Verizon Reports Continued Strong Quarterly Results
Sustained Industry-Leading Growth in Wireless and Broadband, Improving Trends at Verizon Business Produce Solid 2Q Revenues and Margins
August 1, 2006
SECOND-QUARTER 2006 HIGHLIGHTS
* Diluted earnings per share (EPS) of 55 cents, or 64 cents per share before special items (non-GAAP measure)
* Reported revenues of $22.7 billion, up 25.6 percent from second quarter 2005
* Company reiterates full-year EPS guidance
* Total ARPU up year-over-year and up from first quarter 2006; retail ARPU of $50.34
* 1.8 million net customer additions; 54.8 million total customers, up 15.8 percent from second quarter 2005; 52.6 million retail customers
* Total revenues up 18.0 percent from second quarter 2005, with data service revenues topping $1 billion for the quarter; EBITDA margin (non-GAAP) of 44.4 percent
* Consecutive quarterly industry-record low churn rates (customer turnover); 1.13 percent total churn; 1.05 percent retail churn; 0.87 percent retail postpaid churn
* 440,000 net new broadband connections, including 111,000 FiOS Internet customers; 6.1 million total broadband connections, up 47.9 percent from second quarter 2005
* Data revenues of $4.0 billion, up 89.8 percent from second quarter 2005, including results from Verizon Business domestic and global operations
* Integration of former MCI operations ahead of plan; synergies continue ramp-up and revenue trends improve
Notes: Reclassifications of prior-period amounts have been made to reflect comparable results excluding Verizon’s Hawaii wireline and directory operations, which were sold in the second quarter 2005. See the schedules accompanying this news release and www.verizon.com/investor for reconciliations to generally accepted accounting principles (GAAP) for the non-GAAP financial measures included in this announcement.
NEW YORK -- Maintaining industry-leading growth in wireless and broadband markets, Verizon Communications Inc. (NYSE:VZ) today reported continued strong financial and operational results for the second quarter 2006.
Verizon reported quarterly earnings of $1.6 billion, or 55 cents per diluted share, compared with $2.1 billion, or 75 cents per share, in the second quarter 2005.
Reported earnings in the second quarter 2006 reflect 9 cents per share in special items for severance and related pension and benefits charges, and for employee relocations and merger integration costs. Reported earnings in the second quarter 2005 had included a net of 12 cents per share in non-recurring gains, principally from the sale of Verizon’s wireline and directory operations in Hawaii.
Before special items (non-GAAP), Verizon’s earnings were 64 cents per share in the second quarter 2006, compared with 63 cents in the second quarter 2005.
For the full year, Verizon has reiterated guidance of 2006 EPS similar to 2005 earnings of $2.56 per share before special items.
Consolidated operating revenues in the second quarter 2006 were $22.7 billion, a 25.6 percent increase compared with the second quarter 2005. Consolidated total operating expenses were $19.1 billion, a 35.7 percent increase compared with the second quarter 2005. Reported results in the second quarter 2006 include revenues and expenses from the former MCI, Inc., which merged with Verizon on Jan. 6, 2006.
On a pro-forma (non-GAAP) basis, comparing second quarter 2006 with second quarter 2005, adjusted operating revenues increased 2.3 percent, adjusted cash expenses increased 1.0 percent and adjusted operating income increased 12.4 percent. Adjusted operating income margins, including the effects of net pension and OPEB (other post-retirement benefits), would have been 17.7 percent in second quarter 2006, compared with 16.1 percent in second quarter 2005. Pro-forma adjusted information presents the combined operating results of Verizon and the former MCI on a comparable basis.
Focused on Growth and Shareholder Value
“Our second-quarter results are strong, and we are gaining momentum as we focus on growth initiatives and creating shareholder value,” said Ivan Seidenberg, Verizon chairman and CEO. “We have maintained excellent cost management across our network-based wireless, broadband and enterprise businesses, and we are confident in our ability to grow earnings.”
He continued: "Verizon Wireless produced another industry-leading quarter of profitable growth. The sustainability of the company’s market leadership is due to our network reliability, handset and services innovation, and exceptional customer loyalty.
"In our wireline business, we continue to see strong demand for broadband services. Verizon Telecom is tightly controlling costs in traditional businesses as we make the fiber network investments to accelerate growth and market expansion. At Verizon Business, we’re off to an aggressive start. Using the Verizon model of network strength, product and service innovation, and quality customer service, we already see revenue trends improving, coupled with declining costs.
