01—Abstract
Summary
Summary of the 10-K filed February 21, 2017. Cited figures are marked; the original filing is the authoritative source.
Verizon's FY2016 Form 10-K (filed February 21, 2017) shows a company whose consolidated revenue fell 4.3% to $126.0 billiona, driven by a 2.7% decline in Wireless revenue (to $89.2 billion, about 71% of the total) and a 2.3% decline in Wireline (to $31.3 billion).
Operating income dropped 18% to $27.1 billionb, mainly because of $2.9 billion in net pre-tax severance, pension and benefit charges, $1.8 billion in early debt redemption costs recorded below operating income, and a $1.0 billion gain on the Access Line Sale that partly offset those charges. Net income attributable to Verizon fell to $13.1 billion, or $3.21 per diluted share, versus $4.37 in 2015. Consolidated Adjusted EBITDA rose 1% to $44.1 billion when non-operational items are excluded, and Wireless Segment EBITDA margin improved to 43.8%.
Cash generation weakened sharply. Operating cash flow fell to $22.7 billionc from $38.9 billion, and free cash flow dropped to $5.7 billion from $21.2 billion. Management attributes much of the decline to a change in how device payment receivables are monetized: receivables sales moved from operating cash flow to asset-backed securitizations, which are recorded in financing cash flow.
Dividends paid were $9.3 billiond, which exceeded free cash flow in 2016. Total debt was $108.1 billion at year-end, down from $109.7 billion, and the company raised its quarterly dividend 2.2% to $0.5775, the tenth consecutive annual increase. Management is also pursuing growth investments in mobile media and IoT, including the pending Yahoo operating business purchase (about $4.48 billion after a $350 million price reduction), the completed Fleetmatics and Telogis acquisitions, and the XO Holdings wireline acquisition (closed February 1, 2017).
It is also selling 24 data center sites to Equinix for about $3.6 billion. Management expects continued declines in Wireless service revenue as customers migrate to unsubsidized pricing. For investors, the central question is whether Verizon can sustain its dividend and fund its growth agenda while free cash flow is under pressure.
Wireless's cash generation remains strong, but the Wireline business continues to shrink in voice and legacy data, and leverage remains high at roughly 2.5x Consolidated Adjusted EBITDA based on debt levels. Management's guidance points to a shift toward data, fiber and new platforms, with 5G fixed wireless service targeted for 2018.
02—Key points
Key Highlights
- Consolidated revenue declined 4.3% to $125.98 billion in 2016 from $131.62 billion, as Wireless revenue fell 2.7% to $89.2 billion and Wireline revenue fell 2.3% to $31.3 billion.
- GAAP operating income fell 18% to $27.06 billion, reflecting $2.9 billion in net severance, pension and benefit charges and the $1.0 billion gain on the Access Line Sale. Consolidated Adjusted EBITDA rose 1% to $44.1 billion.
- Net income attributable to Verizon was $13.13 billion, or $3.21 per diluted share, down from $17.88 billion, or $4.37 per share, in 2015.
- Operating cash flow fell to $22.7 billion from $38.9 billion, and free cash flow fell to $5.7 billion from $21.2 billion, in part because device receivable monetization shifted to asset-backed securitizations recorded in financing cash flows.
- Dividends paid totaled $9.3 billion, which exceeded free cash flow. The quarterly dividend was raised 2.2% to $0.5775 per share, the tenth consecutive annual increase.
- Total debt was $108.1 billion at year-end, with an effective interest rate of 4.8%. Roughly 78% of debt is fixed rate, and the company holds $8.9 billion of unused credit facility capacity.
- Strategic transactions include the pending Yahoo operating business acquisition (about $4.48 billion), the completed Fleetmatics ($2.5 billion) and Telogis ($0.9 billion) acquisitions, the XO Holdings wireline acquisition (closed February 1, 2017, about $1.8 billion), and the planned $3.6 billion sale of 24 data centers to Equinix.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Verizon Communications Inc kept $0.10.
