Verizon Communications Reports Strong 4Q 2005 Results, Driven by Continued Growth in Wireless and Broadband
Industry-Record Broadband Net Adds and Wireless Record Growth and Margins Fuel 4Q Revenues of $19.3 Billion, Annual Revenues of $75.1 Billion
Fourth-quarter diluted earnings per share of 59 cents, or 64 cents per share before special items (non-GAAP measure); 2005 earnings per share of $2.65, or $2.56 per share before special items (non-GAAP)
Fourth-quarter consolidated operating revenues of $19.3 billion, up 6.7 percent on a comparable basis (non-GAAP) from fourth quarter 2004; 2005 revenues of $75.1 billion
$22.0 billion in 2005 Cash Flows From Operations
Verizon Wireless fourth-quarter results: Industry-record 2.0 million net customer additions, up 20.5 percent from fourth quarter 2004; 51.3 million total customers, up 17.2 percent from 2004; repeat record-low quarterly churn (customer turnover) of 1.2 percent; total revenues up 18.3 percent from fourth quarter 2004; EBITDA margin (non-GAAP) of 46.8 percent
Wireline fourth-quarter results: Industry-record 613,000 net new broadband connections (DSL and Verizon FiOS data lines); 5.1 million total broadband connections, up 47.6 percent from 2004; total data revenues up 9.0 percent from fourth quarter 2004; average monthly revenue per residential customer up 3.9 percent to $51.50
Notes: Reclassifications of prior-period amounts have been made to reflect comparable results excluding Verizonís 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. Discontinued operations in the prior-year periods presented include the operations of Verizon Information Services Canada.
January 26, 2006, NEW YORK -- Verizon Communications Inc. (NYSE:VZ) today reported strong fourth-quarter and year-end 2005 results, highlighted by an industry-record quarterly total for net new wireline broadband connections, as well as continued record growth and sustained margins at Verizon Wireless.
For the fourth quarter 2005, Verizon reported earnings of $1.7 billion, or 59 cents per diluted share, compared with $3.0 billion, or $1.08 per share, in the fourth quarter 2004. Reported earnings in the fourth quarter 2005 include non-recurring net expenses for previously announced changes to management retirement benefit plans, as well as severance and relocation costs. The fourth quarter 2004 principally included non-recurring gains from sales of non-strategic assets and tax benefits.
Before special items, earnings were 64 cents per share in both the fourth quarter 2005 and the fourth quarter 2004.
For the year, Verizon reported earnings of $7.4 billion, or $2.65 per share, in 2005, compared with $7.8 billion, or $2.79 per share, in 2004. Before special items, earnings were $7.2 billion, or $2.56 per share, in 2005, compared with $7.0 billion, or $2.51 per share, in 2004.
íStrategies Taking Rootí
ďVerizon finished the year strongly, and as we begin 2006 our strategies are taking root,Ē said Ivan Seidenberg, Verizon chairman and CEO. "We continue to grow what is already a great customer base -- especially as we continue to introduce innovations in wireless and broadband services.
ďAt the same time, we are investing in our powerful networks to position Verizon for additional growth in the future. We see real momentum in these growth initiatives, and we look forward to seizing the opportunities we see in the large-business market with our new Verizon Business unit.Ē
Continued Revenue Gains
Quarterly consolidated operating revenues reached $19.3 billion in the fourth quarter 2005. On a comparable basis (non-GAAP, excluding revenues in both periods from operations that Verizon sold in 2005), consolidated operating revenues increased 6.7 percent from $18.1 billion in the fourth quarter 2004. Verizonís growth businesses -- wireless, broadband, data and long-distance services -- contributed 59.6 percent to fourth-quarter 2005 revenues, compared with a 54.9 percent contribution to fourth-quarter 2004 revenues.
Annual consolidated operating revenues were $75.1 billion in 2005, or $74.9 billion excluding revenues from operations since sold. On a comparable basis, this is a revenue increase of 6.0 percent from $70.7 billion in 2004.