“As our strategic initiatives are proceeding on target, we are continuing our share repurchase program in another sign of our confidence.”
Verizon Wireless Again Leads Industry
Verizon Wireless again generated industry-leading net customer additions and profitability in the second quarter 2006, and again set new all-time low churn records among the major carriers.
This was the 16th consecutive quarter of double-digit, year-over-year revenue growth. This was the sixth consecutive quarter with EBITDA margins above 40 percent, the ninth consecutive quarter in which the company added more than 1.5 million total customers and the eighth consecutive quarter in which it added more than 1.5 million retail customers.
Verizon Wireless added 1.8 million net customers in the second quarter 2006, for a total of 54.8 million customers nationwide, representing a 15.8 percent increase in total customers from the end of the second quarter last year. During the past 12 months, the company added nearly 7.5 million net customers, more than any other carrier in the industry.
All of the net additions in the quarter and almost all of those in the past 12 months were retail customers -- that is, businesses and consumers directly served and managed by Verizon Wireless and who buy Verizon Wireless-branded service, rather than customers of the company’s resellers.
Verizon Wireless continued to set new industry records for low customer churn, a key measure of customer loyalty. For the second quarter 2006, total churn was a record-low 1.13 percent, and churn among the company’s retail postpaid customers was 0.87 percent, another record.
Verizon Wireless revenues grew 18.0 percent year-over-year to $9.3 billion in the second quarter 2006, driven by continued strong customer growth and demand for data services. Topping $1.0 billion for the first time in a quarter, wireless data revenues accounted for nearly 12.9 percent of total wireless service revenues.
Verizon Wireless operating income margin was 25.6 percent in the quarter, reflecting its ability to maintain industry-leading cost efficiency even as it added the most retail customers.
Wireless EBITDA margin was 44.4 percent. (EBITDA -- or earnings before interest, taxes, depreciation and amortization -- is a non-GAAP measure that adds depreciation and amortization to operating income; EBITDA margin is calculated by dividing EBITDA by wireless service revenues.)
Strong Demand for Wireline Broadband
In the second quarter, Verizon’s wireline business added 440,000 net broadband connections, which include both DSL and FiOS, Verizon’s next-generation, fiber-optic-based service. Over the past three quarters, Verizon has added 1.6 million net new DSL and FiOS customers, more than any other company offering broadband services in the United States for that period.
FiOS Internet customers accounted for 111,000 of the net broadband connection additions in the second quarter 2006 and now make up 375,000 of the company’s 6.1 million total wireline broadband connections, which have increased 47.9 percent compared with the second quarter 2005. FiOS data services are becoming increasingly available for sale in 16 states, as Verizon’s FTTP (fiber to the premises) network passed a total of 4.5 million premises by mid-July 2006 and is on target to pass 6 million premises by year-end.
Penetration of FiOS Internet service now stands at 12 percent across all markets. In markets where Verizon has been selling FiOS data services for at least a year, the average penetration rate was 15 percent at the one-year mark, well on the way toward achieving the company’s goal of 30 percent penetration in five years. Earnings dilution from FiOS data and video deployment was 7 cents per share in the second quarter 2006 and is expected in the range of 28 cents per share to 30 cents per share for the full year.
Total wireline operating revenues were $12.8 billion in the second quarter 2006, an increase of 35.3 percent compared with the second quarter 2005 on an adjusted basis (non-GAAP) excluding revenues from operations sold in 2005. On the same adjusted basis, total wireline operating expenses were $11.6 billion in the second quarter 2006, a 40.1 percent increase compared with the second quarter 2005.
On a pro-forma basis, wireline operating revenues decreased 6.2 percent comparing second quarter 2006 with second quarter 2005, driven in part by expected declines in the former MCI mass market business. Also on a pro-forma basis, wireline cash expenses (total operating expenses less depreciation and amortization expense) of $9.1 billion in the second quarter 2006 decreased 6.7 percent compared with the second quarter 2005.
Verizon Business Builds Momentum
Verizon Business, which provides advanced communications and information technology solutions to large business and government customers globally, steadily built momentum during the second quarter.
