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| VZ > SEC Filings for VZ > Form 10-Q on 28-Oct-2008 | All Recent SEC Filings |
28-Oct-2008
Quarterly Report
Verizon Communications Inc. (Verizon or the Company) is one of the world's leading providers of communications services. Verizon's wireline business provides communications services, including voice, broadband data and video services, network access, nationwide long-distance and other communications products and services, and also owns and operates one of the most expansive end-to-end global Internet Protocol (IP) networks. Verizon's domestic wireless business, operating as Verizon Wireless, provides wireless voice and data products and services across the United States using one of the most extensive and reliable wireless networks. Stressing diversity and commitment to the communities in which we operate, we have a highly diverse workforce of approximately 228,300 employees.
The sections that follow provide information about the important aspects of our operations and investments, both at the consolidated and segment levels, and include discussions of our results of operations, financial position and sources and uses of cash. In addition, we have highlighted key trends and uncertainties to the extent practicable. The content and organization of the financial and non-financial data presented in these sections are consistent with information used by our chief operating decision makers for, among other purposes, evaluating performance and allocating resources. We also monitor several key economic indicators as well as the state of the economy in general, primarily in the United States where the majority of our operations are located, in evaluating our operating results and assessing the potential impacts of these trends on our businesses. While most key economic indicators, including gross domestic product, affect our operations to some degree, we historically have noted higher correlations to non-farm employment, personal consumption expenditures and capital spending, as well as more general economic indicators such as inflation, unemployment rates and housing starts.
Our results of operations, financial position and sources and uses of cash in the current and future periods reflect Verizon management's focus on the following strategic imperatives:
• Revenue Growth - Our emphasis is on revenue growth, devoting more resources to higher growth markets such as wireless, including wireless data, wireline broadband connections, including Verizon's high-capacity fiber optics to the premises network operated under the FiOS service mark, high-speed Internet lines and other data services, as well as expanded strategic services to business markets, rather than to the traditional wireline voice market. During the third quarter of 2008, we reported consolidated revenue growth of 4.1% compared to last year, primarily driven by 12.5% higher revenue at Domestic Wireless, due to increases in data revenues, which accounted for 25.5% of service revenue, and an 11.2% increase in customers. At Wireline, revenue growth in the residential market, driven by broadband and video services, coupled with growth in the business market derived from strategic services, partially offset declines in the traditional voice mass market. Operating revenues in the third quarter of 2007 include $279 million related to the local exchange and related business assets in Maine, New Hampshire and Vermont that were spun-off in the first quarter of 2008.
• Market Share Gains - We are focused on gaining market share. In our wireline business, our goal is to become the leading broadband provider in every market in which we operate. At Wireline, as of September 30, 2008, we passed 11.9 million premises with our high-capacity fiber network of which 9.1 million premises are open for FiOS Internet sales and 8.2 million premises are open for FiOS TV sales. We added 129,000 net wireline broadband connections during the third quarter of 2008, for a total of 8,459,000 connections. We are among the top 10 video providers in the U.S. through the continued deployment of FiOS. At September 30, 2008, we had 1,615,000 FiOS TV customers, adding approximately 233,000 net new FiOS TV customers in the third quarter of 2008. Revenues from strategic services (Private IP, IP, Managed Services, Virtual Private Network or VPN, Web Hosting and Voice over IP or VoIP) grew 15.4% over the same period last year. At Domestic Wireless, we continue to add retail customers, grow revenue and gain market share while maintaining a low churn (customer turnover) rate.
• Profitability Improvement - Our goal is to increase operating income and margins. While our reported operating results in the third quarter of 2008 were lower compared to last year, primarily attributable to $315 million ($196 million after-tax) of merger integration costs, as well as severance, pension and benefit costs, operating income for the nine months ended September 30, 2008 rose 7.4% compared to the same period last year, while income before provision for income taxes and discontinued operations and extraordinary item rose 4.0% over the same period. Our operating income margin during the nine months ended September 30, 2008 rose to 18.0% compared with 17.5% in the same period in 2007. Supporting these improvements, our capital spending continues to be directed primarily toward growth markets, positioning the Company for sustainable, long-term profitability. High-speed wireless data (Evolution-Data Optimized or EV-DO) services, fiber optics to the premises, as well as expanded services to enterprise customers are examples of these growth markets. During the nine months ended September 30, 2008, capital expenditures were $12,575 million compared with capital expenditures of $12,792 million in the similar period in 2007, excluding discontinued operations. During the second quarter of 2008, Verizon Wireless completed the payment for several licenses awarded to it in the Federal Communications Commission (FCC) 700 MHz auction for an aggregate bid price of approximately $9.4 billion. Verizon Wireless expects the licenses to be granted by the FCC in the fourth quarter of 2008. Domestic Wireless also expects, from time to time, to acquire operating markets and spectrum in geographic areas where it does not currently operate.
