Verizon Communications Inc. (VZ)

Q2 2010 Earnings Call

July 23, 2010 8:30 am ET


Ron Lataille - SVP, IR

John Killian - CFO


John Hodulik - UBS.

Mike McCormack - JPMorgan

Simon Flannery - Morgan Stanley

David Barden - Bank of America

Michael Rollins - Citi Investment Research

Jason Armstrong - Goldman Sachs

Brett Feldman - Deutsche Bank

Tim Horan - Oppenheimer



Good morning and welcome to the Verizon second quarter 2010 earnings conference call. (Operator Instructions) It is now my pleasure to turn the call over to your host, Mr. Ron Lataille, Senior Vice President, Investor Relations of Verizon.

Ron Lataille

Good morning and welcome to our second quarter 2010 earnings conference call. Thanks for joining us this morning. I'm Ron Lataille. With me this morning is John Killian, our Chief Financial Officer.

Before we get started, let me remind you that our earnings release, financial statements, the investor quarterly publication and the presentation slides are available on our Investor Relations website. This call is being webcast. If you would like to listen to a replay, you can do so from our website.

I would also like to draw your attention to our Safe Harbor statement. Information in this presentation contains statements about expected future events and financial results that are forward looking and subject to risks and uncertainties. Discussion of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our website. This presentation also contains certain non- GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are also on our website.

On a GAAP basis, we reported a net loss for the second quarter of $0.07 per share. These quarterly results include a total of $0.65 of non-operational or one-time charges which are listed on slide four. The largest items relates to the recognition of costs in connection with our wireline force reduction initiative primarily for severance, special termination benefits and pension charges.

These costs totaled $2.3 billion pre-tax and resulted in a charge to earnings of $0.52 per share. Roughly $1 billion of the pre-tax amount is for additional severance liabilities as a result of the enhanced incentive offer. The remaining $1.3 billion of pre-tax costs are non-cash and relate to the recognition on special termination benefits and pension plan liabilities for the effective employees.

We also incurred non-operational costs in connection with the spin-off of our access line properties to Frontier. As we previously discussed, these costs are related to network, software and other activities required for these facilities to function as a separate company. In the second quarter, these get-ready costs amounted to $195 million pre-tax or a charge of $0.04 per share.

Another item we've been pointing out for you is our merger integration cost related to Alltel. During the second quarter, charges related these activities amounted to $0.02 per share. In addition, the sale of the Alltel divestiture properties resulted in a one-time tax expense worth about $0.04 per share.

The last item that I would like to highlight is a one-time non-cash adjustment of $268 million primarily related to wireless data revenues. This adjustment was recorded to properly defer previously recognized wireless data revenues that will be earned and recognized in the following period. As the amounts involved were not material to our consolidated financial statements in any current or previous reporting period, the $268 million adjustment was reported entirely in the second quarter with an unfavorable impact on consolidated revenues, which equates to $0.03 per share of earnings.

Consistent with our reporting methodology, the items I just described are not included at the segment level primarily due to their non-operational or non-recurring nature. However, they are included in our reported consolidated results.

With that, I will now turn the call over to John Killian.

John Killian

Thanks, Ron, and good morning everyone. Before we get into the details, let me start with some brief comments on the business overall and add some of my perspective to our second quarter results.

Our results show that we continue to do a good job executing in our key focus areas. In terms of cash generation, we had an exceptionally strong quarter of cash flow growth with continued tight controls on capital spending. We saw a good customer growth in wireless where data revenue growth continues to be driven by smartphone sales to both new and existing customers. As a result, we saw increasing year-over-year growth in postpaid ARPU and improvements to our industry-leading customer retention metrics in this quarter.

In wireline, our EBITDA margin improvement was driven by cost reductions. During the quarter, we had approximately 11,000 volunteers for our enhanced separation offer in the East and Mid-Atlantic regions. So this will go a long way toward helping us achieve our wireline force reduction objectives for the year.

Broadband and video continue to drive revenue results within the mass markets. Revenue trends in global enterprise improved again this quarter and showed positive year-over-year growth. And while we are seeing stability in underlying trends in the enterprise space, we are still seeing cyclical effects and remain cautiously optimistic with regard to a more meaningful economic recovery.

Lastly, we completed the pending transactions that were part of our overall strategic transformation. During the second quarter, we closed the sale of the 105 markets we were required to divest as part of the Alltel acquisition in 2009. And on July 1, we completed the access line spin-off in merger transaction with Frontier. Through the spin-off, Verizon shareholders received $1.85 per share in value in the form of Frontier shares and cash in what was effectively a stock dividend. So it was an active quarter for sure, with solid overall performance.

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