Verizon Reports Strong 1Q 2007 Results, Driven by Top-Line Growth Across Key Markets
Continued Strong Wireless Performance and Improvements in the Wireline Consumer and Large-Business Markets.
Operating Income Increases as Wireless, Broadband, Video and Strategic Services Growth Accelerates.
NEW YORK -- Verizon Communications Inc. (NYSE:VZ) today reported strong, profitable first-quarter 2007 revenue growth, supported by industry-leading retail customer growth at Verizon Wireless and strong sales of broadband services, including video.
Verizon reported first-quarter 2007 earnings of $1.5 billion, or 51 cents in fully diluted earnings per share (EPS). This compares with EPS of 56 cents in the first quarter 2006 -- which includes operations that Verizon has since divested.
Verizonís first-quarter 2007 diluted EPS before discontinued operations was 51 cents, or 54 cents per share on an adjusted basis (before special items, non-GAAP), a 17.4 percent increase from 46 cents per share in the first quarter 2006.
In total, on an adjusted basis (non-GAAP), Verizonís first-quarter 2007 earnings were $1.6 billion, or 56 cents in EPS, compared with 60 cents in EPS in the first quarter 2006, which included operations that Verizon has since divested. Special item adjustments in the first quarter 2007 included an extraordinary loss of 5 cents in EPS due to the impact of the Venezuelan governmentís nationalization of telecommunications services.
Accelerating Growth in Key Markets
ďVerizon is off to a strong start in 2007,Ē said Chairman and CEO Ivan Seidenberg. ďOur results show that across-the-board we have accelerated organic growth in key markets: retail wireless, broadband, data, video and global IP [Internet protocol].Ē
Seidenberg added, ďVerizon is focused on growing revenue, capturing market share, improving margins, increasing productivity, and providing the best customer experience. Throughout the first quarter, we built positive momentum on all these fronts, and this reinforces our confident outlook.
ďWe continue to drive value for shareholders. Our investment in advanced network platforms has been a foundation for product innovations and operating efficiencies, and we have divested non-strategic assets while maintaining our strong balance sheet and returning capital to shareholders through dividends and share repurchases.Ē
Profitable Revenue Growth
Verizonís total operating revenues grew 6.4 percent, to $22.6 billion, comparing first quarter 2007 with first quarter 2006. On an adjusted basis (non-GAAP), which reflects comparable results for the sale of selected non-strategic assets in the first quarter 2007, year-over-year operating revenue growth was 6.5 percent.
Total operating expenses increased 4.1 percent, to $18.8 billion, and to $18.7 billion on an adjusted basis, which also represented a 4.1 percent increase. Operating income grew 19.6 percent, to $3.8 billion, and 19.5 percent on an adjusted basis, to $3.9 billion, over the same periods.
Because Verizon completed its merger with MCI, Inc. on Jan. 6, 2006, GAAP comparisons of the first quarters in 2006 and 2007 do not include five days of the former MCIís 2006 results. Comparing results on a pro-forma basis (non-GAAP) -- as if Verizon and MCI had merged on Jan. 1, 2006 -- Verizonís adjusted operating revenues increased 5.4 percent and adjusted operating expenses increased 2.8 percent in the first quarter 2007.
Verizonís operating income margin rose to 16.8 percent in the first quarter 2007, compared with 15.0 percent in the first quarter 2006. On an adjusted basis and on a pro-forma basis, Verizonís operating income margin rose to 17.3 percent in the first quarter 2007, compared with 15.4 percent (adjusted) and 15.2 percent (pro-forma) in the first quarter 2006.
Verizon Wireless Continues to Stand Out From Industry
Verizon Wireless continued its record of strong, industry-leading retail net customer additions, revenue growth, profitability and low churn in the first quarter 2007.
Verizon Wireless remains the largest U.S. wireless company in terms of retail (non-wholesale) customers, total revenues and data revenues. In the first quarter:
* Nearly all of the 1.6 million retail net customer additions (including acquisitions and adjustments) were post-paid customers. Based on publicly available information, the company has the most retail customers in the industry: 58.5 million.
