VZ: Verizon Communications Posts Strong Third-Quarter Results as Organic Growth Initiatives Gain Momentum

Verizon Communications Inc. (NYSE:VZ) today reported strong financial and operational results for the third quarter 2006, as sales volumes gained momentum in wireless, broadband and enterprise markets.

Verizon reported quarterly earnings of $1.9 billion, or 66 cents per diluted share, compared with $1.9 billion, or 67 cents per share, in the third quarter 2005.

Reported earnings in the third quarter 2006 include a charge of 2 cents per share for special items, including pension settlement charges and Verizon Center relocation and merger integration costs.  Reported earnings in the third quarter 2005 had included a net gain of 1 cent per share in special items, principally from gains on a real estate sale and tax benefits, partially offset by asset impairments.  In the third quarter 2006, Verizon recognized an $85 million favorable tax benefit at Vodafone Omnitel.

Before special items (non-GAAP), Verizon's third-quarter 2006 earnings were $2.0 billion, or 68 cents per share.  This is an increase of 7.5 percent compared with earnings of $1.8 billion, or 66 cents per share, in the third quarter 2005.

Consolidated third-quarter 2006 operating revenues were $23.3 billion, a 25.8 percent increase compared with the third quarter 2005.  Consolidated total operating expenses were $19.3 billion, a 29.0 percent increase compared with the third quarter 2005.  Verizon's third-quarter 2006 reported results include revenues and expenses from the former MCI.

Comparing third quarter 2006 with third quarter 2005 on a pro-forma (non-GAAP) basis:

• Adjusted operating revenues increased 3.6 percent, supported by increasing sales volumes in markets that the company has been growing organically rather than through acquisition.
  
  


• Adjusted cash expenses increased 4.4 percent.
  
  


• Adjusted operating income increased 6.6 percent.

Adjusted operating income margins, including the effects of net pension and OPEB (other post-retirement benefits) costs, were 17.3 percent in third quarter 2006, compared with 16.8 percent in third quarter 2005.  Pro-forma, adjusted information presents the combined operating results of Verizon and the former MCI on a comparable basis.

Long-Term Shareholder Value

"Verizon continues to win customers and market share for wireless, broadband and enterprise services," said Ivan Seidenberg, Verizon chairman and CEO.  "These organic growth initiatives gained momentum in the third quarter, and we are confident this growth is sustainable.  We are building long-term shareholder value on a foundation of infrastructure and technology investment, supported by innovative marketing and customer service initiatives.

"Once again, Verizon Wireless has posted another industry-leading quarter of profitable growth, while our other network-based businesses continue to establish new customer relationships.  Verizon Telecom reported an excellent quarter in adding broadband and video customers.  Verizon Business again delivered sequential revenue growth as it focuses on increasing its penetration of U.S.-based multi-national accounts, and the integration of the former MCI is producing significant operational benefits and synergies that are on plan."

Seidenberg added, "We are maintaining strong consolidated cash flows that we have used in part to continue our share repurchase program in the third quarter."

Verizon Wireless Leads Industry

Verizon Wireless again delivered strong revenue growth, profitability, net customer additions and low churn that were significantly ahead of the industry.

Verizon Wireless is now the largest U.S. wireless carrier in terms of revenue.  The company is also the largest wireless data provider based on data revenue, and it has the most retail customers -- that is, businesses and consumers directly served by Verizon Wireless and who buy Verizon Wireless-branded service, rather than customers of the company's resellers.

Verizon Wireless revenues grew 18.2 percent year-over-year to $9.9 billion in the third quarter 2006, driven by strong customer growth and demand for data services.  This was the fourth consecutive quarter of 18 percent or better revenue growth.  Service ARPU (average revenue per user) increased year-over-year for the second consecutive quarter, and wireless data revenues grew to 14.1 percent of total wireless service revenues.

Verizon Wireless operating income margin was 26.2 percent in the quarter, its highest level ever, reflecting the company's ability to improve its industry-leading cost efficiency even as it added the most retail customers.

Wireless EBITDA margin was 45.0 percent.  (EBITDA -- or earnings before interest, taxes, depreciation and amortization -- is a non-GAAP measure that adds depreciation and amortization to operating income; EBITDA margin is calculated by dividing EBITDA by wireless service revenues.)

