01—Abstract
Summary
Summary of the 10-K filed February 28, 2011. Cited figures are marked; the original filing is the authoritative source.
Verizon Communications' 2010 Form 10-K (filed February 28, 2011) shows a company whose growth is concentrated in Domestic Wireless while the Wireline business shrinks.
Consolidated operating revenues fell 1.2% to $106.6 billiona, largely due to divested operations (Alltel divestiture markets and the July 2010 spin-off/merger of rural landline assets with Frontier). Domestic Wireless revenue rose 5.1% to $63.4 billion, with total data revenue reaching $19.6 billion (35.1% of service revenue), while Wireline revenue declined 2.9% to $41.2 billion amid switched access line losses. Operating income fell 8.3% to $14.6 billion, weighed down by $3.1 billion of severance, pension and benefit charges tied to a union agreement, while net income attributable to Verizon fell to $2.5 billion ($0.90 per diluted share) from $4.9 billion, reflecting a $1.0 billion one-time non-cash tax charge from the Health Care Act and a larger share of earnings going to Vodafone's 45% noncontrolling stake in Verizon Wireless.
Cash generation remained strong. Operating cash flow rose to $33.4 billion and capital expenditures fell to $16.5 billionb, producing free cash flow of $16.9 billion, up from $14.5 billion in 2009. Management guided 2011 capital spending to be flat or lower, and the Board raised the quarterly dividend 2.6% to $0.4875 while authorizing a new buyback of up to 100 million shares.
Debt declined to $52.8 billionc from $61.2 billion, helped by the $3.1 billion special cash payment from the Frontier transaction and the repayment of Verizon Wireless bank facilities. Key risks for investors include intensifying competition, continued access line erosion in Wireline, the cost of the LTE build-out, spectrum needs, union contract renegotiations in 2011, and the Idearc litigation trust suit seeking over $9 billion in damages. The filing also notes that the company intends to acquire Terremark for about $1.4 billion, expected to close in Q1 2011.
02—Key points
Key Highlights
- Consolidated operating revenues of $106.6 billion, down 1.2% year over year, mainly from divested operations and Wireline access line losses
- Domestic Wireless revenue rose 5.1% to $63.4 billion; total customers reached 94.1 million, and total data ARPU grew 17.3% to $17.73
- Wireline revenue fell 2.9% to $41.2 billion; switched access lines declined 8.2%, while FiOS Internet and FiOS TV subscribers grew 24.2% and 26.3%
- Operating income declined 8.3% to $14.6 billion, including $3.1 billion of severance, pension and benefit charges
- Net income attributable to Verizon fell to $2.5 billion ($0.90 per diluted share) from $4.9 billion, weighed down by a $1.0 billion one-time tax charge and higher noncontrolling interest
- Free cash flow of $16.9 billion (operating cash flow $33.4 billion less capex $16.5 billion), up from $14.5 billion in 2009
- Quarterly dividend raised 2.6% to $0.4875; new buyback authorization of up to 100 million shares; debt reduced to $52.8 billion
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Verizon Communications Inc kept $0.02.
- Revenue$106.56B100.0%
- Cost of revenue−$44.15B41.4%
- Gross profit$62.42B58.6%
- Operating costs−$47.77B44.8%
- Operating income$14.64B13.7%
- Interest, other & tax−$12.10B11.4%
- Net income$2.55B2.4%
Where FY2010 revenue went
$106.56B- Cost of revenue: $44.15B, 41% of revenue
- SG&A: $31.37B, 29% of revenue
- Other operating costs: $16.41B, 15% of revenue
- Net income: $2.55B, 2.4% of revenue
- Interest, other & tax: $12.10B, 11% of revenue
Kept 2.4% as net incomeNet income $2.55B · 2.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 28, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $106.56B$107.81B | −1.2% |
| Cost of Revenue | $44.15B$44.58B | −1.0% |
| Gross Profit | $62.42B$63.23B | −1.3% |
| SG&A Expenses | $31.37B$30.72B | +2.1% |
| Operating Expenses | $91.92B$91.83B | +0.1% |
| Operating Income | $14.64B$15.98B | −8.3% |
| Interest Expense | $2.52B$3.10B | −18.7% |
| Net Income | $2.55B$4.89B | −47.9% |
| EPS (Basic) | $0.90$1.72 | −47.7% |
| EPS (Diluted) | $0.90$1.72 | −47.7% |
| Shares Outstanding (Basic) | 2.83B2.84B | −0.4% |
| Shares Outstanding (Diluted) | 2.83B2.84B | −0.3% |
05—Questions
Frequently Asked Questions
Why did Verizon's reported revenue and net income decline in 2010?
Revenue fell 1.2% mainly because of divested operations, including the Alltel divestiture markets and the July 2010 spin-off of rural landline assets to Frontier, along with Wireline access line losses. Net income attributable to Verizon fell to $2.5 billion from $4.9 billion because of $3.1 billion in severance, pension and benefit charges, a $1.0 billion one-time non-cash tax charge from the Health Care Act, and higher earnings attributed to Vodafone's 45% stake in Verizon Wireless.
How is the Domestic Wireless business performing?
Domestic Wireless is the growth engine. Revenue rose 5.1% to $63.4 billion and segment operating income rose 12.5% to $18.7 billion. Data revenue reached $19.6 billion, or 35.1% of service revenue, although voice ARPU continued to decline. Retail net additions slowed to about 2.0 million from 4.4 million, and the company began deploying its 4G LTE network, which covered 38 major metro areas by year-end 2010.
Is the Wireline segment in decline, and what is being done about it?
Wireline revenue fell 2.9% to $41.2 billion and segment operating income dropped to $0.8 billion from $1.6 billion, largely due to access line losses from wireless substitution and VoIP. Management is offsetting this with FiOS growth (8.4 million broadband connections and 3.5 million FiOS TV subscribers), strategic enterprise services (growing 6.3%), and cost reductions. Verizon expects continued access line losses.
How strong is Verizon's cash flow and dividend capacity?
Operating cash flow of $33.4 billion and free cash flow of $16.9 billion in 2010 covered $5.4 billion of dividends with room to spare. Management expects 2011 capital expenditures to be flat or lower than 2010, and the Board raised the dividend and authorized a new buyback of up to 100 million shares. Verizon also reports that it is in compliance with all debt covenants and that its debt securities carry high ratings from the three primary agencies.
What are the main risks and legal exposures highlighted in the filing?
Key risks include intense competition from cable, wireless, and VoIP providers; dependence on key suppliers for LTE equipment and chipsets; regulatory changes, including FCC net neutrality rules and open-access requirements on 700 MHz C-Block spectrum; and labor, since about 30% of the workforce is unionized and many contracts expire in 2011. A major legal matter is the Idearc Litigation Trust suit, which seeks over $9 billion in damages over the 2006 directories spin-off. Verizon describes the NSA-related class actions as without merit, with dismissal on appeal.
06—Continue