* Total customers (which include retail and wholesale) were 60.7 million. The company added 1.7 million total net customers.
* Verizon Wireless continued its industry-leading low churn, with retail churn at 1.08 percent for the quarter, indicating remarkable customer loyalty. Churn among retail post-paid customers was even lower, at 0.89 percent.
* Revenues totaled $10.3 billion, up 17.0 percent. Service revenues were $9.0 billion, up 18.2 percent, driven by strong customer growth and demand for data services.
* Retail service ARPU (average monthly revenue per customer) was $50.73, up 2.8 percent year-over-year, delivering the fourth consecutive quarter of year-over-year growth.
* Wireless operating income margin was 26.5 percent, the highest ever. EBITDA margin was 44.3 percent. Margins remained strong even as the company added a significant number of net retail customers. (EBITDA -- earnings before interest, taxes, depreciation and amortization -- is non-GAAP, and wireless EBITDA margin is EBITDA divided by wireless service revenues.)
Verizon Wireline Highlighted by Broadband and Data Growth
Verizonís Wireline operations reported continued strong growth from broadband, video and strategic services. This segment includes Verizon Telecom, which serves residential and small-business customers, and Verizon Business, which provides advanced communications and information technology solutions to large-business and government customers globally. In the first quarter 2007:
* Data revenues across all market segments increased 12.2 percent, to $4.2 billion, compared with the first quarter 2006. On pro-forma basis (non-GAAP), data revenue growth was 9.5 percent compared with the first quarter 2006.
* Data growth reflected increasing revenues from consumer broadband -- such as DSL and Verizonís all-digital, fiber-optic FiOS services -- as well as from wholesale data transport and sales of Verizon Business data services.
* Verizon added 416,000 net new broadband connections. This is the sixth consecutive quarter that Verizon has added more than 400,000 net broadband connections, a measure that combines the number of DSL and FiOS Internet connections.
* Wireline broadband connections totaled 7.4 million, a 30.1 percent increase compared with the first quarter 2006. This total includes 864,000 FiOS Internet connections, an increase of 177,000 in the first quarter 2007.
Strong Demand for FiOS TV
Verizon Telecom added a net of 141,000 new FiOS TV customers in the first quarter 2007. Verizon served 348,000 FiOS TV customers as of the end of the quarter, and this growth is accelerating. The company averaged approximately 2,200 FiOS TV net customer additions per business day in the first quarter 2007, about 750 more net additions per business day than the fourth-quarter 2006 average.
Complementing the FiOS TV rollout, Verizon now serves 618,000 satellite TV customers in partnership with DIRECTV, for a total approaching 1 million video customers nationwide.
Revenues for Verizon Telecomís consumer market decreased by 3.5 percent, to $4.2 billion, comparing first quarter 2007 with first quarter 2006. However, in legacy Verizon markets, consumer revenues reversed recent year-over-year declines. (Legacy Verizon consumer markets exclude former MCI consumer markets -- where Verizonís strategic focus has led to expected declines.) With an increasing shift to broadband and video sales, FiOS sales contributed to revenue growth in legacy Verizon markets of 1.6 percent, to $3.8 billion, comparing first quarter 2007 with first quarter 2006.
ARPU in this consumer market increased 8.5 percent, to $55.66, comparing first quarter 2007 with first quarter 2006.
Verizon Business Continues Momentum of Revenue Growth
Verizon Business reported first-quarter 2007 revenues of $5.2 billion, or growth of 2.3 percent compared with the first quarter 2006 on a pro-forma adjusted basis (non-GAAP, including MCI revenues from Jan. 1, 2006). This is the second consecutive quarter of positive year-over-year revenue growth.
Overall revenue growth at Verizon Business was driven by the continued momentum of strong sales of key strategic services, such as IP and managed services. In the first quarter 2007, strategic services generated $1.2 billion in revenue, up 22.8 percent from the first quarter 2006 on a pro-forma basis.
This resulted in year-over-year growth of more than $200 million in revenues from strategic services, and it exceeded declines in revenues from core services, such as traditional voice and data services. Sales of strategic services were also up sequentially, increasing 2.0 percent from the fourth quarter 2006.