Verizon Wireless added 1.9 million net customers in the third quarter 2006, for a total of 56.7 million customers nationwide, a 15.1 percent increase in total customers from the end of the third quarter last year.  During the past 12 months, the company has added nearly 7.5 million net customers, more than any other wireless carrier.  All of the net additions in the third quarter and almost all net additions in the past 12 months were retail customers.

Key to the company's strong net add performance was its continued industry-leading low churn level.  For the third quarter 2006, total churn was 1.24 percent, and churn among the company's retail postpaid customers -- 93 percent of all its customers -- was 0.95 percent.

Verizon Telecom Broadband Gains

Verizon Telecom, which serves wireline residential and small-business customers, added 448,000 net broadband connections in the third quarter 2006.  These results include new customers of both DSL and FiOS fiber-optic-based Internet access services.  Over the past year, Verizon Telecom has added more than 2 million net new DSL and FiOS Internet customers.  Verizon Telecom now has 6.6 million total broadband connections, an increase of 45.1 percent compared with the third quarter 2005.

FiOS Internet customers accounted for 147,000 of the net broadband connection additions in the third quarter and now total 522,000.  In addition, Verizon Telecom had 118,000 FiOS TV customers at the end of the third quarter.

In the consumer market, Verizon added 120,000 more net broadband and video customers during the third quarter than it lost in primary wireline voice access lines.  New broadband and video sales have more than made up for a reduction in primary wireline voice access lines of customers who turned to wireless, cable or Internet protocol (IP) services.  Primary residential access lines decreased by 419,000 in the third quarter 2006, compared with the second quarter 2006, while Verizon added 539,000 residential broadband and video customers, including customers with DIRECTV bundles, over the same period.

At the end of the third quarter 2006, there were 46.0 million total domestic wireline access lines -- which also include secondary residential lines, public telephones, business lines and wholesale voice connections.  This represents a 7.5 percent decrease compared with the end of the third quarter 2005.

Total wireline operating revenues, including Verizon Business, were $12.8 billion in the third quarter 2006, an increase of 35.5 percent compared with the third quarter 2005.  On an adjusted basis (non-GAAP), total wireline operating expenses were $11.7 billion in the third quarter 2006, a 43.3 percent increase compared with the third quarter 2005.

On a pro-forma basis, wireline operating revenues decreased 4.7 percent, comparing third quarter 2006 with third quarter 2005, driven in part by a continuation of the expected declines in former MCI operations serving mass market (residential and small business) customers.  Wireline revenues were up sequentially for the second quarter in a row, with third quarter 2006 revenues up 0.1 percent over second quarter 2006.

Also on a pro-forma basis, wireline cash expenses (total operating expenses less depreciation and amortization expense) were $9.3 billion in the third quarter 2006, a decrease of 1.3 percent compared with the third quarter 2005.

Verizon Business Continues to Build Momentum

Verizon Business, which provides advanced communications and information technology solutions to large business and government customers globally, continued to build momentum during the third quarter.

Compared with the second quarter 2006, Verizon Business operating revenues increased 1.7 percent to $5.2 billion in the third quarter 2006.  Pro-forma revenues from key strategic services, such as IP and managed services, grew nearly 25 percent in the third quarter 2006, compared with the third quarter 2005.

During the third quarter 2006, Verizon Business realized approximately $150 million in incremental synergies from the integration of the former MCI.  This brings the year-to-date total to approximately $350 million -- on track with the company's year-end target of $550 million.

Verizon Business once again introduced a series of new products and capabilities for its large business and government customers, and delivered a strong quarterly performance.  New offerings during the quarter included expansion of Ethernet access to the Verizon Business Private IP network in six additional European countries and the addition of new IP-based capabilities for its Contact Center Services and VoIP (voice over Internet protocol) portfolio to help businesses enhance customer-service operations and leverage the benefits of VoIP.  Verizon Business also unveiled a new unified operations and security center for its federal government customers.

Cash Flows, Share Repurchases and Debt

At the consolidated level, cash flows from continuing operations were $17.9 billion in the first nine months of 2006, compared with $15.0 billion in the first nine months of 2005.  Capital expenditures from continuing operations were $12.3 billion in the first nine months of 2006, including a $1.1 billion increase in wireline investment primarily driven by the inclusion of MCI, compared with $11.4 billion over the same period in 2005.  Verizon continues to maintain its guidance for full-year 2006 capital expenditures of $17.0 billion to $17.4 billion.

