01—Abstract
Summary
Summary of the 10-K filed February 23, 2018. Cited figures are marked; the original filing is the authoritative source.
Verizon's 2017 Form 10-K (filed February 23, 2018) shows a business that is essentially flat on revenue but substantially stronger on profitability and cash generation.
Consolidated operating revenues were $126.0 billiona, roughly unchanged from 2016 ($126.0 billion), while operating income rose to $27.4 billion from $27.1 billion, and Consolidated Adjusted EBITDA increased about 0.7% to $45.1 billion. Wireless remains the core engine, generating $87.5 billion of revenue (about 69% of the total, down 1.9%) and $29.2 billion of segment operating income, while Wireline revenue grew 0.6% to $30.7 billion, aided by the XO acquisition, and its segment operating income swung to a $380 million profit from a $294 million loss the prior year. Reported GAAP net income surged to $30.1 billion (diluted EPS of $7.36) versus $13.1 billion ($3.21) in 2016, but this is driven by a one-time, non-cash $16.8 billion income tax benefit from the Tax Cuts and Jobs Act, which lowered the effective tax rate to -48.3%.
Investors should look past this headline figure to underlying earnings power. Cash flow from operations was $25.3 billion, free cash flow rose to $8.1 billionb from $5.8 billion, and dividends paid were $9.5 billion, so free cash flow still does not cover the dividend, which is a key watch item. Total debt rose to $117.1 billion, and the company is pursuing a $10 billion zero-based cost reduction program alongside a 2018 capex guide of $17.0 to $17.8 billion, including the 5G launch.
Strategically, Verizon is positioning itself around network leadership, 5G (with residential fixed wireless launches planned in three to five markets in 2018), One Fiber fiber densification, and new media and IoT/telematics businesses anchored by the Yahoo operating business combined into Oath. Key risks include intensifying wireless competition, the shift from fixed-term to unsubsidized pricing (now about 80% of postpaid phones), linear video declines, access line losses, and rising pension and healthcare costs. Pension plans are underfunded at year end, though a $3.4 billionc discretionary contribution in 2017 should keep mandatory funding minimal through 2020.
02—Key points
Key Highlights
- Consolidated operating revenue was flat at $126.0 billion, with Wireless down 1.9% to $87.5 billion and Wireline up 0.6% to $30.7 billion, while Corporate and other grew 20.7% to $9.4 billion on the Yahoo operating business acquisition.
- GAAP net income attributable to Verizon jumped to $30.1 billion ($7.36 diluted EPS) from $13.1 billion, but this is inflated by a one-time, non-cash $16.8 billion tax reform benefit; the effective tax rate was -48.3%.
- Consolidated Adjusted EBITDA rose to $45.1 billion from $44.8 billion, and operating margin was 21.8%, indicating stable underlying profitability excluding special items.
- Free cash flow improved to $8.1 billion from $5.8 billion, though it remains below the $9.5 billion paid in dividends, and operating cash flow rose to $25.3 billion.
- Total debt increased to $117.1 billion from $108.1 billion, with a 4.7% effective interest rate and roughly $8.9 billion of unused credit facility capacity.
- Verizon Wireless added 2.0 million retail connections to reach 116.3 million, with postpaid churn stable at 1.01%, while service revenue per account declined as customers migrated to unsubsidized pricing.
- Management is pursuing a $10 billion cumulative cash cost reduction over four years through zero-based budgeting, and 2018 capex is guided to $17.0 to $17.8 billion, including the commercial 5G launch.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Verizon Communications Inc kept $0.24.