Total operating expenses were $15.6 billion in the fourth quarter 2005 and $60.3 billion for the full year, up 4.8 percent and 3.7 percent, respectively, from the similar periods in 2004.
Growth in Total Customer Connections
Verizonís total customer connections -- which include wireline switched access lines, wireless customers, and wireline and wireless customers using broadband connections (EV-DO, DSL or FiOS) -- increased to 105.3 million at the end of the fourth quarter 2005. This is an increase of 5.7 percent compared with the fourth quarter 2004, and an increase of 1.8 million customer connections compared with the end of the third quarter 2005.
Switched access lines totaled 48.8 million at the end of the fourth quarter 2005, a decline of 6.7 percent compared with the end of the fourth quarter 2004. This has been more than offset by increases of 47.6 percent in wireline broadband connections and 17.2 percent in total wireless customers over the same period.
Continued Solid Margins, Cash Flows
Verizonís consolidated operating income margin was 19.2 percent in the fourth quarter 2005, compared with 18.4 percent in the fourth quarter 2004. When adjusted to exclude the special and non-recurring items as well as net pension and OPEB (other post-retirement benefits) impact, Verizonís consolidated operating income margin would have been 22.1 percent in the fourth quarter 2005 and 20.2 percent in the fourth quarter 2004 (non-GAAP measures) -- the fourth consecutive quarter of gains in consolidated margins.
Cash Flows From Operations were $22.0 billion in 2005, compared with $21.8 billion in 2004. In 2005, net cash used in investing activities was $18.5 billion, including $15.3 billion in capital expenditures. Net cash used in financing activities was $5.0 billion.
Verizonís total debt decreased $0.3 billion compared with year-end 2004, to $39.0 billion at year-end 2005.
Wireless Builds on Momentum of Sustained Strong Performance
At Verizon Wireless, record growth and profitability in the fourth quarter 2005 built on the momentum of its sustained strong performance, quarter after quarter. This was the 14th consecutive quarter of double-digit, year-over-year revenue growth; the seventh consecutive quarter that the company added more than 1.5 million customers, and the fourth consecutive quarter of EBITDA margins of more than 40 percent.
Verizon Wireless added 7.5 million net new customers over the last 12 months and now has 51.3 million customers nationwide.
The company continued to set records for low churn, a key measure of customer loyalty, with total churn of 1.2 percent for the fourth quarter 2005 (matching the companyís previous quarterly record) and 1.3 percent for the year. Churn among the companyís 47 million retail postpaid customers was even lower -- 1.0 percent for the quarter and 1.1 percent for the year.
Verizon Wireless revenues were $8.7 billion in the fourth quarter 2005, an 18.3 percent increase compared with $7.3 billion in the fourth quarter 2004 -- driven by continued strong customer growth and demand for data services. Full-year 2005 wireless revenues were $32.3 billion, an increase of 16.8 percent compared with 2004.
Wireless operating income margins were 25.8 percent for the fourth quarter and 22.8 percent for the year, the result of the companyís continued focus on managing costs and efficiencies as it added record numbers of customers.
Wireless EBITDA margins were 46.8 percent for the fourth quarter and 43.2 percent for the year. (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.)
Record Wireline Broadband Growth
Verizonís wireline business segment added a net of 613,000 wireline broadband connections in the fourth quarter 2005. This is a broadband industry record, topping any prior quarterly total posted by a telecommunications or cable company.
This brings the companyís year-end total to 5.1 million wireline broadband connections, representing 1.7 million net additions in 2005 -- a growth rate of 47.6 percent compared with year-end 2004. Wireline broadband connections include totals for both DSL and FiOS, Verizonís next-generation, fiber-optic-based service.