In the third quarter, Verizon repurchased approximately $350 million in shares, bringing total share repurchases to $1.35 billion over the first nine months of 2006, toward a previously announced target of $1.5 billion by year-end.

Verizon's total debt at the end of the third quarter 2006 was $41.7 billion, compared with $42.4 billion at the end of the second quarter 2006.

Special Items and FAS 158

Special items in the third quarter 2006 included $64 million in after-tax charges, or 2 cents per share, for pension settlement charges, MCI merger integration costs, and relocation and other costs related to establishing the Verizon Center in New Jersey.  Special items in the third quarter 2005 included a net gain of 1 cent per share on the sale of a New York City office building and related relocation costs, tax benefits, asset impairments and other costs.

The recently issued Financial Accounting Standard, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (FAS 158), will be effective at year-end 2006 and requires the recognition of the funded status of defined benefits plans as either an asset or liability on the balance sheet.  Based on Verizon's current estimates, the company expects to decrease shareowners' equity by approximately $10 billion post-tax as a result of adopting this change.  There is no impact on cash flows or earnings as a result of adopting this change.

Updates on Future Transactions

Earlier this month, Verizon announced that its Board of Directors had approved the proposed spin-off of Information Services to its stockholders. The spin-off is expected to close on or about Nov. 17, resulting in a new public company called Idearc Inc.

As a result of the spin-off, Verizon is expected to reduce its outstanding indebtedness by approximately $7 billion through a debt-for-debt exchange as described in the Form 10 Registration Statement filed with the Securities and Exchange Commission.  Verizon is also expected to receive approximately $2 billion in cash proceeds from additional borrowings by Idearc in connection with the spin-off.

In April 2006, Verizon announced the execution of definitive agreements to sell its interests in Verizon Dominicana, Telecomunicaciones de Puerto Rico and Compañia Anónima Nacional Teléfonos de Venezuela.  These asset sales are proceeding, and Verizon Dominicana and Telecomunicaciones de Puerto Rico are reported as discontinued operations.

Business Highlights

Following are third-quarter 2006 highlights for Verizon's Wireless, Wireline and Information Services business segments.

Wireless:

• Continuing its focus on retail (non-wholesale) customers, Verizon Wireless added a record 2.0 million net retail customers during the third quarter.  Based on publicly available information, the company has the largest retail customer base in the industry -- 54.6 million retail customers of its 56.7 million total customers (which includes retail and wholesale).
  
  


• Service revenues (which do not include taxes and regulatory fees) increased 16.5 percent to $8.5 billion for the third quarter 2006.  Total service ARPU increased to $50.59, up 0.9 percent from the similar period in 2005 and up 1.8 percent from the prior quarter.  Retail service ARPU was higher at $51.21 for the quarter, an increase of 1.2 percent over 2005.
  
  


• Cost efficiency continued to lead the industry, as the company's cash expense per customer in the third quarter declined 5.0 percent year-over-year to $27.85.
  
  


• Data services revenues, driven mainly by continued growth in business data revenues, contributed $1.2 billion, nearly double the amount for the same period a year ago.  In the third quarter, data revenues were 14.1 percent of all service revenues, up from 8.4 percent in the third quarter of 2005.  Data service ARPU continued to grow in the third quarter, increasing by 69 percent over the year-ago quarter.  The company now has 30.9 million data customers -- a 43 percent increase compared with third quarter 2005.
  
  


• Continued expansion of the company's national 3G EV-DO high-speed data network and a leading lineup of business and consumer devices are propelling its growth in data services revenues.  During the third quarter, Verizon Wireless extended its wireless broadband network reach to include new areas in Alabama, Arizona, Florida, Georgia, Idaho, Illinois, Kansas, Massachusetts, Nebraska, New Hampshire, New Mexico, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Texas and Vermont.  At the end of the third quarter, 13.7 million customers had broadband-capable devices, including phones, PDAs, BlackBerries and laptop PC cards.
  
  


• During the third quarter, the company announced supply agreements with Nortel and Motorola for CDMA 1xEV-DO Revision (Rev.) A technology, which will provide significantly faster data speeds for high-bandwidth wireless services such as VoIP and advanced multimedia applications.  An agreement with Lucent Technologies was announced in June.
  