- Revenue$125.98B100.0%
- Cost of revenue−$22.24B17.7%
- Gross profit$103.74B82.3%
- Operating costs−$74.49B59.1%
- Operating income$29.25B23.2%
- Interest, other & tax−$16.12B12.8%
- Net income$13.13B10.4%
Where FY2016 revenue went
$125.98B- Other operating costs: $46.39B, 37% of revenue
- SG&A: $28.10B, 22% of revenue
- Cost of revenue: $22.24B, 18% of revenue
- Interest, other & tax: $16.12B, 13% of revenue
- Net income: $13.13B, 10% of revenue
Kept 10% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 21, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $125.98B$131.62B | −4.3% |
| Cost of Revenue | $22.24B$23.12B | −3.8% |
| Gross Profit | $103.74B$108.50B | −4.4% |
| SG&A Expenses | $28.10B$29.99B | −6.3% |
| Operating Expenses | $96.73B$98.56B | −1.9% |
| Operating Income | $29.25B$33.06B | −11.5% |
| Interest Expense | $4.38B$4.92B | −11.1% |
| Net Income | $13.13B$17.88B | −26.6% |
| EPS (Basic) | $3.22$4.38 | −26.5% |
| EPS (Diluted) | $3.21$4.37 | −26.5% |
| Shares Outstanding (Basic) | 4.08B4.08B | −0.1% |
| Shares Outstanding (Diluted) | 4.09B4.09B | −0.2% |
05—Questions
Frequently Asked Questions
Is Verizon's dividend covered by its cash flow?
Not fully in 2016. Dividends paid were $9.3 billion, while free cash flow (operating cash flow less capital expenditures) was $5.7 billion. The shortfall was reduced by the 2016 Access Line Sale proceeds, which were used to pay down debt and were not available for dividends. Operating cash flow was also depressed by the change in how device receivables are monetized. Management's stated view is that the company generates strong cash flows over time, but 2016 coverage was thin.
Why did operating cash flow decline so sharply in 2016?
Three main factors. First, Verizon changed how it monetizes device payment plan receivables: it moved from selling receivables, which ran through operating cash flow, to asset-backed securitizations, which run through financing cash flow. Second, earnings declined, partly because of severance and pension charges. Third, 2015 included $2.4 billion of proceeds from the American Tower tower transaction, which did not recur. Management has said the receivables change lowers operating cash flow but does not reduce the cash available to run the business.
How is the Wireless business performing?
Wireless revenue fell 2.7% to $89.2 billion, mainly because service revenue dropped 5.4% as customers moved to plans with unsubsidized pricing. Equipment revenue rose 3.5%, and Wireless operating income was roughly flat at $29.9 billion. Segment EBITDA margin rose to 43.8% from 42.5%. Retail connections grew 1.9% to 114.2 million, but net additions slowed sharply, and churn increased. Management expects continued service revenue pressure in 2017.
What are the main risks to the Wireline business?
Wireline revenue declined as traditional voice connections fell 7.3% and as Global Enterprise and Global Wholesale revenues dropped. Management cites competition from cable, wireless and VoIP providers, technology substitution, and price pressure in enterprise services. Fios growth partly offsets these losses: Fios Internet subscribers rose 4.3%, and Fios video subscribers rose 1.3%. The company is also reinvesting through its One Fiber strategy and the XO Holdings acquisition to shift the business toward data and fiber services.
How much debt does Verizon carry, and what are the key financing risks?
Total debt was $108.1 billion at December 31, 2016, down from $109.7 billion, with an effective interest rate of 4.8%. Roughly 78% of debt is fixed rate, so a 100 basis point rise in rates would increase annual interest expense by only about $0.3 billion on floating-rate exposure. Term loan covenants require a leverage ratio no higher than 3.50x until the credit ratings reach A3/A-. Verizon has a $9.0 billion revolving facility with about $8.9 billion unused, and it issued $5.0 billion of asset-backed debt in 2016. Pension obligations and healthcare cost trends are additional long-term liabilities.
06—Continue