Operating revenues on a comparable basis at Domestic Telecom were $9.4 billion in the fourth quarter 2005, a 1.8 percent decrease compared with the fourth quarter 2004. For the year, comparable wireline operating revenues were $37.6 billion, a 1.1 percent decrease compared with 2004.
Revenues from DSL and FiOS data contributed to total wireline data revenues of $2.2 billion in the fourth quarter 2005, a 9.0 percent increase compared with the fourth quarter 2004. For the year, data revenues of $8.5 billion grew 10.5 percent compared with 2004 and now represent 23.4 percent of total wireline revenues, up from 21.1 percent at the end of 2004.
Long-distance services including regional toll services, another wireline growth area, contributed $1.1 billion to total wireline revenues in the fourth quarter 2005 and $4.3 billion in the full year, up 2.7 percent and 5.0 percent, respectively, compared with the similar periods in 2004.
Operating income margin for the wireline segment was 11.1 percent in fourth quarter 2005 and 12.7 percent for the year, compared with 15.0 percent and 14.9 percent in the similar periods in 2004. When adjusted to exclude the net pension and OPEB impact, wirelineís operating income margin would have been 14.5 percent in the fourth quarter 2005 and 16.1 percent for the year, compared with 17.1 percent and 17.0 percent in the similar periods in 2004 (non-GAAP measures). For 2006, Verizon is targeting comparable annual operating income margins of about 16 percent.
Consistent with past practice, Verizon believes that excluding the impact of net pension and OPEB expenses or credits enhances comparability, providing a better picture of operating cost management.
Earnings Comparisons and Special Items
Verizonís reported fourth-quarter 2005 earnings of $1.7 billion, or 59 cents per share, primarily included non-recurring expenses of $59 million, or 2 cents per share, to recognize the net effect of the restructuring of management retirement benefit plans announced in December 2005, and 1 cent per share in expenses each for a voluntary severance program for union-represented employees ($36 million) and for net relocation costs associated with the new Verizon Center in New Jersey ($29 million).
Fourth-quarter 2004 earnings of $1.08 per share included net gains of $1.0 billion, or 36 cents per share, from the sales of Verizon Information Services Canada and Verizonís investment stake in TELUS Corp.; and tax benefits of $234 million, or 8 cents per share, from previous investment-related losses.
Verizonís reported year-end 2005 earnings of $7.4 billion, or $2.65 per share, also included non-recurring gains of $336 million each, or 12 cents per share each, related to the sale of wireline and directory operations in Hawaii, and for tax benefits recognized on prior-year investment losses. These gains were partially offset by net tax expense of $206 million, or 7 cents per share, for the repatriation of foreign earnings, as well as asset impairments at Verizonís leasing operations and other costs of $133 million, or 5 cents per share.
Reported year-end 2004 earnings of $7.8 billion, or $2.79 per share, also included $499 million, or 18 cents per share, in severance-related charges, partially offset by a $43 million, or 2 cents per share, gain on the sale of an investment.
Net pension and OPEB costs reduced Verizonís earnings by 30 cents per share in 2005, compared with 21 cents per share in 2004. The earnings dilution from FiOS was 15 cents per share in 2005, compared with 4 cents per share in 2004.
2006 Guidance Items
In 2006, Verizon expects that net pension and OPEB costs will reduce earnings by 34 cents to 36 cents per share, compared with the 30 cents per share noted above.
Regarding 2006 capital spending, the company reiterated previous guidance of from $15.4 billion to $15.7 billion, excluding capital related to Verizonís recently closed merger with MCI, Inc. Verizon announced today that, with MCI, total 2006 capital spending is expected to be from $17.0 billion to $17.4 billion. This includes about $550 million in integration capital in 2006 to improve efficiencies and help achieve merger synergies, which have a net present value of approximately $8 billion in incremental revenues and operational savings, including investments in network and systems to achieve these savings.
Network savings represent nearly half of the synergies, as bringing traffic onto Verizonís networks is expected to save more than $200 million in 2006. Workforce reductions and information technology savings each represent about 20 percent of the synergy totals.