  


• The company continued to expand its business customer base during the quarter and introduced new devices to enhance business connectivity, including the compact, plug-in Novatel ExpressCard for PCs; two Airlink Wireless rugged modems designed for always-on and location-based solutions; and the BlackBerry 8703e, which runs on the Verizon Wireless high-speed broadband network.
  
  


• For consumers, the company launched the G'zOne Type-V, a rugged phone designed to stand up under the roughest conditions, and the MOTOKRZR K1m, the latest in a leading lineup of V CAST Music-enabled phones that allow customers to browse and download from the V CAST Music library of 1.4 million songs.  The company now offers 10 music-capable phones, including the Chocolate(TM), available exclusively from Verizon Wireless.
  
  


• Get It Now services continued to hit milestones, for the first time in a single month topping 5 billion text messages and 100 million picture/video messages exchanged, in September.  For the quarter, Verizon Wireless customers exchanged a total of 14.4 billion text messages -- a company and industry record -- and nearly 290 million picture/video messages.  Customers also completed more than 68 million downloads of games, ringtones, ringback tones and exclusive content.
  
  


• Verizon Wireless continued to expand its distribution, adding post-paid service plans to its prepaid lineup at nearly 1,400 Target stores nationwide.
  
  


• The company announced plans to add a new customer service center in Huntsville, Ala., in late 2007 to continue to deliver the best customer service in the industry to its growing customer base.  The facility also will be home to a business sales team and a national service team for government customers.
  
  


• During the quarter, the company again received third-party recognition for the reliability of its network.  Verizon Wireless ranked highest nationally among the top five national wireless providers and scored significantly above the industry average in the J.D. Power and Associates Wireless Call Quality Performance Study Volume 2.  In addition, for the sixth consecutive year, Verizon Wireless was included among Working Mother Magazine's 100 Best Companies for its commitment to helping parents balance work and family.  (Working Mother also included Verizon Communications separately on this year's list.)

Wireline:

• Data revenues were $4.1 billion in the third quarter 2006, up 89.3 percent from the third quarter 2005 -- a comparison favorably affected by the inclusion of MCI this year.  Data revenues now make up 32 percent of Verizon's total wireline revenues.

Verizon Telecom

• FiOS data services are becoming increasingly available for sale in 16 states, as Verizon's FTTP (fiber to the premises) network passed a total of 5.3 million premises by the end of the third quarter and is on target to pass 6 million premises by year-end.
  
  


• Penetration of FiOS Internet service now stands at 14 percent across all markets, with the service available for sale to 3.8 million premises as of the end of the third quarter, compared with 12 percent at the end of the second quarter 2006.
  
  


• Penetration of FiOS TV service now stands at 10 percent across all markets, with the service available for sale to 1.2 million premises as of the end of the third quarter.  As the deployment of FiOS TV ramped up and more premises became open for sale due to successful efforts to obtain cable franchises, the company added a net of 63,000 new FiOS TV customers in the third quarter 2006, compared with 35,000 in the second quarter 2006.
  
  


• Churn among FiOS customers remains lower than 1.5 percent per month, and costs associated with customer churn continue to be lower than anticipated.  Costs to pass a premises with fiber have declined to $845 in September 2006, already lower than the company's year-end target of $850.  Costs to connect a premises to fiber declined to $900 in September, toward a year-end target of $880.  As customer growth ramped up, earnings dilution from FiOS data and video deployment was 9 cents per share in the third quarter.  The company increased the full-year 2006 estimate of this dilution to 31 cents to 32 cents per share, from 28 cents to 30 cents per share.
  
  


• Complementing the FiOS TV rollout, Verizon now has 496,000 customers who receive a Verizon DIRECTV bundle, adding 64,000 net new customer additions in the quarter.  Total net additions of 170,000 year-to-date reflect adjustments for amounts previously reported.
  
  


• Approximately 7.5 million Verizon Freedom packages were in service to mass market customers by the end of the third quarter 2006, an increase of approximately 2.5 million since the end of the third quarter 2005.  Verizon Freedom packages, which offer local wireline services with various combinations of long-distance and Internet access, are part of a bundling strategy designed to retain retail, primary access line customers.
  