Verizon Business experienced improving revenue trends in the quarter. The business remains ahead of plan to achieve its 2006 target of $550 million in synergies from the MCI merger. By the end of the second quarter, approximately $200 million in synergies were realized, at a rate that will continue to ramp up through the remainder of the year.
Compared with the first quarter 2006, Verizon Business operating revenues increased 1.6 percent, on a pro-forma basis, to $5.1 billion in the second quarter 2006. Over the same period, pro-forma revenues from strategic growth products -- including a variety of IP (Internet protocol) and managed network services -- rose 5.4 percent, to $938 million.
Verizon Business continued to deliver on the success of its January 2006 launch, unveiling additional products and services that meet customers’ advanced communications and information technology needs. As the business communications market continued its shift to IP technology, Verizon Business moved to further enhance its industry-leading VoIP (voice over IP) product portfolio, rolling out new offerings such as a VoIP security assessment service in the U.S. and extending VoIP capabilities to international markets.
Cash Flows and Additional Share Repurchases
At the consolidated level, Cash Flows from Operating Activities were $11.5 billion in the first half of 2006, compared with $9.9 billion in the first half of 2005. Capital expenditures were $8.3 billion in the first half of 2006, including a nearly $1.0 billion increase in wireline investment primarily driven by the inclusion of MCI, compared with $7.5 billion in 2005.
In the first half of the year, Verizon repurchased $1.0 billion in shares, meeting its previously stated full-year target. The company plans to continue its share buyback program in 2006, and it is targeting an additional $500 million in repurchases in the second half.
Verizon’s total debt at the end of the second quarter 2006 was $42.4 billion, compared with $38.3 billion at the end of 2005. The increase was primarily due to the addition of MCI’s debt as a result of the merger.
Special Items and Other Information
Special items in the second quarter 2006 included $186 million in after-tax charges, or 6 cents per share, for severance and related charges for 3,200 employees, primarily in the company’s wireline business, who will leave Verizon before the end of the year. At the end of the second quarter, Verizon had more than 252,000 employees -- essentially flat with the first-quarter total, as job growth in wireless balanced declines in other areas of the business.
Other special items were $48 million after-tax, or 2 cents per share, for MCI merger integration costs, and $29 million after-tax, or 1 cent per share, for relocation and other costs related to the Verizon Center in New Jersey.
In April 2006, Verizon announced that definitive agreements were reached to sell its interests in Verizon Dominicana, Telecomunicaciones de Puerto Rico and Compañia Anónima Nacional Teléfonos de Venezuela. Verizon Dominicana and Telecomunicaciones de Puerto Rico are now reported as discontinued operations.
Following are second-quarter 2006 highlights for Verizon’s Wireless, Wireline and Information Services business segments.
* Based on publicly available information, Verizon Wireless has the largest retail customer base in the industry -- 52.6 million retail customers of 54.8 million total customers, which includes retail and wholesale. In keeping with the company’s focus on retail, Verizon Wireless delivered not only the most net additions in the industry in the second quarter, but also the most retail net additions.
* Service revenues (which do not include taxes and regulatory fees) increased 16.9 percent to $8.0 billion for the second quarter 2006. Average monthly service revenue per customer (ARPU) increased to $49.71, up 0.6 percent from the similar period in 2005 and up 2.1 percent from the prior quarter. Retail service revenue per retail customer was higher at $50.34 for the quarter, an increase of 0.5 percent over 2005.
* The company’s cost efficiency continued to lead the industry, as cash expense per customer in the second quarter declined 1.8 percent year-over-year to $27.66, even as the company added a high volume of customers.
* Data services revenues contributed slightly over $1.0 billion, more than double the same period a year ago. This was the first time quarterly data services revenues exceeded the billion-dollar mark. In the second quarter, data revenues contributed 12.9 percent of service revenues, up from 7.0 percent in the second quarter of 2005. Data ARPU increased 84 percent from second quarter 2005. The company now has 28.9 million data customers -- a 52 percent increase compared with second quarter 2005.
* Driving the growth in data services revenues are the company’s national 3G EV-DO high-speed network and an industry-leading lineup of business and consumer devices. By the end of the second quarter, 10 million customers had broadband-capable devices, including phones, PDAs, Blackberries and laptop PC cards.
* During the second quarter, the company continued to expand its business customer base and ranked highest in the second annual J.D. Power and Associates 2006 Business Wireless Satisfaction StudySM. The survey of 2,725 businesses measured overall customer satisfaction with call quality, performance and reliability, customer service, billing, and other criteria.