Related to the merger closing, Verizon Business -- the industryís new provider of advanced communications and information technology solutions to large businesses and government -- earlier this week unveiled a robust line of integrated services, including new integrated wireless and wireline network access offerings.
Business Segment Highlights
Following are highlights from Verizonís 2005 business segments.
By the end of 2005, the company was deploying or selling FiOS fiber-to-the-premises (FTTP) broadband data services in 16 states, passing a cumulative 3 million homes and businesses. In markets where Verizon has been selling FiOS data services for at least nine months, the average penetration rate at the nine-month mark was 14 percent.
Verizon has franchises covering 1 million households for FiOS video services. Market penetration in Keller, Texas -- Verizonís first video market -- is 21 percent in four months. Verizon announced it had begun sales of FiOS video in markets in Massachusetts and New York earlier this week, and it expects to announce sales in a California market shortly.
Approximately 65 percent of Verizon residential customers have purchased local services in combination with either Verizon long-distance or a Verizon broadband connection, or both. This compares with approximately 55 percent in the fourth quarter 2004. In addition, Verizon now has nearly 350,000 customers who receive a Verizon DirecTV bundle.
Consumer demand for value-added services has increased average monthly revenue per wireline customer to $51.50, up 3.9 percent from the fourth quarter 2004.
Approximately 5.5 million Verizon Freedom packages were in service to residential and business customers by the end of the fourth quarter 2005, an increase of 1.1 million since the end of the fourth quarter 2004. Verizon Freedom plans help retain and win back customers by offering local services with various combinations of long-distance, wireless and Internet access, available on one bill. Freedom packages for business customers have passed the 1 million mark and are up 38 percent since year-end 2004.
Wholesale voice connections -- which includes resale, Unbundled Network Element-Platform (UNE-P) and end-to-end wholesale voice services provided under commercial agreements -- totaled 5.5 million at the end of the fourth quarter 2005, down 16.1 percent from the end of the fourth quarter 2004. At the same time, continued growth from sales of wholesale special access products -- such as high-speed DS1 and DS3 circuits -- contributed to $2.1 billion in fourth-quarter 2005 wholesale revenues, an increase of 1.6 percent compared with the fourth quarter 2004.
Comparing fourth quarter 2005 with fourth quarter 2004, consumer revenues were $3.8 billion, down 1.1 percent, and business revenues were $2.8 billion, down 4.4 percent.
For the year, wireline total operating revenues were $37.6 billion, down 1.1 percent from 2004. Total operating expenses were $32.8 billion in 2005, up 1.4 percent from 2004.
Retail gross additions increased 4.6 percent over the fourth quarter 2004. Retail net additions increased 15.4 percent, to 1.8 million of the companyís 2.0 million total net additions. Retail customers are 96 percent of the companyís customer base.
Service revenues (which do not include taxes and regulatory fees) were $7.4 billion for the fourth quarter 2005, up 14.9 percent. For the year, service revenues were $28.1 billion, up 15.3 percent. Average monthly service revenue per customer was $49.36 for the quarter and $49.49 for the full year, down 1.9 percent and 1.5 percent, respectively, from the similar periods in 2004.
Verizon Wireless continued to deliver industry-leading cost efficiency, even as it added a record-high volume of new customers. Cash expense per customer declined 2.9 percent for the full year and 13.7 percent, to $26.27, for the fourth quarter, achieving the companyís lowest-ever annual and quarterly per-customer expense levels.
Data services revenues in 2005 more than doubled over the previous year, contributing $2.2 billion in revenues. In the fourth quarter, $731 million, or 9.8 percent, of service revenues came from data services, up from 5.6 percent in the prior yearís quarter. The company now has 23.7 million data customers -- a 43 percent increase compared with 2004.
