Verizon Communications CEO Discusses Q4 2010 Earnings Call Transcript

Verizon Communications (VZ)

Q4 2010 Earnings Call

January 25, 2011 8:30 am ET

Executives

Francis Shammo - Chief Financial Officer and Executive Vice President

Ivan Seidenberg - Chairman and Chief Executive Officer

Lowell McAdam - President, Chief Operating Officer and Chairman of the Verizon Wireless

John Doherty - Senior Vice President of Investor Relations

Analysts

Christopher Larsen - Piper Jaffray Companies

John Hodulik - UBS Investment Bank

Kevin Smithen - Macquarie Research

Michael Rollins - Citigroup Inc

Simon Flannery - Morgan Stanley

David Barden

Jason Armstrong - Goldman Sachs Group Inc.

Presentation

Operator

Ladies and gentlemen, Mr. John Doherty.

John Doherty

Good morning. Welcome to Verizon's Investor Conference. Thanks for joining us here at Cipriani Wall Street, where we are live webcast, where I understand we have an additional 500 plus people that have signed in. We hope you're all as excited as we are to be meeting with you in person, as we end 2010 and kick off 2011. Before we get started, I would like to point out that our fourth quarter earnings release, financial statements, investor quarterly publication and the earnings presentation slides are all currently available on our Investor Relations website. At the conclusion of this morning's meeting, the strategic and financial overview piece will also be posted to the website for your reference and use. All historical information has been adjusted for the effects of the change in the benefit plan accounting that we announced on Friday. It is my pleasure to be joined this morning by our Chairman and Chief Executive Officer, Ivan Seidenberg; our President and Chief Operating Officer, Lowell McAdam; and our Executive Vice President and Chief Financial Officer, Fran Shammo.

If you can switch to be agenda slide. We will start our session this morning with the review of our fourth quarter earnings by Fran, and then we're going to have a brief Q&A session just after that, where I'd really like you to stay focused on the earnings that we released in that piece of the agenda. We're going to be followed by our strategic and financial piece, and then we'll open it up to a broader Q&A, where we'll have Ivan join us, as well as Fran and Lowell, of course. So with that, I'd like to hand it over to our Chief Executive Officer, Ivan Seidenberg. Ivan?

Ivan Seidenberg

Thank you, John, and good morning, everyone. Once again, I would like to thank all of you who are here and those of you on the webcast for joining us this morning and participating in this earnings call. Just a very short introduction here before I ask Fran to join us. I thought, with all of the moving parts and all of the strong momentum that we have been developing here in the end of 2010 and a very exciting set of prospects for 2011 and beyond, that our investors needed a little grounding in making sure they understood our strategic, operational and financial metrics. And hopefully, this morning, while we're not intending to make a lot of new, big news, I think you will be pleased to see Fran and Lowell share with you what they think the vision is in the model looks like as we go out into 2011 and 2012. I also thought it was very important that you have a chance to see and touch and talk to both Lowell and Fran as we enter this important year, 2011. And for those of you here in person, of course, the opportunity to go in the back and play with our toys and all of the products and services is always a nice thing, and you will get a chance to see how all of these new technology comes alive for the customer.

So with that brief introduction, as John just mentioned, what we'd like to do is the structure of first order of business this morning is to cover 2010 earnings. And for that, let's ask Fran to come up and do that for us right now. Thank you.

Francis Shammo

Thank you, Ivan. Well, good morning, everyone. For those of you here in person, as well as those on our live webcast, I want to thank you for joining us today. During the transition period with John Killian, I had the pleasure of meeting a few of you. For many of you who I have not yet met, I would like to look forward to that later today or in the near future. Okay, so let's move into our first topic for today and review our fourth quarter and full year 2010 financial results. After my remarks, we'll take some questions, and then move onto the rest of the program.

Before we get started, I would like to draw your attention to our Safe Harbor statement. The factors which may affect future results are contained in our SEC filings and are also available on our website.

So going to the next slide, for fourth quarter '10 overview. We ended 2010 on a high note, with very strong overall financial performance in the fourth quarter, driven by continued solid execution and growth across all of our businesses. The Wireless business is performing extremely well. Service revenue growth in the fourth quarter remains strong at 7.7% year-over-year, driven once again by smartphone sales to both new and existing customers.

