% of revenue
- Net income: $5.52B, 5.9% of revenue
- Interest, other & tax: $10.06B, 11% of revenue
Kept 5.9% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 28, 2008Financial Statements
| Revenue | $93.47B |
| Cost of Revenue | $37.55B |
| Gross Profit | $55.92B |
| SG&A Expenses | $25.97B |
| Operating Expenses | $77.89B |
| Operating Income | $15.58B |
| Interest Expense | $1.83B |
| Net Income | $5.52B |
| EPS (Basic) | $1.91 |
| EPS (Diluted) | $1.90 |
| Shares Outstanding (Basic) | 2.90B |
| Shares Outstanding (Diluted) | 2.90B |
05—Questions
Frequently Asked Questions
How much of Verizon's 2007 growth came from wireless versus wireline?
Nearly all of it. Domestic Wireless added $5.8 billion of revenue (up 15.3%), while Wireline revenue declined $412 million (down 0.8%). Wireless segment income rose 27.5% to $3.8 billion, while Wireline segment income fell 7.3% to $1.5 billion.
Why did the effective tax rate jump to 42.0%, and is it likely to persist?
The increase was driven mainly by a $610 million charge for foreign and domestic taxes tied to Verizon's share of Vodafone Omnitel distributable earnings, following a net distribution of about $2.1 billion in December 2007. Management noted it may receive an additional distribution within twelve months, so further charges of this type are possible, though the one-time charge itself should not recur at the same level.
What are the main risks to the wireline business?
Cable operators are identified as the largest overall threat, bundling broadband, digital TV and voice. Wireless substitution, VoIP and portal-based free calling are eroding voice revenues, with switched access lines down 8.1% in 2007. Regulatory changes, including FCC intercarrier compensation and UNE rules, could also reduce pricing and revenue.
What is Verizon's exposure to Vodafone and the minority interest structure?
Verizon owns 55% of Verizon Wireless, and Vodafone owns 45%. Minority interest expense was $5.1 billion in 2007, reflecting Vodafone's share of wireless earnings and reducing the net income attributable to Verizon shareowners. Vodafone's put rights on its stake expired in August 2007 without exercise.
What major transactions are pending that could change the company's profile?
Two are pending. First, the spin-off of Maine, New Hampshire and Vermont access lines to shareowners and merger with FairPoint, expected to close around March 31, 2008, at an estimated value now below the original $2.7 billion. Second, Verizon Wireless's acquisition of Rural Cellular for about $2.7 billion including assumed debt, expected to close in the first half of 2008, along with a related exchange of markets with AT&T.
06—Continue