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Verizon Communications (NYSE: VZ) is one of the largest U.S. telecommunication companies, operating Verizon Wireless, the largest wireless carrier in the United States.[1] Apart from fixed-line and wireless services, the company provides internet access and other data services as well as television services. Its wireline business segment has experienced increased competition as customers switch to wireless products or less expensive alternatives such as VoIP technology. One of VZ's largest investments has been its Fiber-to-the-Home (FTTH) service, FiOS, which provides advanced data, video, and telephony products. FiOS offers "triple play" services and its fiber optic transmission allows download speeds upwards of 50Mbps. Verizon plans to invest almost $23B by 2010 on its FiOS network;[2] the success of FiOS hinges on whether there is enough demand for the faster speeds and greater bandwidth of FiOS to justify paying the higher price. Verizon Wireless also sees steep competition but it continues to post strong growth. In recent years, Verizon has seen customer growth remain strong and margins improve as a result of its dominating market position; for the three years from 2006 to 2008, revenue from sales has increased nearly 30 percent to $49.3 billion and net income has increased more than 45 percent to $13.9 billion.[3]
On January 9, 2009, Verizon completed its $5.9 billion acquisition of Alltel. This merger helps to expand Verizon's already extensive wireless and advanced data services in the United States.[4] In the first quarter of 2009, operating revenues and net income increased 11.57% and 5.28%, respectively, year over year from the first quarter of 2008.[5] This can be partially attributed to the acquisitions that Verizon has made to grow their customer base and reduce their costs. The emphasis that Verizon has put on growing out their FiOS business has increased their debt level. Verizon's long term debt increased 18.56% in the first quarter of 2009 from the same time in 2008 and Verizon's current ratio has decreased to .62.[6] In the first quarter of 2009, Verizon added 252,000 wireline broadband connections and 299,000 new FiOS TV customers, showing growth for the business.[7]
[edit] Company Overview
[edit] History
Verizon Communications was formed in 2000 with the merger of Bell Atlantic and GTE Corp and offers a wide array of wireline and wireless voice and data transmission services. Verizon has approximately 41.4 million residential and commercial access lines throughout the United States. Through its wireless joint venture with Vodafone, Verizon Wireless, the company serves more than 83.7 million wireless customers throughout the entire United States.[1] Verizon owns 55% of Verizon Wireless and Vodafone owns the remaining 45%.[1]
In January 2006, Verizon completed the acquisition of MCI (formerly WorldCom). The MCI acquisition provided Verizon with a much stronger presence in the commercial long distance marketplace as well as with a global long haul fiber network. In late 2005, Verizon announced it was pursuing a sale or spin-off of its directories publishing business, Verizon Information Services. The company completed this spin-off by the end of 2006.
[edit] Business Financials
Verizon Communications’ revenue increased more than 4 percent during fiscal 2008 to $97.3 billion, up from $93.4 in 2007.[9] The increase was primarily from its domestic wireless business segment whose revenue increased 12.42 percent in 2008, while its wireline segment reported a revenue decrease of 1.8 percent[9]. Net income in 2008 rose 16.4 percent, from $5.5 billion in 2007 to $6.4 billion in 2008.[9] Once again its wireless division was the primary cause of the increase in net income as its operating margin increased from 26.9 percent to 28.4 percent, while its wireline operating margin decreased from 9.1 percent in 2007 to 8 percent in 2008.[9] Verizon’s wireline business segment has experienced increased competition as customers substitute to wireless products or less expensive non-wireline services such as VoIP.
[edit] Operating Segments
Verizon has two primary business segments, its Wireless (Verizon Wireless) and Wireline (Verizon Telecom and Verizon Business) businesses.
[edit] Verizon Wireless (50.8 % of sales)
Verizon Wireless is the largest provider of wireless voice and data services in the United States.[11] Its services include basic local and long distance wireless voice services, text messaging, music downloads, navigation and Internet access, V CAST Music and V CAST Mobile TV. The company has 25 multimedia phones that allow customers to browse and download songs, and the first true mobile TV service in the nation. (See 3G concept page for additional information on third-generation wireless technology.)
The business segment is a joint venture between Verizon Communications and Vodafone; with Verizon holding a 55% stake in Verizon Wireless, and Vodafone holding the remaining 45%, it has controlling power over the company’s operations.[12] In January 2009, Verizon Wireless completed its $28.1 billion acquisition of Alltel Corp., a regional wireless carrier, increasing its market share and becoming the largest U.S. wireless carrier by subscribers; the company boasts a customer network of more 83.7 million, beating AT&T wireless which as of September 2008 had 74.9 million customers.[11]
[edit] Wireline(49.6% of sales)
Verizon Telecom (62 % of sales for wireline business)
Verizon Telecom provides voice, broadband video and data, network access, long distance, and other services to residential and small business customers. At the end of 2007, Verizon serviced 41.4 million total switched voice lines, a decline of 3.6 million lines since year-end 2006.