- Revenue$126.03B100.0%
- Cost of revenue−$22.15B17.6%
- Gross profit$103.89B82.4%
- Operating costs−$76.46B60.7%
- Operating income$27.43B21.8%
- Interest, other & tax$2.68B2.1%
- Net income$30.10B23.9%
Where FY2017 revenue went
$126.03B- Other operating costs: $47.87B, 38% of revenue
- SG&A: $28.59B, 23% of revenue
- Operating income: $27.43B, 22% of revenue
- Cost of revenue: $22.15B, 18% of revenue
Kept 22% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 23, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $126.03B$125.98B | 0.0% |
| Cost of Revenue | $22.15B$22.24B | −0.4% |
| Gross Profit | $103.89B$103.74B | +0.1% |
| SG&A Expenses | $28.59B$28.10B | +1.7% |
| Operating Expenses | $98.61B$96.73B | +1.9% |
| Operating Income | $27.43B$29.25B | −6.2% |
| Interest Expense | $4.73B$4.38B | +8.2% |
| Net Income | $30.10B$13.13B | +129.3% |
| EPS (Basic) | $7.37$3.22 | +128.9% |
| EPS (Diluted) | $7.36$3.21 | +129.3% |
| Shares Outstanding (Basic) | 4.08B4.08B | +0.1% |
| Shares Outstanding (Diluted) | 4.09B4.09B | +0.1% |
05—Questions
Frequently Asked Questions
How much of 2017's net income growth is due to the tax reform, and what is the underlying earnings trend?
The one-time, non-cash income tax benefit of approximately $16.8 billion from the Tax Cuts and Jobs Act accounts for most of the jump in net income to $30.1 billion from $13.1 billion. Excluding this benefit, net income would have been roughly $13 billion, so the underlying trend is more modest. Operating income rose only about 1.3% to $27.4 billion, and Adjusted EBITDA grew about 0.7%. Investors should focus on operating and EBITDA metrics rather than reported GAAP EPS for trend analysis.
Is the dividend covered by free cash flow?
Not fully in 2017. Free cash flow (operating cash flow less capex) was $8.1 billion, while dividends paid were $9.5 billion, a shortfall of about $1.4 billion. The shortfall was funded with debt, which rose to $117.1 billion. Free cash flow did improve from $5.8 billion in 2016, helped by higher earnings, working capital changes and a lower 2018 pension funding requirement. The Tax Cuts and Jobs Act is expected to add $3.5 to $4.0 billion to 2018 operating cash flow, which could narrow the gap. The dividend was raised 2.2% to $0.59 per quarter, the eleventh consecutive annual increase.
Why is Wireless revenue declining, and what is driving its profitability?
Wireless revenue fell 1.9% to $87.5 billion, mainly because service revenue declined 5.2% as customers moved to unsubsidized, lower-fee plans and overage revenue fell with the introduction of unlimited pricing. Equipment revenue rose 7.8% on higher device prices and greater use of the device payment program. Despite the top-line decline, segment operating income was $29.2 billion, and segment EBITDA margin improved to 44.1% from 43.8%, reflecting a $1.2 billion reduction in selling, general and administrative expense, mostly lower sales commissions and reduced headcount costs.
What are the main risks to Verizon's wireline business?
Wireline faces ongoing decline in legacy voice (total voice connections fell 8% to 12.8 million) as customers switch to wireless, VoIP and cable, and in Partner Solutions revenue, which fell 0.2% with core data circuits down 26.8%. Fios video subscribers declined 1.6% amid the shift to over-the-top streaming. Growth is supported by Fios Internet subscribers (up 3.5% to 5.85 million), the One Fiber build-out, and XO, which added about $1.1 billion of revenue. Management expects Wireline revenue growth in 2018 to depend mainly on Consumer Markets, offset by Partner Solutions declines. Goodwill headroom in Wireline has narrowed to 14% of carrying value, so further deterioration could trigger an impairment.
What does Verizon's 5G strategy mean for investors over the next few years?
Verizon plans to commercially launch 5G residential fixed wireless broadband in three to five U.S. markets in 2018 and aims to be the first to deploy fixed 5G at scale. It acquired NextLink (closed January 2018) and agreed to acquire Straight Path (about $3.1 billion enterprise value, expected to close by Q1 2018) to secure millimeter-wave spectrum in the 28 and 39 GHz bands. The company also expects its One Fiber network to support both wireless densification and Fios growth. Investors should weigh these investments against a 2018 capex guide of $17.0 to $17.8 billion and the risk that 5G revenue takes time to offset continued wireless service pressure.
06—Continue