We had a solid quarter of postpaid customer growth with 872,000 net adds, and we continue to see accelerating growth in postpaid ARPU, which was up 2.5% on a year-over-year basis. We improved our industry-leading customer retention metrics this quarter. In local number portability, we were net positive against all major carriers. In terms of profitability, we reported a record high service EBITDA margin of 47.5%, which we are obviously quite pleased with.

In Wireline, the financial picture continues to improve. We had positive quarterly revenue growth in consumer and enterprise, and the benefits our workforce reduction and other cost initiatives are resulting in improved margin performance.

The Wireline EBITDA margin expanded for the third consecutive quarter and was up 80 basis points sequentially, from an adjusted margin of 22.7% in the third quarter to 23.5% in the fourth quarter. This reflects the impacts of the pension accounting change between the Wireline segment and corporate.

This sequential increase had nothing to do with the accounting change. It was driven by improved operational performance. Looking ahead, we will continue to focus on opportunities to expand our Wireline margins. Our increased scale and the success of our FiOS products, including our recent launch of Flex View, are clearly helping both top line and margin performance in the consumer and small-business markets. Global enterprise revenue increased sequentially in the fourth quarter and showed positive growth of 1.3% year-over-year, driven by an acceleration of growth in the strategic services.

In terms of cash generation, we had another outstanding quarter. For the full year, our improving operational performance, the tax benefit initiatives, the efficient capital management, resulted in an increase of free cash flow of $2.4 billion. Our focus on reducing leverage has improved our key metrics and strengthened the balance sheet. Lastly, through a combination of share price appreciation and dividends, we generated a 23.1% return to shareholders in 2010. In addition, Verizon shareholders also received the equivalent of $1.84 per share in value through the spin-off of our Wireline properties to Frontier. So all in all, I say we are very pleased with our financial performance.

Let's now move to our detailed review of the quarter. So on the financial summary, let's start with earnings. On a GAAP basis, we reported earnings for the quarter of $0.93 per share. The non-operational items amounted to an or a net favorable impact of $0.39. Setting these items aside, our adjusted EPS for the quarter was $0.54. As far as the non-operational impacts go, although the overall impact of accounting for pension and retiree benefits under the new methodology was a net cost of $600 million for the year. The fourth quarter impact was a net pretax gain of $2 billion or $0.44 per share. This was due to the previous recognition of pension and benefits losses resulting from pension settlements earlier in the year.

The fourth quarter benefit was due primarily to favorable investment returns and an increase in the discount rate during the fourth quarter. The second non-operational item is merger integration cost related to Alltel. During the fourth quarter, charges related to these activities amounted to $0.05 per share. This concludes our two-year integration program, and we will no longer be identifying these as non-operational costs going forward.

Consolidated revenue growth in the quarter accelerated to 2.3% year-over-year, up from 2.1% year-over-year growth in the third quarter. For the full year, total revenues increased by $1.9 billion to $104.4 billion. Our fourth quarter operating income increased by 18.2% year-over-year compared with the third quarter growth of 11.3%. For the full year, operating income grew $1.4 billion or 8.4%. The adjusted EBITDA margin grew 40 basis points sequentially to 33.6%, and was up 260 basis points from the fourth quarter last year. For the full year 2010, the adjusted EBITDA margin expanded a 130 basis points to 32.9%. We're making good progress improving profitability. Our cash flow also remains very strong. More on that in a minute.

Now to adjusted EPS. First, I want to make a couple of additional points of clarification on earnings. The quarterly display on the chart before you show our earning results adjusted for the impact of the vested operations, as well for the non-operational or one-time items, which occurred during the year. The first thing I'd point out is that the first three quarters of 2010, as displayed on this slide, are different than what we showed you on the similar slide last quarter, and that is because a prior period adjustments due to the pension accounting change we announced last Friday.

Reported EPS changed, as did the amount of non-operational one-time items. The net effect was an incremental $0.01 charge to adjusted EPS. So whereas the first three quarters of adjusted EPS used to be $0.49, $0.52 and $0.56, they are now $0.48, $0.51 and $0.55, as shown on this slide. This reason for the painstaking detail here is because I want to tie back to our earnings guidance statements in July and October. On our second quarter earnings call, we stated that our goal was to grow earnings in the second half of the year by 5% to 10% from our first half adjusted base of $1 and $0.01 per share, which excluded the earnings of the divested operations. That first half base is now $0.99 because of the accounting [ph] change.

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