01—Abstract
Summary
Summary of the 10-K filed February 24, 2012. Cited figures are marked; the original filing is the authoritative source.
Verizon Communications (VZ) reported 2011 operating revenues of $110.9 billiona, up 4.0% from $106.6 billion in 2010, driven by Verizon Wireless, which grew revenue 10.6% to $70.2 billion (about 63% of the total).
Wireline revenues fell 1.3% to $40.7 billionb as wireless substitution, access line losses and declines in Global Wholesale offset growth in FiOS and strategic services. Reported operating income fell 12.1% to $12.9 billion, and net income attributable to Verizon fell to $2.4 billion ($0.85 per diluted share) from $2.5 billion, mainly because of a $6.0 billion pre-tax severance, pension and benefit charge recorded in the fourth quarter after a lower discount rate. Excluding these non-operational items, Consolidated Adjusted EBITDA rose to $35.3 billion from $34.4 billion, and free cash flow declined to $13.5 billion from $16.9 billion as operating cash flow fell to $29.8 billion on device purchases, pension contributions and divested operations.
Capital expenditures were $16.2 billionc, or 14.7% of revenue. Verizon raised its quarterly dividend 2.6% to $0.50 per share, the fifth consecutive annual increase, and paid $5.6 billion in dividends. It made no share repurchases in 2011 and has 100 million shares authorized under a program running through February 2014.
The balance sheet remains solid, with net debt to Consolidated Adjusted EBITDA of 1.2x, all debt covenants met, and investment-grade ratings. Key forward-looking items include pending AWS spectrum purchases from SpectrumCo and Cox (about $3.9 billiond, expected to close in 2012), DOJ review of the cable-company commercial agreements, 4G LTE expansion to virtually all of the 3G footprint by mid-2013, and roughly $9 billion in litigation exposure from the Idearc and FairPoint creditor suits.
02—Key points
Key Highlights
- Revenue grew 4.0% to $110.9 billion, led by Verizon Wireless (+10.6% to $70.2 billion), while Wireline declined 1.3% to $40.7 billion.
- Verizon Wireless ended 2011 with 92.2 million retail customers; data revenue reached $23.6 billion, 40% of service revenue, and smartphones were about 44% of the retail postpaid base.
- Net income attributable to Verizon fell to $2.4 billion ($0.85 per diluted share) from $2.5 billion, weighed down by a $6.0 billion pre-tax severance, pension and benefit charge.
- Consolidated Adjusted EBITDA (non-GAAP, excluding non-operational items) rose to $35.3 billion from $34.4 billion.
- Free cash flow fell to $13.5 billion from $16.9 billion, as operating cash flow dropped to $29.8 billion and capex was $16.2 billion.
- The quarterly dividend was raised 2.6% to $0.50 per share, the fifth straight annual increase; $5.6 billion was paid in dividends in 2011, and no shares were repurchased.
- Pending litigation includes the Idearc creditor suit (over $9 billion sought, trial set for October 2012) and the FairPoint trust suit (about $2 billion sought).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Verizon Communications Inc kept $0.02.
- Revenue$110.88B100.0%
- Cost of revenue−$45.88B41.4%
- Gross profit$65.00B58.6%
- Operating costs−$52.12B47.0%
- Operating income$12.88B11.6%
- Interest, other & tax−$10.48B9.4%
- Net income$2.40B2.2%
Where FY2011 revenue went
$110.88B- Cost of revenue: $45.88B, 41% of revenue
- SG&A: $35.62B, 32% of revenue
- Other operating costs: $16.50B, 15% of revenue
- Net income: $2.40B, 2.2% of revenue
- Interest, other & tax: $10.48B, 9.4% of revenue
Kept 2.2% as net incomeNet income $2.40B · 2.2%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 24, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $110.88B$106.56B | +4.0% |
| Cost of Revenue | $45.88B$44.15B | +3.9% |
| Gross Profit | $65.00B$62.42B | +4.1% |
| SG&A Expenses | $35.62B$31.37B | +13.6% |
| Operating Expenses | $98.00B$91.92B | +6.6% |
| Operating Income | $12.88B$14.64B | −12.1% |
| Interest Expense | $2.83B$2.52B | +12.0% |
| Net Income | $2.40B$2.55B | −5.7% |
| EPS (Basic) | $0.85$0.90 | −5.6% |
| EPS (Diluted) | $0.85$0.90 | −5.6% |
| Shares Outstanding (Basic) | 2.83B2.83B | +0.1% |
| Shares Outstanding (Diluted) | 2.84B2.83B | +0.2% |
05—Questions
Frequently Asked Questions
Why did Verizon's reported net income fall even though revenue grew?
The decline was driven by non-operational charges rather than core weakness. In 2011 Verizon recorded about $6.0 billion in pre-tax severance, pension and benefit charges, mostly from a drop in the discount rate from 5.75% to 5.0% and weaker-than-expected asset returns. Operating income fell 12.1% to $12.9 billion, and net income attributable to Verizon was $2.4 billion versus $2.5 billion. Adjusted EBITDA, which excludes these items, rose about 2.8%.
How is Verizon Wireless performing, and what drives its growth?
Verizon Wireless revenue rose 10.6% to $70.2 billion, with service revenue up 6.3% and equipment revenue up 41.4%. Growth came from strong smartphone and tablet demand and from data services, where data revenue rose to $23.6 billion (40% of service revenue). Voice revenue is declining as voice ARPU falls, and management expects future service growth to depend mainly on data. Its 4G LTE network covered more than 200 million people by January 2012.
What pressures does the Wireline segment face?
Wireline revenue fell 1.3% to $40.7 billion. Access line losses to wireless, VoIP and cable substitution are reducing voice revenue, and Global Wholesale fell 8.8% on lower international voice volumes and rate compression. Growth is coming from FiOS (4.8 million Internet and 4.2 million Video subscribers) and strategic services, which rose 15.2% to $7.6 billion, partly reflecting the Terremark acquisition.
Is Verizon's dividend secure, and what are the capital return priorities?
The dividend appears well supported. Verizon paid $5.6 billion in dividends in 2011 and raised it for the fifth consecutive year, to $0.50 per quarter. Free cash flow of $13.5 billion covered the dividend, though with less room than in 2010 ($16.9 billion). The company made no buybacks in 2011, and a 100 million share authorization runs through February 2014. Management says it will prioritize investment for growth, then debt reduction and buybacks, with Verizon Wireless distributions to Vodafone also affecting cash.
What are the main risks and upcoming catalysts for investors?
Key items include: the FCC and DOJ review of about $3.9 billion in AWS spectrum purchases from SpectrumCo and Cox, expected to close in 2012; DOJ review of the December 2011 agreements with major cable companies, which allow reciprocal sales and a potential wholesale wireless option; the ActiveVideo patent judgment against FiOS TV VOD, with an injunction deferred to May 2012; ongoing union contract negotiations after a 14-day work stoppage in August 2011; and pension funding and discount-rate sensitivity, with a 0.5-point discount rate change moving pension obligations by about $1.5 to $1.7 billion.
06—Continue