Verizon Communications Inc.’s (NYSE: VZ) reported fourth-quarter 2015 earnings of $1.32 per share, or 89 cents per share on an adjusted basis (non-GAAP).
“In 2015, Verizon delivered strong and balanced results in a dynamic competitive environment while returning more than $13.5 billion to shareholders. At the same time, Verizon built and acquired next-generation network capabilities that position the company to be an innovator in the digital-first mobile world in 2016 and beyond,” said Chairman and CEO Lowell McAdam.
Fourth-quarter 2015 EPS results compare with a loss of 54 cents per share in fourth-quarter 2014. Earnings were impacted by non-operational items in both quarters, primarily related to the annual actuarial valuation of benefit plans and mark-to-market pension adjustments (see details below). Verizon’s adjusted EPS (non-GAAP) of 89 cents in fourth-quarter 2015 increased 25.4 percent compared with adjusted EPS of 71 cents in fourth-quarter 2014.
For the full year, Verizon reported $4.37 in EPS in 2015, compared with $2.42 in EPS in 2014. On an adjusted basis (non-GAAP), Verizon’s $3.99 in EPS in 2015 was an increase of 19.1 percent compared with $3.35 in adjusted EPS in 2014.
In 2015, Verizon invested approximately $28 billion in spectrum licenses and capital for future network capacity, in addition to the more than $4 billion acquisition of AOL Inc. in June. Over that same time, the company reduced its leverage ratio and returned more than $13.5 billion to shareholders in the form of dividends and share repurchases. Verizon’s Board of Directors increased the dividend for the ninth consecutive year in September.
Acquisitions of AOL and Millennial Media added capabilities that significantly bolster Verizon’s strategy with strong cross-platform consumer and advertising offerings, particularly in mobile and video. In 2015, the company launched the go90tm mobile-first social entertainment platform, Custom TV options for Fios customers, the humtm direct-to-consumer telematics product, and the Thingspace suite of developer tools to advance the Internet of Things market. Verizon’s investments have also positioned the company to lead in the deployment of 5G wireless broadband.
“Verizon embraced transformational change in 2015, and in 2016 the company has a huge opportunity to drive a new era of growth in our industry,” McAdam said.
- Total operating revenues in fourth-quarter 2015 were $34.3 billion, a 3.2 percent increase compared with fourth-quarter 2014. For the full year, Verizon reported total consolidated revenues of $131.6 billion. Full-year 2015 revenues grew 3.6 percent, compared with full-year 2014. Current-quarter and third-quarter revenues include results from AOL.
- New revenue streams from IoT are growing, with revenues of approximately $200 million in fourth-quarter 2015 and about $690 million for the full year. This is a year-over-year increase of 18 percent.
- Cash flows from operating activities totaled $38.9 billion in 2015, compared with $30.6 billion in 2014. Cash flows in 2015 included a non-recurring $2.4 billion related to the monetization of tower assets.
- Excluding the tower transaction, free cash flow (non-GAAP, cash flow from operations less capital expenditures) totaled $18.8 billion in 2015. Capital expenditures totaled $17.8 billion, up 3.4 percent from 2014.
- Consolidated operating income margin was 25.1 percent for 2015. EBITDA (earnings before interest, taxes, depreciation and amortization) margin (non-GAAP) was 37.3 percent for full-year 2015. Adjusted consolidated EBITDA margin (non-GAAP) for 2015 was 35.4 percent, an expansion of 130 basis points from 2014.
Verizon Wireless delivers continued profitable, quality growth
In fourth-quarter 2015, Verizon Wireless continued to deliver profitable, quality postpaid connections growth and low customer churn.
Wireless financial highlights
- Total revenues were $23.7 billion in fourth-quarter 2015, up 1.2 percent compared with fourth-quarter 2014. Service revenues totaled $17.2 billion, down 5.6 percent year over year. Over the same period, equipment revenues increased to $5.4 billion, up from $4.2 billion, as more customers chose to buy new devices with installment pricing.
- For the year, total revenues were $91.7 billion, a 4.6 percent increase compared with 2014.
