Strong wireless profitability and customer loyalty, renewed Fios growth highlight Verizon’s 3Q results

Via Verizon Wireless Newsroom

Oct 20, 2016

3Q 2016 highlights

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  • Consolidated: 89 cents in earnings per share (EPS); adjusted EPS (non-GAAP) of $1.01, excluding non-operational items related to pension re-measurement and severance costs.
  • Wireless: 442,000 retail postpaid net additions, including 357,000 new 4G LTE smartphones.
  • Wireline: 90,000 Fios Internet net additions, 36,000 Fios Video net additions.

NEW YORK – Third-quarter 2016 earnings at Verizon Communications Inc. (NYSE, Nasdaq: VZ) showed continued strong profitability and customer loyalty at Verizon Wireless, and renewed customer growth for Fios fiber-optic services.

The company reported third-quarter 2016 EPS of 89 cents, compared with 99 cents per share in third-quarter 2015.

Adjusted third-quarter 2016 EPS (non-GAAP) of $1.01 excluded 12 cents per share related to mark-to-market pension re-measurement and severance costs. This compares with adjusted third-quarter 2015 earnings of $1.04 per share, which excluded 5 cents per share due to pension re-measurement.

“Verizon continues to deliver strong financial and operational results in highly competitive markets while positioning itself for future growth,” said Chairman and CEO Lowell McAdam. “While we transform our company in a challenging environment, we have maintained the financial flexibility to invest in our industry-leading networks to better serve customers, add scale to bring innovation to the mobile media and Internet of Things (IoT) markets, and increase dividends for a 10th consecutive year.”

Consolidated results

  • Total operating revenues in third-quarter 2016 were $30.9 billion, a 6.7 percent decrease compared with third-quarter 2015. Excluding third-quarter 2015 revenues from since-divested local landline businesses, total operating revenues on a comparable basis (non-GAAP) would have declined 2.9 percent year over year.
  • Cash flows from operations totaled $4.8 billion in third-quarter 2016. Third-quarter 2016 proceeds of $2.6 billion from asset-backed securitization transactions, which in prior quarters under the off-balance-sheet securitization model would have flowed through cash flow from operations, are reflected in cash flows from financing.
  • Cash taxes were higher compared to a year ago, due primarily to tax payments of $2.4 billion in third-quarter 2016 related to the gain on sale of wireline operations divested earlier this year. Verizon also made a discretionary pension contribution in third-quarter 2016, bringing full-year pension funding payments to approximately $750 million.
  • Operating income was $6.5 billion in third-quarter 2016, and operating income margin was 21.1 percent. EBITDA (non-GAAP, earnings before interest, taxes, depreciation and amortization) totaled $10.5 billion, and the consolidated EBITDA margin (non-GAAP) was 33.9 percent in third-quarter 2016.

In September, Verizon’s Board of Directors approved a 2.2 percent dividend increase, the 10th consecutive year with an increase.

In July, Verizon announced an agreement to acquire Yahoo! and closed on the acquisition of Telogis, which added to Verizon’s suite of connected vehicle solutions. In August, Verizon announced an agreement to acquire Fleetmatics, a global provider of fleet and mobile workforce management solutions, in a transaction expected to close in fourth-quarter 2016. In September, Verizon announced the acquisition of Sensity Systems, adding to Verizon’s suite of smart city solutions when the transaction closed in October.

Growth continued in new markets, with strong demand from advertisers for AOL’s expanding programmatic capabilities and high-quality data analytical tools. Organically, IoT revenues, led by telematics, increased 24 percent on a comparable basis to third-quarter 2015, to $217 million.

Maintaining its network leadership, Verizon launched LTE Advanced in more than 460 markets in third-quarter 2016. The company is advancing its software-defined network (SDN) architecture, building a next-generation fiber network in Boston and aggressively densifying its nationwide wireless network. Based on the outcome of its commercial pilot program, Verizon intends to be the first company to launch a 5G fixed wireless broadband solution in the United States.