* For business customers, Verizon Wireless introduced two new PDAs, the ultra-thin Motorola Q and the Treo 700p, the latest in a steady stream of handheld devices that offer productivity solutions for mobile professionals. Both devices provide all-in-one voice and data capabilities and use Verizon Wireless’ high speed, award-winning broadband network to send and receive data.
* For consumers, the company launched four new V CAST Music-enabled phones: the sleek, music-centric ChocolateTM by LG, available exclusively from Verizon Wireless; the LG VX8300; the RAZR V3m; and the SCH-a930. V CAST Music lets customers preview, download and play high-quality, digital music on their handsets over the Verizon Wireless broadband network or on their PCs, as well as transfer their own music from their PC to their handset. Verizon Wireless also launched the industry’s only wireless phone with a 3.2 mega pixel camera, the SCH-a990, and ChaperoneSM service, a new tool for parents to help identify the whereabouts of their young children who are carrying an LG Migo phone.
* The company continued to expand its distribution channels by adding post-paid service plans to its pre-paid lineup at 1,900 Wal-Mart stores nationwide.
* Verizon Wireless customers sent and received an industry-record-setting 12 billion text messages in the quarter. Customers exchanged more than 232 million picture and video messages, and completed nearly 55 million downloads of games, ringtones, ringback tones and exclusive content.
* Verizon Wireless continued to garner top honors during the quarter for its industry-leading customer satisfaction and loyalty. The company ranked first in the American Customer Satisfaction Index (ACSI) survey and the Brandweek 2006 Brand Keys Customer Loyalty Index®, and tied for first place in the J.D. Power and Associates 2006 Wireless Customer Care Performance StudySM.
* Data revenues were $4.0 billion in the second quarter 2006, up 89.8 percent from the second quarter 2005 -- a comparison favorably affected by the inclusion of MCI this year. Data revenues now make up 31 percent of Verizon’s total wireline revenues.
* Verizon’s video deployment plans remain on track. Verizon has passed more than 1.5 million households with its FTTP video network this year and has obtained more than 100 franchises covering approximately 3 million households. The company has begun selling FiOS TV in approximately 60 markets across seven states.
* In markets where Verizon has been selling FiOS TV for at least six months, Verizon’s penetration levels already average 10 percent, representing significant progress toward the company’s goal of penetration of 20 percent to 25 percent in five years.
* More than 60 percent of FiOS TV customers have selected advanced set-top boxes with either digital video recorders, high-definition capabilities or both. Approximately 80 percent of FiOS TV customers purchase three Verizon services -- voice, data and video.
* Complementing the FiOS TV rollout, Verizon now has 485,000 customers who receive a Verizon DIRECTV bundle, adding a company-record 70,000 net new customers in the quarter.
* Total switched access lines in service -- not including wireline broadband connections -- were 47.0 million at the end of the second quarter 2006, a 7.4 percent decline compared with the second quarter 2005. Among Verizon residential retail customers, gains in wireline broadband connections helped increase RGUs (revenue generating units, defined as consumer retail access lines plus consumer broadband and video customers) by 1.0 percent year-over-year to 32.3 million.
* Verizon Freedom packages, which offer local wireline services with various combinations of long-distance and Internet access, have been instrumental in retaining retail wireline customers. Approximately 6.9 million Verizon Freedom packages were in service to mass market (residential and small business) customers by the end of the second quarter 2006, an increase of more than 2 million since the end of the second quarter 2005.
* Verizon Business is executing ahead of schedule on previously announced network synergy targets. Ninety percent of the voice traffic previously on third-party networks formerly used by Verizon prior to the MCI merger has been moved to the Verizon Business network. Also, 100 percent of the IP traffic has been moved to the Verizon Business network.
* Several leading industry authorities recognized the power of Verizon Business’ go-to-market strategy and product portfolio during the second quarter. Verizon Business achieved leader status in the Gartner Magic Quadrant as a Provider of Managed and Professional Services and as U.S. Network Service Provider of Advanced Voice and Data Solutions. Additionally, the company was cited for the Highest Customer Satisfaction With Large Enterprise Business Data Service Providers by J.D. Power and Associates.