Also during the quarter, Verizon Business rolled out significant enhancements to its global networking and managed services offerings. These rollouts focused on expanding strategic service offerings and enhancing global consistency among products.
Capex, Share Repurchases, Debt Levels as Planned
At the consolidated level, Verizon reported $5.0 billion in cash flows from continuing operations for the first quarter 2007, compared with $5.6 billion in the first quarter 2006. First quarter 2007 included payments of about $500 million related to funding qualified pension plans.
Capital expenditures were in line with the companyís previously announced plans. Expenditures totaled $4.2 billion in the first quarter 2007, compared with $4.0 billion in the first quarter 2006.
Verizon repurchased approximately $425 million in shares during the first quarter 2007, as part of a previously announced plan to repurchase $2 billion in shares over the course of the year.
Total debt at the end of the first quarter 2007 was $34.7 billion, down from $36.4 billion at year-end 2006. Verizon reduced its total debt by $7.7 billion year-over-year, largely as a result of the effect of last yearís spin-off of the directories business.
Detail of Special Items
Special items in the first quarter 2007 consisted primarily of a $131 million after-tax extraordinary loss, or 5 cents per share, related to the tender offer implementing the nationalization of CompaŮia Anůnima Nacional Telťfonos de Venezuela (CANTV).
Other special items were less than 1 cent per share: $9 million in after-tax charges for MCI merger integration costs and a $5 million net gain related to the sale of Telecomunicaciones de Puerto Rico. This sale closed on March 30, 2007, and Verizon received gross proceeds of approximately $980 million -- $100 million of which was contributed to the Verizon Foundation.
Special items in the first quarter 2006 reflected costs of 4 cents per share, or 1 cent per share each for the early extinguishment of debt, employee relocations, merger integration costs and the cumulative effect of an accounting change.
Business Segment Highlights
Following are first-quarter 2007 highlights for Verizonís Wireless and Wireline business segments.
* Once again, Verizon Wireless added the most retail customers in the industry.
* Verizon Wireless continued to lead the industry in cost efficiency. Cash expense per customer (non-GAAP) was $27.87, an increase of 3.3 percent over the similar period in 2006 and a decrease of 2.1 percent sequentially.
* Total data revenues continued to climb during the first quarter, contributing $1.6 billion, up 80 percent over the prior year. Data revenues were 17.4 percent of all service revenues in the first quarter, up from 11.5 percent in the first quarter 2006. Retail data service ARPU increased 54 percent over the year-ago quarter to $8.95. The company had 36.0 million retail data customers in March -- a 37.5 percent increase from first quarter 2006.
* In February, Verizon Wireless continued to expand its high-speed wireless broadband network in cities throughout the country, giving customers access to e-mail, corporate data and the Internet at faster speeds. Based on CDMA 1x Evolution-Data Optimized (EV-DO) Revision A (Rev. A) technology, the enhanced broadband network is now available to more than 145 million people in the United States. At the end of the first quarter, more than 39 percent of the companyís retail customers -- 23.1 million -- had broadband-capable devices.
* Since the beginning of the year, the company continued to add more broadband-capable products for business connectivity, including three EV-DO Rev. A-capable devices: the V740 ExpressCard, the USB720 wireless modem and the PC5750 PC Card, and two broadband-capable smartphones: the Treo 700wx and the Verizon Wireless PN 820. In addition, Verizon Wireless last week announced the first Global CDMA/GSM BlackBerry. The BlackBerry 8830 World Edition smartphone will be available in May.
* For consumers, the company launched new handsets, including the LG VX8700 and the Samsung u740, as well as new Americaís Choice plans that include unlimited text, picture and video messages.
* Verizon Wireless launched V CAST Mobile TV in select markets and two V CAST Mobile TV handsets: the Samsung SCH u620 and the LG VX9400.
* During the first quarter, Verizon Wireless customers sent or received nearly 22.3 billion text messages and more than 450 million picture/video messages. Customers also completed 106 million downloads of music, videos, games, ringtones, ringback tones and exclusive content.
* In March, Verizon Wireless introduced its 30-day Test Drive initiative and became the only major carrier to let customers experience its network virtually risk-free for 30 days and to absorb the cost of calls if customers are not satisfied and take their number to another carrier.