Recently, there has been a lot of investor focus on the wireline division’s initiative to run fiber directly to the homes of many of its customers. By installing a fiber-to-the-premises (FTTP) network, Verizon hopes to better compete with cable operators with advanced data, video, and telephony products. Branded as FiOS, Verizon is offering digital and high-definition television, video on demand, and broadband with download speeds as high as 50 Mbps, not to mention voice services. Verizon passed approximately 9.3 million homes with fiber by year-end 2007 and plans to pass an additional 3 million in 2008. By 2010, the company plans to pass 18-20 million total homes with its FiOS network.
Verizon Telecom (62 % of sales for wireline business)
[edit] Trends and Forces
[edit] Bringing Fiber to the Home
Verizon is the leading provider of Fiber-to-the-Home (FTTH) with 9.3 million customers at the end of 2007, and an expected 12 million customers by the end of 2008. In comparison, AT&T U-Verse, a competing FTTH service, had only 231,000 customers by the end of 2007. The fiber connectivity offered by FiOS gives its customers speeds of up 50 Mbps, depending on their service plan. This connection speed can more than handle the growing trend of consumers using "triple play" options, which includes video, data, and telephony services. The combination of customer reach, inftrastructure size, and connection speed of the FiOS service is unmatched at the moment. However, a competing technology for cable companies, known as Docsis 3.0, threatens to offer increased competition to FiOS. Comcast is the only cable company with a Docsis 3.0 service in the US, but that service offers a 50 Mbps connection speed, the same as FiOS. In addition, Docsis 3.0 is requires much lower deployment cost than building a fiber to the home network.
[edit] Maturing Market
While the wireless business has been the driver behind Verizon's recent revenue growth, this growth is expected to slow down as the US market matures. Revenues from voice traffic for a wireless carrier are driven by its number of subscribers and the average revenue generated per customer. In the US, wireless subscriber growth is slowing as market penetration comes close to reaching 100%. With a penetration reaching 100%, the market is clearly maturing and delivering lower growth as a result. The incremental penetration is decreasing quarter-to-quarter and year-to-year while overall US market penetration peaked at 77.4% end of 2006. Nevertheless, Verizon is offering broadband wireless and data services to existing customers, and the company continues to target double-digit annual wireless revenue growth. To cite one example of wireless data usage, Verizon Wireless customers sent or received nearly 45 billion text messages during the last three months of 2007.
One way to grow in a stagnant market is to acquire. In November 2008, the Federal Communication Commission approved the merger between the company and Alltel Corp for $28.1 billion and the Justice Department signed off the deal.[14] In January 2009, the acquisition was completed making Verizon the top player in the US market, ousting its competitor AT&T.[15] Alltel added another 13 million customers to Verizon Wireless, totaling its customer network to more than 83 million customers; in comparison AT&T has about 71 million. As part of the deal, Verizon will divest 105 markets where its network overlaps with Alltel’s. These divestitures are worth between $3 billion and $4 billion, and potential bidders include AT&T among other competitors.[16] Along with acquiring the number one spot in the U.S. among wireless carriers, Verizon also acquired Alltel’s $22.2 billion debt.[14] In a slowing economy where consumer confidence has fallen, being number one can potentially be risky as well. Verizon must hold on to its subscribers and add more to its list in order to hedge the risk of consumers defaulting on their payments
[edit] Pricing Pressures
Revenues from voice traffic for a wireless carrier are driven by its number of subscribers and the average revenue generated per customer. The average revenue is expressed by the industry as Average Revenue Per User (ARPU) which quantifies the average monthly revenue any customer is generating. While pricing competition has led to declining average voice revenue per subscriber among Verizon Wireless competitors -- through lower priced plans, plans that allow users to add additional units to their plans at attractive rates, plans with a higher number of bundled minutes included in the fixed monthly charge for the plan, plans that offer the ability to share minutes among a group of related customers, or a combination of these features -- Verizon Wireless ARPU showed increases throughout 2007. With a slowing subscriber growth, competition will further intensify within an already very competitive market, while Verizon plans continue to add value to its own plans and increase ARPU through data services, such as music and video and wireless broadband Internet access.
In the wireline segment, heavy competition -particularly from cable companies and VOIP providers- could continue to put pressure on prices.
[edit] Line Losses and VOIP Substitution
Wireline line losses at Verizon Communications happened consistently over the last years. Several factors have been driving this trend, including increased VOIP and wireless substitution as well as line losses to the cable companies that started to offer bundled wireline services themselves. An increase in line losses has less of a material effect on revenues and earnings at Verizon now than in the past. Wireline ARPU among remaining Verizon wireline customers rose 11 percent in 2007, due to customer usage of new wireline broadband and FiOS TV services. There could be some improvement in the rate of phone customer loss as the FiOS network upgrade progresses, but currently the services aren't available to a large enough number of customers to offset the inroads the cable firms are making in the phone business.