Verizon Wireless, the first to build a national wireless broadband network, continued to extend the reach of its 3G EV-DO high-speed network. During the fourth quarter, the company expanded its award-winning broadband network to now include 180 major metropolitan areas covering approximately 150 million Americans coast to coast.
More than 3.5 million customers had broadband-capable devices at the end of the fourth quarter 2005, as the company continued its stream of new broadband devices, including the first EV-DO enabled Motorola RAZR; Palmís Treo 700, the first Windows Mobile-based Treo smartphone; and aircards embedded in laptops and PDAs from major manufacturers.
The companyís broadband network also made possible its launch earlier this month of V CAST Music, the worldís most comprehensive mobile music service. Customers can download music over the air directly to their wireless phones and to their Windows XP PCs, and can transfer new and existing digital music from the PC to their wireless phone. Two new V CAST Music-capable handsets are available. One million songs will be available on V CAST Music by spring from artists at major music labels, Warner Music Group, EMI Music, Universal and Sony/BMG, and at independent providers, including The Orchard.
Usage of the companyís Get It Now services continued to climb, with an industry-leading 7.4 billion text messages during the fourth quarter. In addition, customers exchanged more than 134 million picture and video messages and had nearly 35 million downloads of games, exclusive content, ringtones and ringback tones.
During the fourth quarter, the company continued to expand and diversify its distribution channels with the opening of stores inside 117 BJís Wholesale Clubs, mainly in the Northeast. Customers can now purchase Verizon Wireless service and equipment at more than 2,000 Verizon Wireless communications stores including stores in Circuit City and BJís, and from 7,000 Verizon Wireless agents nationwide including Best Buy and Costco.
Verizon Information Servicesí (VIS) fourth-quarter operating revenues were $844 million, bringing full-year revenues to $3.45 billion, compared with $874 million and $3.55 billion in the fourth quarter and full-year 2004, respectively. This fourth-quarter decrease of 3.4 percent and full-year decrease of 2.7 percent were primarily driven by reductions in domestic print advertising revenue. However, reductions in total operating expenses have resulted in an improved operating income margin for both the fourth quarter and the full year when compared with the similar periods in 2004.
In 2005, VISí domestic online directory and search service, SuperPages.com, achieved revenue growth of 18.4 percent compared with 2004, and Internet yellow pages searches increased 17.1 percent over the same period.
In December, Verizon announced that it is exploring divesting VIS through a spin-off, sale or other strategic transaction.
Fourth-quarter revenues were $567 million, bringing full-year revenues to $2.2 billion, compared with $544 million and $2.0 billion in the fourth quarter and full-year 2004, respectively. The fourth-quarter increase of 4.2 percent was primarily driven by wireless growth in Puerto Rico and the Dominican Republic, partially offset by unfavorable foreign exchange rates in the Dominican Republic. The full-year increase of 8.9 percent primarily reflects favorable foreign exchange impacts in the Dominican Republic.
During the fourth quarter, the second part of the Vodafone Omnitel share buyback was completed, resulting in Verizon receiving approximately $1.0 billion in proceeds before taxes. During the second quarter of 2005, the board of directors and shareowners of Vodafone Omnitel approved a share buyback in two parts -- resulting in total cash proceeds before taxes of $2.2 billion for the year.
Verizon Communications Inc. (NYSE:VZ), a Dow 30 company, is a leader in delivering broadband and other communication innovations to wireline and wireless customers. Verizon operates Americaís most reliable wireless network, serving 51.3 million customers nationwide; one of the most expansive wholly-owned global IP networks; and one of the nationís premier wireline networks, serving home, business and wholesale customers. Based in New York, Verizon has a diverse workforce of approximately 250,000 and generates annual consolidated operating revenues of approximately $90 billion. For more information, visit www.verizon.com.
NOTE: This press 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; and the extent and timing of our ability to obtain revenue enhancements and cost savings following our business combination with MCI, Inc.
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