01—Abstract
Summary
Summary of the 10-K filed February 24, 2009. Cited figures are marked; the original filing is the authoritative source.
Verizon's 2008 10-K (filed February 24, 2009) shows a company that grew revenue 4.2% to $97.4 billiona and operating income 8.4% to $16.9 billion, driven almost entirely by Domestic Wireless (Verizon Wireless, 55% owned), whose revenue rose 12.4% to $49.3 billion and operating income rose 18.6% to $14.0 billion.
Wireline revenue fell 1.9% to $48.2 billionb as access line losses (down 9.1% in total retail lines) outweighed growth in broadband (8.67 million connections) and FiOS TV (1.92 million customers). Net income was $6.4 billion, or $2.26 per diluted share, up from $1.90 in 2007, though 2007 comparisons were distorted by a large tax charge tied to Vodafone Omnitel distributions. The filing's most important forward-looking item is the closing of the Alltel acquisition on January 9, 2009.
Verizon Wireless paid about $5.9 billionc for Alltel's equity and took on roughly $22.2 billion of Alltel net debt, which pushed total debt to about $51 billion and the debt-to-capital ratio to 55.5% from 38.1%. Verizon financed the deal in part with a $12.5 billion Bridge Facility, with plans to refinance it and divest 105 overlapping markets. Management says the combined company becomes the largest U.S. wireless provider by customer count, with more than 80 million customers, and expects synergies from reduced roaming and network costs.
Investors should weigh that integration and leverage against a balance sheet that still carries A-category ratings. The agencies have flagged possible downgrade triggers, and S&P and Moody's have negative outlooks. Capital and cash flow remain strong.
Operating cash flow from continuing operations was $26.6 billiond, and dividends rose 7% to $1.78 per share. Management expects 2009 capital spending, excluding Alltel, to be below 2008's $17.2 billion. Pension and retiree healthcare costs are a growing pressure point, and the company faces ongoing litigation over alleged NSA cooperation, which it describes as without merit.
02—Key points
Key Highlights
- Consolidated operating revenues rose 4.2% to $97.4 billion in 2008, and operating income rose 8.4% to $16.9 billion, with operating margin up about 4 points to 17.3%.
- Domestic Wireless drove growth: revenue up 12.4% to $49.3 billion, operating income up 18.6% to $14.0 billion, and data revenue up 44.2% to $10.7 billion (25% of service revenue).
- Wireline revenue declined 1.9% to $48.2 billion as access lines fell 9.1%, partly offset by 660,000 net new broadband connections and 975,000 net new FiOS TV customers.
- The Alltel acquisition closed January 9, 2009 (about $5.9 billion equity plus roughly $22.2 billion of net debt), making Verizon Wireless the largest U.S. wireless carrier by subscribers.
- Total debt rose about $20.8 billion in 2008 and the debt-to-capital ratio reached 55.5% (from 38.1%). Ratings are A-category but carry negative outlooks at S&P and Moody's, with explicit downgrade triggers.
- Diluted EPS was $2.26 versus $1.90 in 2007. Dividends were increased 7% to $1.78 per share, and $1.4 billion of buybacks were executed in 2008 under a new 100 million share authorization.
- Pension and retiree healthcare costs are a growing burden: pension plans are underfunded by about $2.6 billion, and other postretirement plans by about $24.5 billion, with 2009 retiree healthcare contributions estimated at $1.77 billion.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2008, Verizon Communications Inc lost $0.02.
- Revenue$97.35B100.0%
- Cost of revenue−$38.62B39.7%
- Gross profit$58.74B60.3%
- Operating costs−$56.13B57.7%
- Operating income$2.61B2.7%
- Interest, other & tax−$4.80B4.9%
- Net income−$2.19B2.3%
Where FY2008 revenue went
$97.35B- SG&A: $41.52B, 43% of revenue
- Cost of revenue: $38.62B, 40% of revenue
- Other operating costs: $14.61B, 15% of revenue
- Operating income: $2.61B, 2.7% of revenue
Kept 2.7% as operating incomeOperating income $2.61B · 2.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 24, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $97.35B$93.47B | +4.2% |
| Cost of Revenue | $38.62B$37.55B | +2.8% |
| Gross Profit | $58.74B$55.92B | +5.0% |
| SG&A Expenses | $41.52B$25.97B | +59.9% |
| Operating Expenses | $94.74B$77.89B | +21.6% |
| Operating Income | $2.61B$15.58B | −83.2% |
| Interest Expense | $1.82B$1.83B | −0.5% |
| Net Income | -$2.19B$5.52B | −139.7% |
| EPS (Basic) | $-0.77$1.91 | −140.3% |
| EPS (Diluted) | $-0.77$1.90 | −140.5% |
| Shares Outstanding (Basic) | 2.85B2.90B | −1.7% |
| Shares Outstanding (Diluted) | 2.85B2.90B | −1.8% |
05—Questions
Frequently Asked Questions
How did the Alltel acquisition change Verizon's financial profile?
Alltel closed January 9, 2009, after Verizon Wireless paid about $5.9 billion for Alltel's equity and assumed roughly $22.2 billion of Alltel net debt. The 2008 balance sheet does not yet include Alltel's operations. Verizon Wireless funded the deal partly through a $12.5 billion Bridge Facility, which it expected to refinance with asset sales, free cash flow and new bonds, including a February 2009 issuance of about $4.2 billion. Verizon expects overlapping markets in 105 operating areas to be divested, with the rest integrated to reduce roaming and network costs.
Is Verizon's dividend and credit profile at risk after the Alltel deal?
The dividend is supported by operating cash flow of $26.6 billion in 2008, but leverage has risen sharply. Management says it does not expect a ratings downgrade and expects to keep its investment-grade ratings. However, S&P and Moody's have negative outlooks, and the agencies identified weaker wireless performance, failure to achieve Alltel synergies, accelerated wireline losses, or a large acquisition as possible downgrade drivers. A downgrade would raise refinancing costs and could constrain short-term debt access.
Where is Verizon's growth coming from, and where is it under pressure?
Growth comes mainly from Domestic Wireless, where data revenue rose 44% and ARPU increased 1.2%. Wireline is under pressure: revenue fell 1.9%, and traditional voice access lines declined 9.3% in 2008 as customers shifted to wireless, VoIP and cable. Broadband and FiOS TV are the offsets, with FiOS Internet penetration of 24.9% and FiOS TV penetration of 20.8% in markets where they are offered.
What are the main legal and regulatory risks disclosed?
The most prominent item is a set of class actions alleging Verizon participated in government intelligence-gathering programs; the FISA Amendments Act provides a route to dismissal, and Verizon believes the suits lack merit. Other risks include FCC rules on 700 MHz open access, a pending FCC cap on high-cost universal service support for competitive carriers, intercarrier compensation reform, and the possibility that wireless licenses are not renewed. The company also faces environmental remediation at the Hicksville, NY site, which it says will not be material.
How much capital is Verizon spending, and what does 2009 look like?
Capital expenditures were $17.2 billion in 2008, with $6.5 billion for Domestic Wireless and $9.8 billion for Wireline. Management expects 2009 capital spending, excluding Alltel, to be below 2008 levels, reflecting the FiOS build-out moving toward maturity and wireless spectrum spending already completed in 2008. The company also committed $9.4 billion to 700 MHz spectrum in Auction 73, which will support LTE deployment.
06—Continue