[edit] Third-Generation Wireless
Third generation wireless, or 3G is a technology with the capability for high-speed wireless data transfer, making possible a myriad of additional applications such as mobile video, secure mobile ecommerce, location-based services, mobile gaming and audio on demand. For example, using 2.5G (or a slightly better version of second-generation wireless) a three-minute song takes between six and nine minutes to download. Using 3G, it can download in 11 to 90 seconds.
Verizon offers 3G services currently (e.g., V-Cast) on its nationwide EVDO network. However, comparing the U.S. and most of the rest of the world to Japan and some parts of Asia, there has been slower uptake or demand for 3G multimedia services, which are used for data heavy applications such as multimedia. As a result, phone manufacturers have been hesitant to release 3G handsets. If 3G adoption does accelerate in a meaningful way, Verizon would benefit from additional fees for related wireless services.
[edit] 700 MHz Auction Win
In March of 2008, Verizon won a band of spectrum that the FCC had put up for auction. This band is to be freed up by the move from analog television to digital, which uses a different method of broadcast. As a part of this auction win, Verizon had agreed to use a set percentage of it for open access, a stipulation of the auction that was championed by Google in its attempt to spread the use if its upcoming mobile software, Android. Verizon's acquisition of the spectrum C in the auction means it is now capable of offering high speed packetized communications. However, given that Verizon was already in posession of similar spectrums, the key value for the consumer comes from the open access system that will be available as a part of the auction agreement. This could potentially be a step into unchartered territory for mobile communication.
[edit] Regulatory Environment
The telecommunications industry is a heavily regulated market. In the U.S., communications services are subject to regulation at the federal level by the FCC and in certain states by public utilities commissions, or PUCs. With regards to wireless, the FCC regulates the licensing, construction, operation, acquisition and sale of all wireless operations and wireless spectrum holdings. With regards to wireline, The Telecommunications Act of 1996 was designed to promote competition and eliminate legal and regulatory barriers for entry into local and long distance communications markets. It also required companies to allow resale of specified local services at wholesale rates, negotiate interconnection agreements, provide nondiscriminatory access to unbundled network elements, and allow co-location of interconnection equipment by competitors. It speaks for itself that in such a heavily regulated market, any significant regulatory change could have a major impact on the company or industry as a whole.
[edit] Comparison to Competitors
Both of Verizon Communications’ business segments receive competition. Its wireless business competes with all wireless carriers, particularly AT&T, Sprint, and T-Mobile.Verizon Wireless ousted AT&T as the largest U.S. wireless service provider gaining a larger share of the market. However, its wireline business has been affected by the severe competition from new technology and continues to face challenges from non-wireline telecommunications providers including VoIP, high-speed internet companies, and cable companies such as Time Warner Cable and Cablevision Systems (CVC).
| AT&T | Verizon | Qwest | Vonage | |
| Net Income | 11.9B | 5.5B | 2.9B | -267.4M |
| Revenue | 118.9B | 93.4B | 13.7B | 828.2M |
| #of Access lines (000s) | 62,871 | 42,316 | 13,032 | 2,200 |
All financial values recorded above were taken from each company's respective FY 2007 Annual Report or 10-K and from Google Finance.
Verizon has seen customer growth and apart from monthly ARPU, Verizon is performing better than any of its competitors on all performance metrics. Regarding its monthly ARPU, Verizon managed to post the biggest year-to-year increase in its ARPU figures.
| Key metric (Q3 2007) | AT&T | Verizon | Sprint Nextel |
|---|---|---|---|
| Net adds (Millions) | 2 | 1.7 | -0.4 |
| Post-Paid Churn (%) | 1.7 | 1.2 | 2.3 |
| Monthly ARPU ($) | 50.8 | 52.1 | 60 |
[edit] References
- ↑ 1.0 1.1 1.2 2008 Annual Report (December 31, 2008).
- ↑ Analyzing Verizon's FiOS Bet. Seeking Alpha (August 19, 2008).
- ↑ 2008 Annual Report (December 31, 2008).
- ↑ VZ Q1 2009 10-Q (March 31, 2009).
- ↑ VZ Q1 2009 10-Q (March 31, 2009).
- ↑ VZ Q1 2009 10-Q (March 31, 2009).
- ↑ VZ Q1 2009 10-Q (March 31, 2009).
- ↑ http://www.freepress.net/content/atthistory
- ↑ 9.0 9.1 9.2 9.3 Verizon Communications 2006-2008 Financials, January 27, 2009
- ↑ Yahoo Finance, VZ Income Statements
- ↑ 11.0 11.1 Verizon Wireless Completes $28.1B Alltel Buy, January 9, 2009
- ↑ Verizon Communications 2007 10-K, Pg. 7
- ↑ [1]
- ↑ 14.0 14.1
- ↑
- ↑
- ↑ Verizon Communication's Quarterly Earnings
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