  


• Among legacy Verizon customers (that is, excluding former MCI mass market customers), the average monthly revenue per household in the third quarter 2006 was $53.06, an increase of more than 2 percent compared with both third quarter 2005 and second quarter 2006.

Verizon Business

• The Verizon Business IP Web Center continues to be recognized by leading industry authorities for the breadth and depth of its product portfolio, and its service received the prestigious 2006 INTERNET TELEPHONY TMC Labs Innovation Award.  IP Web Center, a Web-based, complete hosted contact-center solution, allows companies to quickly start up or expand their customer communications operations in response to rapidly changing business plans or business continuity requirements. 
  
  


• In addition to a significant expansion of its Ethernet capabilities in Europe, Verizon Business offerings during the third quarter included further expansion of its managed hosting capabilities to support five of the world's most widely deployed computer operating systems, as well as the launch of a high-definition digital video transport service for broadcast and entertainment companies and other businesses in 13 Northeast and Mid-Atlantic states.
  
  


• During the quarter, Verizon Business also opened its new Government Network Operations and Security Center, dedicated to supporting the unique security and operational requirements of its federal government customers.  The center, located in Northern Virginia, will support the managed network services Verizon Business provides to nearly every federal government agency from the civilian, intelligence and defense communities.
  
  


• Multinational companies including Hearst Corporation, First Data Corporation and Johnson Controls completed agreements with Verizon Business during the quarter for a wide range of communications services.  Verizon Business recently completed the deployment of a 60-plus node Private IP multiprotocol label switching (MPLS) network and a global IP network connecting more than 30 sites for Hearst, a 119-year-old multimedia company with more than 20,000 employees worldwide.
  
  


• Verizon Business executed significant extension agreements during the quarter with federal customers including the General Services Administration and the U.S. Postal Service.
  
  


• Extended Stay Hotels recently increased the scope of its agreement with Verizon Business to provide Private IP service to CarrAmerica, a recently acquired affiliate.  This is in addition to the La Quinta and MeriStar brands added earlier this year.  By the end of 2006, Verizon will connect more than 1,200 sites.  Dave & Buster's, a leading operator of upscale restaurant/entertainment complexes, completed a new agreement during the quarter with Verizon Business for Private IP, virtual private network (VPN), and data center and voice services.  Verizon Business will help Dave & Buster's link all their locations nationwide in a secure, reliable advanced IP network environment.
  
  


• Internationally, Verizon Business also signed significant new business during the quarter, including several notable deals for VoIP services.  The Queen Elizabeth II Conference Centre in Westminster, London, an executive agency of the newly-created Department for Communities and Local Government, is one of the first U.K. government agencies to migrate its voice services to a VoIP system using IP Integrated Access.  Separately, the U.K. National Health Service's Eastern Region Tariffs Consortium is conducting an IP Integrated Access VoIP trial in preparation for a full VoIP rollout across its sites.
  
  


• Atos Worldline, a major European player in the processing of large volume electronic exchanges, signed a new contract with Verizon Business for Global Inbound Services to support customer communications.  The London Stock Exchange has also extended its existing relationship with Verizon Business, signing a new four-year contract to manage its overall wide area network (WAN).  Network reliability to support trading market data was cited as a key reason for contract renewal.
  
  


• Personal computer manufacturer Acer Europe Services has also extended its relationship with Verizon Business, implementing Private IP in a two-year contract to link its European sites with its overall global network.  Other customers that have extended their relationship with Verizon Business include Ubisoft Entertainment Inc., a computer and video game publisher, and Alliance Atlantis Communications Inc., a leading specialty broadcaster in Canada.  Both customers use Verizon Internet bandwidth and co-location services.

Information Services:

Since the spin-off process described above is still ongoing, Information Services results of operations, financial position and cash flows continue to be reported in continuing operations in the third quarter.

• Information Services third-quarter operating revenues were $804 million compared with $857 million in the third quarter of 2005, a 6.2 percent decline, primarily driven by reductions in domestic print-advertising revenue and the impact of the sale of small international operations.
  
  


• In the third quarter, Information Services' domestic online directory and search service, SuperPages.com, achieved revenue growth of 22.4 percent compared with the third quarter of 2005, and Internet yellow pages searches increased 84.5 percent over the same period.