01—Abstract
Summary
Summary of the 10-K filed February 23, 2016. Cited figures are marked; the original filing is the authoritative source.
Verizon's 2015 10-K shows a company in transition: revenue grew 3.6% to $131.6 billion and operating income more than doubled to $33.1 billiona, but that jump is largely due to a $2.3 billion net pension and benefit credit versus a $7.5 billion charge in 2014.
Excluding non-operational items, Consolidated Adjusted EBITDA rose 7.7% to $46.6 billionb. Wireless (about 70% of revenue, 112.1 million retail connections) drove growth, with revenue up 4.6% on a 54.4% jump in equipment sales tied to the Verizon device payment program, while service revenue fell 3.1% as customers shifted to unsubsidized pricing. Wireline revenue declined 1.8%, with Fios growth offsetting shrinking voice and Global Enterprise sales.
Cash generation strengthened, with free cash flow of $21.2 billionc (up from $13.4 billion), helped by $5.9 billion from receivable sales and $2.4 billion from the American Tower tower transaction. Those inflows, however, are one-time or financing-like in nature. Total debt was $110.2 billion at year-end, and management plans to use proceeds from the pending Frontier sale (about $10.5 billion) to reduce debt and return to its pre-Wireless Transaction credit rating by 2018-2019.
Dividends were raised 2.7% to $0.565d per quarter, the ninth consecutive annual increase, and shareholders received $8.5 billion in dividends during 2015. Key risks include intensifying wireless competition, the FCC's 2015 reclassification of broadband as a Title II service, rising pension and healthcare costs, the expiration of wireline union contracts, and a heavy debt load. Management also expects Wireline margins to decline after the Frontier closing and expects 2016 capital expenditures of $17.2-17.7 billion.
02—Key points
Key Highlights
- Revenue of $131.6 billion (+3.6%); operating income of $33.1 billion (+69%), inflated by a $2.3 billion net pension/benefit credit vs. a $7.5 billion charge in 2014
- Consolidated Adjusted EBITDA of $46.6 billion (+7.7%), excluding non-operational items
- Wireless revenue +4.6% to $91.7 billion, driven by equipment sales (+54.4%) while service revenue fell 3.1% to $70.4 billion
- Free cash flow of $21.2 billion vs. $13.4 billion in 2014, aided by $5.9 billion from device installment receivable sales and $2.4 billion from the American Tower transaction
- Total debt of $110.2 billion; pending $10.5 billion Frontier access line sale (expected Q1 2016) to be used to reduce debt
- Quarterly dividend raised 2.7% to $0.565; $8.5 billion paid in dividends during 2015 and $5.0 billion used for an accelerated share repurchase
- Net income attributable to Verizon of $17.9 billion (diluted EPS $4.37) vs. $9.6 billion ($2.42) in 2014
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Verizon Communications Inc kept $0.14.
- Revenue$131.62B100.0%
- Cost of revenue−$23.12B17.6%
- Gross profit$108.50B82.4%
- Operating costs−$75.44B57.3%
- Operating income$33.06B25.1%
- Interest, other & tax−$15.18B11.5%
- Net income$17.88B13.6%
Where FY2015 revenue went
$131.62B- Other operating costs: $45.45B, 35% of revenue
- SG&A: $29.99B, 23% of revenue
- Cost of revenue: $23.12B, 18% of revenue
- Net income: $17.88B, 14% of revenue
- Interest, other & tax: $15.18B, 12% of revenue
Kept 14% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 23, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $131.62B$127.08B | +3.6% |
| Cost of Revenue | $23.12B$49.93B | −53.7% |
| Gross Profit | $108.50B$77.15B | +40.6% |
| SG&A Expenses | $29.99B$41.02B | −26.9% |
| Operating Expenses | $98.56B$107.48B | −8.3% |
| Operating Income | $33.06B$19.60B | +68.7% |
| Interest Expense | $4.92B$4.92B | +0.1% |
| Net Income | $17.88B$9.63B | +85.8% |
| EPS (Basic) | $4.38$2.42 | +81.0% |
| EPS (Diluted) | $4.37$2.42 | +80.6% |
| Shares Outstanding (Basic) | 4.08B3.97B | +2.8% |
| Shares Outstanding (Diluted) | 4.09B3.98B | +2.8% |
05—Questions
Frequently Asked Questions
Why did Verizon's reported operating income jump so sharply in 2015?
Operating income rose to $33.1 billion from $19.6 billion, largely because 2015 included $2.3 billion in net pension and benefit credits, primarily from a higher discount rate and a new prescription drug contract, while 2014 included $7.5 billion in charges. Excluding these non-operational items, the underlying improvement is more modest, with Consolidated Adjusted EBITDA up about 7.7% to $46.6 billion.
Is Verizon's wireless growth sustainable given the decline in service revenue?
Wireless revenue grew, but the mix shifted. Equipment revenue rose 54.4% as more customers bought phones through the device payment program, while service revenue fell 3.1% because those customers pay lower unsubsidized service fees. Management expects this shift to continue in 2016, so growth depends on device sales and on retaining customers on installment plans. Retail postpaid connections rose 4.4%, which supports the subscriber base.
How does the Frontier transaction affect Verizon's future results?
Verizon will sell its local exchange and related landline businesses in California, Florida and Texas for about $10.5 billion, including Fios customers and the assumption of $0.6 billion of debt. The transaction is expected to close at the end of the first quarter of 2016. Management expects Wireline EBITDA and operating margins to decline afterward, and plans to use the proceeds to reduce debt.
What are the main risks to Verizon's balance sheet and dividend?
Total debt is $110.2 billion, and the company has committed to returning to its pre-Wireless Transaction credit rating profile in 2018-2019. Pension and healthcare obligations are large, with a 50 basis point change in the pension discount rate moving obligations by about $1.2-1.3 billion. Free cash flow in 2015 was supported by one-time items such as receivable sales and tower proceeds, so investors should be cautious about extrapolating that level. The dividend has grown for nine consecutive years, but the 2015 payout of $8.5 billion remains a significant use of cash.
What regulatory and labor risks could affect Verizon?
The FCC reclassified broadband Internet access as a Title II telecommunications service in 2015, which could bring utility-style rate regulation and limit network management. The decision is being challenged in court and debated in Congress. In addition, labor contracts covering about 36,300 wireline employees expired in August 2015, and negotiations were ongoing at filing, creating a risk of work stoppages.
06—Continue