Verizon Communications (VZ)

Q3 2011 Earnings Call

October 21, 2011 8:30 am ET

Executives

John N. Doherty - Senior Vice President of Investor Relations

Francis J. Shammo - Chief Financial Officer and Executive Vice President

Analysts

Christopher M. Larsen - Piper Jaffray Companies, Research Division

John C. Hodulik - UBS Investment Bank, Research Division

Peter Rhamey - BMO Capital Markets Canada

James M. Ratcliffe - Barclays Capital, Research Division

Michael McCormack - Nomura Securities Co. Ltd., Research Division

Philip Cusick - JP Morgan Chase & Co, Research Division

Brett Feldman - Deutsche Bank AG, Research Division

Michael Rollins - Citigroup Inc, Research Division

Jason Armstrong - Goldman Sachs Group Inc., Research Division

Jonathan Chaplin - Crédit Suisse AG, Research Division

David W. Barden - BofA Merrill Lynch, Research Division

Simon Flannery - Morgan Stanley, Research Division

Jennifer M. Fritzsche - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Good morning, and welcome to the Verizon Third Quarter 2011 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to your host, Mr. John Doherty, Senior Vice President, Investor Relations for Verizon.

John N. Doherty

Thanks, Brad. Good morning, and welcome to our third quarter 2011 earnings conference call. Thanks for joining us this morning. I'm John Doherty. With me this morning is Fran Shammo.

Before we get started, let me remind you that our earnings release, financial and operating information, the investor quarterly 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'd 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 also 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.

For the third quarter of 2011, we reported earnings of $0.49 per share on a GAAP basis. These results include $201 million or $0.07 per share for non-operational charge for pension-related items, primarily comprised of actuarial remeasurement losses related to employees who received lump sum distributions in connection with previously announced separation plans. On an adjusted basis, EPS was $0.56, bringing our year-to-date total to $1.63. With that, I'll now turn the call over to Fran.

Francis J. Shammo

Thanks, John, and good morning, everyone. Before we get into the details, let me start with some brief comments. We had another quarter of solid execution and earnings performance. Adjusted earnings were higher than the same quarter last year and would have been higher sequentially were it not for some extraordinary and hopefully nonrecurring challenges this quarter. In spite of this additional pressure from the storms and the strike, which had about a $0.05 impact on EPS in the quarter, we remain on track to achieve our full year earnings guidance of 5% to 8% growth in adjusted earnings per share of a base of $2.08 in 2010.

In terms of cash generation, we had a strong quarter with disciplined capital spending, resulting in a solid increase in free cash flow. I'd also highlight that our Board of Directors approved the 2.6% dividend increase in September, which on an annual basis is an increase from $1.95 to $2 per share. This marked the fifth consecutive year of dividend increases, a testament to our board's confidence in the sustainability of our cash flows.

We are very pleased with our progress in the key strategic areas, which are the platforms for sustainable growth. In Wireless, we continue to perform extremely well and we are further enhancing our leadership in 4G LTE. In addition to making great progress and extending our network capabilities to our markets, we are seeing increasing customer demand for smartphones, tablets and Internet devices that take advantage of the superior speeds of our LTE network. In FiOS, we continued to steadily increase penetration on all our markets. By further penetrating existing markets, we will enhance our capital and operating efficiency and improve overall investment returns. In the Enterprise space, we are getting some traction in spite of the macroeconomic challenges. We are having productive dialogue with many large customers and secured new agreements for Strategic Services during the quarter, with RWE of Germany, Smile Brands and the University of North Carolina, to name a few.

Our competitive position in the cloud space has been bolstered by the acquisition of Terremark earlier this year and more recently with the addition of CloudSwitch, a well-known Software-as-a-Service provider. A number of multinational companies, including ORINK adapted our cloud services during the quarter.

Some segment-specific highlights are on Slide 4. In Wireless, we had another excellent quarter, with strong growth in retail customers, revenue and ARPU accretion. Our performance with respect to margin, churn and free cash flow was extremely strong in the third quarter. In fact, our Wireless service EBITDA margin of 47.8% is the highest we have ever reported since the formation of Verizon Wireless in the year 2000.

In Wireline, an unprecedented series of storms caused power outages and severe flooding in nearly every part of our landline footprint, causing a significant increase in repair and maintenance costs. In addition, the 2-week strike in August delayed new FiOS installations and, together with the storms, created a sharp increase in our FiOS sales order backlog. The storms also created delays in some order provisioning with Enterprise customers. The impact of these factors caused a 250 basis point decline in the Wireline EBITDA margin this quarter.

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