* New Verizon Business offerings during the second quarter included an expanded suite of solutions to VoIP services available in Europe, as well as an enhanced IP Integrated Access offering. Additionally, Verizon Business launched a global VoIP Gateway service for the wholesale market.
* Verizon Business also introduced significant enhancements to conferencing offerings and launched Hosted Secure IM service, which enables real-time collaboration and communications in the workplace that meets enterprise needs for security and usage management. In addition, Verizon Business introduced a suite of services designed to help ensure business continuity. The portfolio addresses the growing customer need for business continuity preparedness that will allow businesses to maintain vital communications and operations systems during unforeseen events such as natural disasters.
* Verizon Business completed new agreements in the second quarter with multinational corporations, including DaimlerChrysler and McDonald’s. Verizon Business is a primary provider of advanced communications services, including managed services, for DaimlerChrysler in North America, Europe, the Middle East, Africa and other locations. Rapid Solutions Group, a leading digital communications company providing printing and fulfillment services, entered into a new agreement with Verizon Business for Managed Private IP to enable its nationwide data communications. JCPenney added new CPE (customer premises equipment) and professional services in the quarter to enhance its nationwide retail store communications.
* Internationally, Verizon Business has seen significant growth with both new and existing customers over the quarter. New customers include Helly Hansen, a global manufacturer of high-performance clothing and survival products, and REANNZ, a New Zealand research and education network. Helly Hansen has contracted for a Managed Private IP network to link its operations in 17 countries. REANNZ has chosen Verizon Business to develop a high-speed private network to facilitate international academic collaboration for New Zealand researchers. Other new customers include D’Amico Società di Navigazione, a ship owner and shipping company, and Esmertec, a leading provider of software solutions and services for telecommunications, interactive multimedia and consumer electronics markets. Existing customers who have extended their relationship with Verizon Business include Black & McDonald, a Canadian electrical, utility and maintenance service provider.
In December 2005, Verizon announced that it is exploring divesting Verizon Information Services (VIS) through a spinoff, sale or other strategic transaction. In July 2006, Verizon announced the filing of a Form 10 registration statement with the Securities and Exchange Commission in a step toward a proposed spinoff of Verizon’s domestic print and Internet yellow pages directories to its stockholders. Verizon has not yet made a final decision whether a spinoff will occur, but the company continues to expect to complete a disposition of these operations -- which could include the spinoff, a sale or other transaction, or combination of these alternatives -- by the end of 2006. Since this process is still ongoing, VIS’ results of operations, financial position and cash flows remain in continuing operations.
* VIS’ second-quarter operating revenues were $802 million compared with $870 million in the second quarter of 2005, a 7.8 percent decline, primarily driven by reductions in domestic print advertising revenues.
* In the second quarter, VIS’ domestic online directory and search service, SuperPages.com, achieved revenue growth of 12.2 percent compared with the second quarter of 2005, and Internet yellow pages searches increased 143.9 percent over the same period.
Verizon Communications Inc. (NYSE:VZ), a Dow 30 company, is a leader in delivering broadband and other wireline and wireless communication innovations to mass market, business, government and wholesale customers. Verizon Wireless operates America’s most reliable wireless network, serving nearly 55 million customers nationwide. Verizon Business operates one of the most expansive wholly-owned global IP networks. Verizon Telecom is deploying the nation’s most advanced fiber-optic network to deliver the benefits of converged communications, information and entertainment services to customers. Based in New York, Verizon has a diverse workforce of more than 252,000 and generates annual consolidated operating revenues of approximately $90 billion. For more information, visit www.verizon.com.
NOTE: This news release contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The following important factors could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements: materially adverse changes in economic and industry conditions and labor matters, including workforce levels and labor negotiations, and any resulting financial and/or operational impact, in the markets served by us or by companies in which we have substantial investments; material changes in available technology; technology substitution; an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations; the final results of federal and state regulatory proceedings concerning our provision of retail and wholesale services and judicial review of those results; the effects of competition in our markets; the timing, scope and financial impacts of our deployment of fiber-to-the-premises broadband technology; the ability of Verizon Wireless to continue to obtain sufficient spectrum resources; changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; the timing of the closings of the sales of our Latin American and Caribbean properties; and the extent and timing of our ability to obtain revenue enhancements and cost savings following our business combination with MCI, Inc.
2Q Financial Schedules: http://newscenter.verizon.com/relatives/19907.xls
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