Verizon Wireless highlights

  • Verizon reported 442,000 retail postpaid net additions in third-quarter 2016. These net adds exclude wholesale device and wholesale IoT connections. At the end of third-quarter 2016, Verizon had 113.7 million retail connections, a 2.6 percent year-over-year increase. Verizon’s industry-leading retail postpaid connections base grew 3.0 percent to 108.2 million, and retail prepaid connections totaled 5.5 million.
  • Total revenues were $22.1 billion in third-quarter 2016, a decline of 3.9 percent compared with third-quarter 2015, as more customers continued to choose unsubsidized device payment plans. Service revenues plus device payment plan billings increased 2.3 percent, to $19.3 billion, comparing third-quarter 2016 with third-quarter 2015.
  • The percentage of phone activations on device payment plans was about 70 percent in third-quarter 2016, compared with about 67 percent in second-quarter 2016. The company expects this percentage to be around 70 percent in the fourth quarter. About 60 percent of postpaid phone customers are on an unsubsidized pricing plan, and Verizon expects to return to year-over-year service revenue growth by the end of 2017.
  • At the end of third-quarter 2016, Verizon Wireless had a total of about 35.8 million device payment plan phone connections, representing about 41 percent of the postpaid phone base.
  • Segment operating income was $7.6 billion, and segment operating income margin was 34.6 percent. In third-quarter 2016, Verizon Wireless generated $9.9 billion in segment EBITDA (non-GAAP), a year-over-year increase of 0.1 percent. Segment EBITDA margin (non-GAAP) was 44.9 percent, compared with 43.2 percent in third-quarter 2015.
  • Customer loyalty remained high. Retail postpaid churn was 1.04 percent in third-quarter 2016, a year-over-year increase of 11 basis points, as strong retention in the phone base was offset by increased churn in tablets. Retail postpaid phone churn was up 2 basis points year over year and remained below 0.90 percent for the sixth consecutive quarter.
  • The 442,000 retail postpaid net additions in third-quarter 2016 included 357,000 4G LTE smartphones. Net phone additions decreased sequentially to a loss of 36,000, as the net gain in 4G phones was offset by a net decline in basic and 3G phones. Tablet net additions totaled 221,000 in the quarter. All other postpaid net additions totaled 257,000, primarily due to sales of hum, Verizon’s telematics device.

Wireline highlights

  • Total wireline revenue decreased 2.3 percent, to $7.8 billion, comparing third-quarter 2016 with third-quarter 2015. Retail consumer revenues grew 0.2 percent, to $3.2 billion, supported by consumer Fios revenue growth of 4.2 percent.
  • Total revenues for Fios services grew 4.4 percent, to $2.8 billion, comparing third-quarter 2016 with third-quarter 2015. Rebounding from net connection declines in second-quarter 2016 due to a work stoppage, Verizon added a net of 90,000 Fios Internet connections and 36,000 Fios Video connections in third-quarter 2016.
  • Fios revenue growth has been driven by a larger customer base, strong customer loyalty and consumer demand for higher internet speeds. Approximately 16 percent of the company’s Fios Internet base has opted for speeds of 100 megabits per second or higher, compared with 11 percent in second-quarter 2016. Customer demand for Custom TV remains strong and is consistent with prior quarters.
  • Wireline operating income was $156 million in third-quarter 2016, compared with a loss of $109 million in third-quarter 2015. Segment EBITDA (non-GAAP) was $1.7 billion in third-quarter 2016, up 10.1 percent from third-quarter 2015. Segment EBITDA margin (non-GAAP) was 21.2 percent in third-quarter 2016, compared with 18.9 percent in third-quarter 2015, due to Fios growth and cost management. Verizon believes it will continue to make progress in expanding wireline EBITDA margin.
  • During the third quarter, Verizon Enterprise Solutions entered into new agreements or began work with a number of clients, including The American Red Cross, ADP, CA Technologies, CDK, Citrix, Colgate-Palmolive Company, Concentrix, ICON Clinical Research, Juniper Networks, the National Weather Service, PTC, Sage, Steptoe & Johnson LLP, Vantiv, Inc., Viacom, Virginia Information Technologies Agency and the French subsidiary of Allianz Worldwide Partners.

Outlook and forward-looking items

Verizon expects the following:

  • 2016 adjusted earnings to be at a level comparable to 2015, excluding a 7-cent-per-share impact of the 2016 work stoppage;
  • Consolidated adjusted EBITDA margin for 2016 consistent with full-year 2015;
  • Consolidated capital spending for 2016 at the low end of the range of $17.2 billion to $17.7 billion;
  • 2016 effective tax rate to be in the range of 35 percent to 36 percent;
  • Organic growth in consolidated revenues for full-year 2017 consistent with GDP growth for that year, with adjusted EPS growth at normal levels; and
  • A return, by 2018-2019, to the company’s credit-rating profile prior to the acquisition of Vodafone’s indirect 45 percent interest in Verizon Wireless in early 2014.
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