01—Abstract
Summary
Summary of the 10-K filed February 26, 2010. Cited figures are marked; the original filing is the authoritative source.
Verizon's 2009 Form 10-K shows a company whose growth came mainly from the January 2009 acquisition of Alltel, which made Verizon Wireless the largest U.S. wireless carrier by customers and revenue.
Consolidated operating revenues rose 10.7% to $107.8 billiona, and Domestic Wireless now represents about 58% of revenue ($62.1 billion, up 25.9%). Wireline revenue fell 4.4% to $46.1 billion, reflecting continued access line losses (down 10% in 2009) partly offset by FiOS growth. Reported operating income fell 16.9% to $14.0 billion, pressured by roughly $4.0 billion of severance, pension and benefit charges and about $1.2 billion of merger integration costs.
Diluted EPS attributable to Verizon was $1.29b, down from $2.26, though net income including noncontrolling interest was $10.4 billion. Cash generation remained strong, with operating cash flow up $4.0 billion to $31.6 billion. Capital expenditures declined to $17.0 billion, and the company guided 2010 capex to $16.8–17.2 billion.
Total debt rose sharply, long-term debt reached $55.1 billionc, and the debt-to-capital ratio climbed to 59.9% from 55.5%. Verizon kept an 'A' rating framework, though S&P's outlook was Negative. The quarterly dividend was raised 3.3% to $0.475, costing $5.3 billion in 2009.
Key forward-looking items include the planned spin-off and merger of about 4 million access lines into Frontier (expected Q2 2010), the divestiture of 105 Alltel overlapping markets, LTE launch in 25–30 markets in 2010, and ongoing competitive and regulatory pressure, including proposed FCC net neutrality rules. For investors, the central questions are whether Alltel synergies and FiOS growth can offset wireline decline and rising wireless acquisition and subsidy costs, and whether the higher leverage and pension burden constrain the dividend and financial flexibility over time.
02—Key points
Key Highlights
- Consolidated revenue grew 10.7% to $107.8B, driven by Alltel's inclusion; Domestic Wireless revenue rose 25.9% to $62.1B while Wireline fell 4.4% to $46.1B.
- Reported diluted EPS fell to $1.29 from $2.26, reflecting $4.0B of severance, pension and benefit charges and $1.2B of merger integration costs.
- Operating cash flow rose $4.0B to $31.6B, while capex declined to $17.0B and is guided to $16.8–17.2B for 2010.
- Total debt increased significantly to $62.3B (long-term debt $55.1B), lifting the debt-to-capital ratio to 59.9% from 55.5%.
- Verizon Wireless ended 2009 with 91.2M customers (up 26.6%), but service ARPU declined 1.6% to $50.77, while data ARPU grew 17.9% to $15.20.
- Wireline access lines fell 10% to 32.6M, while FiOS TV (2.9M) and FiOS Internet (3.4M) subscribers grew strongly; the planned Frontier transaction would divest about 4M access lines.
- Quarterly dividend raised 3.3% to $0.475 (third consecutive annual increase); 2009 dividends paid totaled $5.3B.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Verizon Communications Inc kept $0.05.
- Revenue$107.81B100.0%
- Cost of revenue−$44.58B41.4%
- Gross profit$63.23B58.6%
- Operating costs−$47.25B43.8%
- Operating income$15.98B14.8%
- Interest, other & tax−$11.08B10.3%
- Net income$4.89B4.5%
Where FY2009 revenue went
$107.81B- Cost of revenue: $44.58B, 41% of revenue
- SG&A: $30.72B, 28% of revenue
- Other operating costs: $16.53B, 15% of revenue
- Net income: $4.89B, 4.5% of revenue
- Interest, other & tax: $11.08B, 10% of revenue
Kept 4.5% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 26, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $107.81B$97.35B | +10.7% |
| Cost of Revenue | $44.58B$38.62B | +15.4% |
| Gross Profit | $63.23B$58.74B | +7.6% |
| SG&A Expenses | $30.72B$41.52B | −26.0% |
| Operating Expenses | $91.83B$94.74B | −3.1% |
| Operating Income | $15.98B$2.61B | +511.7% |
| Interest Expense | $3.10B$1.82B | +70.5% |
| Net Income | $4.89B-$2.19B | +323.2% |
| EPS (Basic) | $1.72$-0.77 | +323.4% |
| EPS (Diluted) | $1.72$-0.77 | +323.4% |
| Shares Outstanding (Basic) | 2.84B2.85B | −0.3% |
| Shares Outstanding (Diluted) | 2.84B2.85B | −0.3% |
05—Questions
Frequently Asked Questions
How did the Alltel acquisition change Verizon's financial profile?
The January 2009 Alltel acquisition for $5.9B in cash plus about $24B of assumed debt made Verizon Wireless the largest U.S. wireless provider by customers and revenue. It drove the 25.9% growth in Domestic Wireless revenue and substantially increased interest expense (to $3.1B from $1.8B), depreciation and amortization, and debt. Management expects cost synergies from reduced roaming, duplicate facilities and advertising, and divestiture of 105 overlapping markets (79 to AT&T Mobility, 26 to ATN) is expected to close in the first half of 2010.
Is Verizon's wireline business in structural decline?
Wireline revenue fell 4.4% in 2009, with switched access lines down 10% as customers shifted to wireless, VoIP and cable. Global Wholesale and Global Enterprise revenues also declined. FiOS is the main growth offset, with broadband and video revenues exceeding $6B and FiOS subscribers growing substantially. Management plans to exit about 4M access lines through the Frontier transaction, which signals a deliberate retreat from the legacy landline business.
Why did reported earnings decline so sharply in 2009?
Net income attributable to Verizon fell to $3.65B from $6.43B. The main drivers were $4.0B of pretax severance, pension and benefit charges (including workforce reductions of about 17,600 employees and pension settlement and curtailment losses), $1.2B of Alltel integration and acquisition costs, and a sharply higher share of income going to Vodafone's 45% noncontrolling interest in Verizon Wireless. The effective tax rate fell to 10.5% largely because of that noncontrolling interest. Investors should note that these charges are largely non-recurring in nature, but workforce-related costs may continue into 2010.
How strong is Verizon's balance sheet and dividend capacity?
Verizon retains high credit ratings (S&P 'A', Moody's 'A3', Fitch 'A'), though S&P's outlook is Negative and rating agencies flagged sustained leverage, Alltel synergy shortfalls and accelerated wireline losses as downgrade triggers. Operating cash flow of $31.6B covered $17.0B of capex and $5.3B of dividends, leaving room to repay debt. Its 2009 debt-to-capital ratio of 59.9% and $5.2B of unused credit capacity support the dividend, though further leverage would limit flexibility.
What are the key risks and catalysts to watch in 2010?
Key catalysts include the closing of the Frontier spin-off and merger (expected Q2 2010), completion of the Alltel divestitures, the launch of LTE in 25–30 markets, and the Alltel integration synergies. Key risks include intensifying wireless competition that could pressure pricing and churn (retail postpaid churn rose to 1.09%), cable and VoIP competition in wireline, underfunded pension and healthcare obligations, the potential FCC net neutrality rules, and possible credit rating downgrades if leverage remains elevated.
06—Continue