- Service revenues plus installment billings increased 1.4 percent in fourth-quarter 2015, and 2.0 percent for the full year, compared with 2014. The percentage of phone activations on installment plans grew to 67 percent in fourth-quarter 2015, compared with 58 percent in third-quarter 2015. Verizon expects the percentage of phone activations on installment plans to increase to above 70 percent in first-quarter 2016.
- In fourth-quarter 2015, wireless operating income margin was 28.6 percent, up from 23.5 percent in fourth-quarter 2014. Segment EBITDA margin on service revenues (non-GAAP) was 52.9 percent, compared with 42.0 percent in fourth-quarter 2014. Segment EBITDA margin on total revenues (non-GAAP) was 38.4 percent, compared with 32.6 percent in fourth-quarter 2014.
Wireless operational highlights
- Verizon Wireless reported 1.5 million retail postpaid net additions in fourth-quarter 2015 and 4.5 million for the full year. These net additions do not include any wholesale or IoT connections.
- Customer retention remained high, with retail postpaid churn at a low 0.96 percent in fourth-quarter 2015, a year-over-year improvement of 18 basis points. Churn was also 0.96 percent for the year, an improvement of 8 basis points from full-year 2014.
- Verizon added 906,000 4G smartphones to its postpaid customer base in fourth-quarter 2015. Postpaid phone net adds totaled 449,000 as net smartphone adds of 713,000 were partially offset by a net decline of basic phones. Tablet net adds totaled 960,000 in the quarter, and net prepaid devices declined by 157,000.
- During fourth-quarter 2015, 7.6 million phones were activated on device payment plans. Verizon has about 25 million device payment phone connections in total, representing approximately 29 percent of its postpaid phone base. Overall, more than 40 percent of Verizon’s postpaid phone customers are on unsubsidized service pricing.
- At year-end 2015, the company had 112.1 million retail connections, a 3.6 percent year-over-year increase, and 106.5 million retail postpaid connections, a 4.4 percent year-over-year increase.
- 4G devices now constitute more than 79 percent of the retail postpaid connections base, with the LTE network handling approximately 90 percent of total wireless data traffic in fourth-quarter 2015. Overall traffic on LTE increased by approximately 60 percent in fourth-quarter 2015, compared with fourth-quarter 2014.
- About 8.4 percent of Verizon’s retail postpaid base upgraded to a new device in fourth-quarter 2015. At year-end, there were 73 million smartphones in Verizon’s customer base.
- Wireless capital investment totaled $3.3 billion in fourth-quarter 2015 and $11.7 billion for the year, up 11.5 percent from 2014. Verizon continues to expand capacity and optimize its network, as the company prepares to pilot 5G technology in 2016.
Fios revenues continue to grow in wireline segment
In the wireline segment, Verizon’s results were once again highlighted by continued revenue and customer growth for Fios fiber-optic-based services.
Wireline financial highlights
- In fourth-quarter 2015, consumer revenues were $4.1 billion, an increase of 2.6 percent compared with fourth-quarter 2014. Fios revenues represented 80.4 percent of the total.
- Comparing fourth-quarter 2015 with fourth-quarter 2014, total Fios revenues grew 6.8 percent, to $3.5 billion, and consumer Fios revenues grew 6.6 percent.
- Wireline operating income margin was 7.3 percent in fourth-quarter 2015, up from 4.4 percent in fourth-quarter 2014. Segment EBITDA margin (non-GAAP) was 24.2 percent in fourth-quarter 2015, compared with 23.9 percent in fourth-quarter 2014.
Wireline operational highlights
- Verizon added 99,000 net new Fios internet connections and 20,000 net new Fios video connections in fourth-quarter 2015. Connections totaled 7.0 million for Fios internet and 5.8 million for Fios video at the end of 2015, representing year-over-year increases of 6.3 percent and 3.2 percent, respectively.
- Fios internet penetration (subscribers as a percentage of potential subscribers) was 41.8 percent at the end of 2015, compared with 41.1 percent at the end of 2014. In the same periods, Fios video penetration was 35.3 percent, compared with 35.8 percent.