• Customer Experience - Our goal is to provide the best customer experience possible and to be the leading company in customer service in every market we serve. We view superior product offerings and customer service experiences as a competitive differentiator and a catalyst to growing revenues and gaining market share. We continue developing and marketing innovative product bundles to include local wireline, long-distance, wireless and broadband services for consumer and general business retail customers. These efforts will help counter the effects of competition and technology substitution that have resulted in access line losses and will enable us to grow revenues. Also at Wireline, we continued to roll out next-generation global IP networks to meet the ongoing global enterprise market shift to IP-based products and services. Deployment of new strategic service offerings - including expansion of our VoIP and international Ethernet capabilities, the introduction of video and web-based conferencing capabilities, and enhancements to our virtual private network portfolio - will allow us to continue to gain share in the enterprise market. At Domestic Wireless, we continue to execute on the fundamentals of our network superiority and value proposition to deliver growth for our business and provide new and innovative products and services, such as Broadband Access, our EV-DO service. We also continue to expand our wireless data, messaging and multi-media offerings for both consumer and business customers and take advantage of the growing demand for wireless data services.
• Performance-Based Culture - We embrace a culture of corporate-wide accountability, based on individual and team objectives that are performance-based and tied to these imperatives. Key objectives of our compensation programs are pay-for-performance and the alignment of executives' and shareowners' long-term interests. We also employ a highly diverse workforce, since respect for diversity is an integral part of Verizon's culture and a critical element of our competitive success.
We create value for our shareowners by investing the cash flows generated by the business in opportunities and transactions that support these strategic imperatives, thereby increasing customer satisfaction and usage of our products and services. In addition, we have used our cash flows to repurchase shares and maintain and grow our dividend payout to shareowners. Reflecting continued strong cash flows and confidence in Verizon's business model, Verizon's Board of Directors increased the Company's quarterly dividend 6.2% during the third quarter of 2007 and 7.0% during the third quarter of 2008, with a goal of moving to an annual dividend increase model. During the nine months ended September 30, 2008, we repurchased $1,369 million of our common stock as part of our previously announced share buyback programs. Net cash provided by operating activities - continuing operations for the nine months ended September 30, 2008 of $19,078 million increased by $1,059 million from $18,019 million for the nine months ended September 30, 2007.
On August 7, 2008, Verizon Wireless completed the acquisition of Rural Cellular Corporation (Rural Cellular) in a cash transaction. Rural Cellular was a wireless communications service provider focusing primarily on rural markets in the United States. Verizon Wireless believes that the transaction will further enhance its network coverage in markets adjacent to its existing service areas and will enable Verizon Wireless to achieve operational benefits through realizing synergies in reduced roaming and operations expenses. Under the terms of the acquisition agreement, Rural Cellular's common shareholders received cash of $45 per share ($728 million in the aggregate). Additionally, the holders of all classes of Rural Cellular's preferred stock received cash in the aggregate of $571 million.
On June 5, 2008, Verizon Wireless entered into an agreement with Alltel Corporation (Alltel) and Atlantis Holdings LLC, an affiliate of private investment firms TPG Capital and GS Capital Partners, to acquire Alltel in a cash merger. Under the terms of the agreement, Verizon Wireless will acquire the equity of Alltel for approximately $5.9 billion. Based on Alltel's projected net debt at closing of approximately $22.2 billion, the aggregate value of the transaction is approximately $28.1 billion. The parties are targeting completion of the merger by the end of the year, subject to obtaining regulatory approvals.
On March 31, 2008, we completed the spin-off of our local exchange and related business assets in Maine, New Hampshire and Vermont. Verizon stockholders received one share of FairPoint Communications, Inc. (FairPoint) common stock for every 53.0245 shares of Verizon common stock they owned as of March 7, 2008. FairPoint paid cash in lieu of any fraction of a share of FairPoint common stock. As a result of the spin-off, our net debt was reduced by approximately $1.4 billion. Both the spin-off and merger qualify as tax-free transactions, except for the cash payments for fractional shares which are generally taxable.
In this section, we discuss our overall results of operations and highlight items that are not included in our business segment results. We have two reportable segments, which we operate and manage as strategic business units and organize by products and services. Our segments are Wireline and Domestic Wireless.
This section and the following "Segment Results of Operations" section also highlight and describe those items of a non-recurring or non-operational nature separately to ensure consistency of presentation. In the following section, we review the performance of our two reportable segments. We exclude the effects of certain items that management does not consider in assessing segment performance, primarily because of their non-recurring and/or non-operational nature as discussed below and in the "Other Consolidated Results" and "Other Items" sections. We believe that this presentation will assist readers in better understanding our results of operations and trends from period to period.
On March 31, 2008, we completed the spin-off of our local exchange and related business assets in Maine, New Hampshire and Vermont. Accordingly, Wireline results from divested operations have been reclassified to reflect comparable operating results.
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