* Wireline total operating revenues, which include both Verizon Telecom and Verizon Business, increased 0.1 percent to $12.5 billion in the first quarter 2007, compared with the first quarter 2006.
* On a pro-forma basis, Wireline operating revenues decreased 1.7 percent, comparing first quarter 2007 with first quarter 2006, driven in part by a continuation of the expected declines in former MCI operations serving mass market (residential and small business) customers. This is a sequential improvement from the 3.5 percent decrease when comparing fourth quarter 2006 with fourth quarter 2005.
* Operating income margin increased to 9.1 percent in the first quarter 2007, compared with 8.6 percent in the first quarter 2006.
* Verizonís net addition of 416,000 broadband connections in the quarter outpaced a 408,000 decline in primary residential access lines. Broadband connections are not included in Verizonís total of traditional wireline access lines. As of the end of the quarter, Verizon served 44.2 million traditional access lines, a 7.9 percent decrease from a year ago.
* Verizonís broadband fiber-to-the-premises network -- over which customers receive FiOS Internet and FiOS TV services -- passed a total of nearly 6.8 million premises by the end of the first quarter 2007, toward a year-end target of 9 million. With accelerated FiOS customer growth, EPS dilution from FiOS deployment was 11 cents in the quarter -- in line with previously announced expectations.
* FiOS Internet and FiOS TV services continue to gain market share.
* FiOS Internet was available for sale to 5.3 million premises by the end of the first quarter. Penetration for the service is 16 percent across all markets, compared with 14 percent against a 4.8 million potential customer base at year-end 2006.
* FiOS TV was available for sale to 3.1 million premises by the end of the first quarter. Penetration for the service is 11 percent across all markets, compared with 9 percent penetration among a 2.4 million potential customer base at year-end 2006.
* FiOS TV is now offered in more than 400 communities in 10 states. By the end of the quarter, Verizon had obtained 769 cable TV franchises covering about 10 million households.
* Consumer RGUs (revenue generating units) totaled 32.3 million, essentially flat year-over-year but up 65,000 since year-end 2006. RGUs are a measure of retail consumer primary and non-primary residential access lines, consumer broadband connections and video subscribers. In the first quarter 2007, the broadband and video component of this measure increased to 23.2 percent of the total, or 7.5 million, from 16.6 percent of the total in the first quarter 2006.
* Verizon Business received recognition from leading industry authorities during the quarter. Forrester Research ranked Verizon Business first in overall voice-over-Internet-protocol (VoIP) strategy. Frost & Sullivan awarded the company its Product Line Strategy Award for Enterprise wide area networking services and its Market Leadership Award for Hosted Interactive Voice Response services. Gartner Inc. placed Verizon Business in the Leaders Quadrant among Asia-Pacific network service providers.
* Verizon Business was named during the quarter as a prime contractor for the U.S. General Services Administrationís multibillion-dollar Networx Universal program.
* Among product and services rollouts in the first quarter: an expansion of the companyís Private IP global footprint; expanded availability of Ethernet Private Line service to an additional six European countries; the introduction of Ethernet Virtual Private LAN Service (E-VPLS); and enhancements to industry-leading security offerings.
* Among global network enhancements: the deployment of 32 additional routers to enhance the companyís global MPLS leadership position; the improvement of Public IP network capabilities through a new regional peering agreement in the Asia-Pacific region; and a network expansion to enable 67 percent of the U.S. population to use local and long-distance VoIP services -- a 36 percent increase in the companyís U.S. VoIP footprint.
* Verizon Business completed significant agreements during the quarter with enterprise customers, including Rent-A-Center and Harleysville Insurance, for a wide range of advanced communications services. Internationally, the company completed important agreements with Akzo Nobel, Getronics, Philippine Airlines and Daiichi Sankyo.
* Verizon Business continues to win significant business with government customers. In addition to being named a Networx Universal prime contractor, the company also completed a new agreement with the state of California during the quarter to provide services under the CALNET 2 program, and the Danish Foreign Ministry extended its existing global Verizon Private IP network.
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