- By year-end 2015, more than 70 percent of consumer Fios internet customers subscribed to data speeds of 50 megabits per second or higher. In addition, customer interest continues to grow for Custom TV, which represented about one-third of Fios video sales in fourth-quarter 2015.
- During the fourth quarter, Verizon Enterprise Solutions helped global clients provide better customer experiences and produce better business results through services such as global networking and security, business communications, IT solutions and managed services. The company worked behind the scenes to help its clients serve their customers. These clients include retailers The Kroger Company and Advance Auto Parts; energy companies Sunoco and FirstEnergy; vehicle manufacturer Yamaha Motor; as well as global brands like General Electric, Albertsons Companies, thyssenkrupp, Tennis Australia, Deluxe Corporation, Apollo Global Management and IXcellerate; and government organizations Defense Information Systems Agency and the City of Houston (Texas).
Details of non-operational earnings impacts
Verizon’s fourth-quarter 2015 earnings of $1.32 per share included a year-end mark-to-market adjustment of pension and Other Post-Employment Benefits liabilities. A pre-tax $3.2 billion credit decreased the company’s pension and OPEB liability. This adjustment, which was primarily non-cash, was caused by an increase in the discount rate, the adoption of new mortality assumption tables and the execution of a new prescription drug contract during 2015. The company also incurred pre-tax expenses primarily related to severance costs. On an after-tax basis, these items amounted to a net of $1.6 billion, or a gain of 40 cents per share.
Additionally, Verizon recognized an after-tax gain of $158 million, or 4 cents per share, on a spectrum license transaction.
Excluding the effect of these non-operational gains, Verizon’s adjusted EPS of 89 cents in fourth-quarter 2015 compared with 71 cents in fourth-quarter 2014, when charges totaled $1.25 per share. Fourth-quarter 2014 results included a negative year-end mark-to-market pension and OPEB adjustment, plus severance costs, of $1.12 per share, in addition to 13 cents per share primarily related to the early retirement of debt.
In February 2014 Verizon completed the acquisition of Vodafone Group PLC’s indirect 45 percent interest in Verizon Wireless. On a non-GAAP illustrative basis, assuming Verizon had 100 percent ownership for Verizon Wireless all of 2014, Verizon’s adjusted earnings per share growth rate on a more comparable basis was 16.7 percent, comparing 2015 with 2014.
Verizon, on a consolidated basis, expects to mitigate 2016 earnings pressures resulting from the sale of high-margin wireline operations to Frontier Communications Corp. (expected to close at the end of the first quarter), from the continued shift of the wireless customer base to device payment plans and from the ramping of new business models. As previously stated, Verizon expects full-year 2016 adjusted earnings to plateau at a level comparable to its strong full-year 2015 adjusted earnings. Additionally, for 2016, the company expects:
- Consolidated adjusted EBITDA margin consistent with full-year 2015.
- Consolidated capital spending of between $17.2 billion and $17.7 billion. This includes approximately $150 million for the properties to be sold to Frontier.
- A minimum pension funding requirement of approximately $550 million.
- An effective tax rate for financial reporting purposes in the range of 35 to 36 percent.
- The use of Frontier proceeds to pay down debt, as the company remains committed to returning to its pre-Vodafone transaction credit rating profile in the 2018 to 2019 timeframe.
Shares of Verizon Communications closed yesterday at $44.42 . VZ has a 1-year high of $50.86 and a 1-year low of $38.06. The stock’s 50-day moving average is $45.22 and its 200-day moving average is $44.89.
On the ratings front, Verizon has been the subject of a number of recent research reports. In a report issued on December 15, BTIG analyst Walter Piecyk downgraded VZ to Hold. Separately, on October 21, Citigroup’s Michael Rollins maintained a Hold rating on the stock and has a price target of $49.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Walter Piecyk and Michael Rollins have a total average return of 9.1% and 3.3% respectively. Piecyk has a success rate of 50.0% and is ranked #576 out of 3579 analysts, while Rollins has a success rate of 53.6% and is ranked #788.