10-QPeriod: Q3 FY2016

VERIZON COMMUNICATIONS INC Quarterly Report for Q3 Ended Sep 30, 2016

Filed October 26, 2016For Securities:VZ

Summary

Verizon Communications Inc. (VZ) reported its third-quarter 2016 financial results, showing a continuation of revenue trends seen in prior periods. Total operating revenues decreased by 6.7% year-over-year to $30.9 billion for the three months ended September 30, 2016, and by 3.8% to $93.6 billion for the nine months ended September 30, 2016. This decline was primarily driven by a decrease in the Wireless segment's service and equipment revenues, and the Wireline segment's performance, partly due to customer migration to unsubsidized service pricing and a decrease in traditional services. Despite revenue declines, the company reported a net income of $3.62 billion for the quarter, or $0.89 per diluted share, down from $4.04 billion, or $0.99 per diluted share, in the prior year's third quarter. A significant factor impacting profitability was a substantial increase in severance, pension, and benefit charges, particularly in the nine-month period, totaling $4.51 billion compared to $342 million in the prior year. The company also made progress on its strategic initiatives, including the announced acquisition of Yahoo's operating business and the acquisition of Fleetmatics, signaling a continued focus on expanding its digital media and IoT capabilities.

Financial Statements
Beta
Revenue$30.94B
Cost of Revenue$5.24B
Gross Profit$25.70B
SG&A Expenses$8.23B
Operating Expenses$24.40B
Operating Income$6.54B
Interest Expense$1.04B
Net Income$3.62B
EPS (Basic)$0.89
EPS (Diluted)$0.89
Shares Outstanding (Basic)4.08B
Shares Outstanding (Diluted)4.09B

Key Highlights

  • 1Total operating revenues for the third quarter of 2016 decreased by 6.7% to $30.9 billion compared to the same period in 2015.
  • 2Net income attributable to Verizon for the quarter was $3.62 billion, down from $4.04 billion in the prior year's third quarter.
  • 3Diluted EPS attributable to Verizon was $0.89, a decrease from $0.99 in the prior year's third quarter.
  • 4Significant severance, pension, and benefit charges negatively impacted the nine-month results, totaling $4.51 billion.
  • 5The company is pursuing strategic acquisitions, including the announced acquisition of Yahoo's operating business and the pending acquisition of Fleetmatics.
  • 6Capital expenditures for the first nine months of 2016 were $11.4 billion, a decrease from $12.5 billion in the same period of 2015, reflecting continued network investment.
  • 7Free cash flow for the first nine months of 2016 was $6.2 billion, a significant decrease from $15.9 billion in the prior year, largely due to working capital impacts and higher tax payments.

Frequently Asked Questions

The decrease in operating revenues for the three and nine months ended September 30, 2016, was primarily driven by declines in the Wireless segment's service and equipment revenues, largely due to customer migration to plans with lower unsubsidized service pricing. The Wireline segment also contributed to the decline due to reduced revenues in Global Enterprise and Global Wholesale, along with the impact of the sale of the local exchange business in California, Florida, and Texas.

The substantial increase in severance, pension, and benefit charges, particularly in the nine-month period, was primarily due to actuarial remeasurement losses recognized in the period they occurred, driven by a decrease in discount rate assumptions used to determine pension and other postretirement benefit liabilities and updated healthcare cost trend rate assumptions. This also includes a significant pension and postretirement benefit curtailment gain related to the sale of the local exchange business.

The acquisition of Yahoo's operating business is expected to make Verizon a major competitor in mobile media, providing valuable online content, mobile applications, and enhanced analytics and ad tech capabilities. The acquisition of Fleetmatics aims to build growth capabilities in the emerging Internet of Things (IoT) market by providing fleet and mobile workforce management solutions.

Capital expenditures for the first nine months of 2016 decreased slightly compared to the prior year, indicating continued, but more controlled, investment in network infrastructure. However, free cash flow saw a significant reduction, mainly due to working capital impacts from asset-backed securitizations, higher tax payments, and a decline in earnings, suggesting a tighter cash generation environment for the period.