Verizon Quarterly Earnings Analysis: By the Numbers

AP/Don Ryan
Verizon Communications (VZ) just reported its preliminary financial results for the quarter that ended Sept. 30, based upon which we provide a unique analysis of its performance. Our analysis focuses on the company's performance for the same quarterly period on a year-on-year basis (unless stated otherwise).

Verizon is one of the first companies amongst its peer group to announce earnings for this period.

Highlights
  • EPS numbers: Missed Estimate. Reported 89 cents versus the estimated 90 cents per share.
  • Summary numbers: Revenues of $31.586 billion, Net Earnings of $3.695 billion and EPS of $0.89.
  • Earnings miss despite performance focus on earnings: same period year-on-year change in earnings of 65.55% better than change in revenues of 4.32%
  • Gross margins now 61.21% from 63.80% compared to the same period last year, EBITDA margins now 35.01% from 36.34%
  • Potential weakening of the balance sheet? Year-on-year change in Operating Cash Flow of -25.68% trailed its change in earnings
  • Year-on-year earnings up despite decline in EBIT margins and pretax margins.
The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):
2013-09-302013-12-312014-03-312014-06-302014-09-30
Revenues30279.0031065.0030818.0031483.0031586.00
Revenue Growth (Qtr YOY)4.393.394.755.704.32
Earnings2232.005067.003947.004214.003695.00
Earnings Growth (Qtr YOY)40.11219.82102.2087.6265.55
Net Margin7.3716.3112.8113.3911.70
EPS0.781.761.151.010.89
Return on Equity10.0621.8328.90112.8986.99
Return on Assets3.577.366.377.566.56
Revenue Growth Versus Earnings Growth

Companies sometimes focus on growing their top-line (Sales or Revenues) more than their bottom-line i.e. Earnings or Net Income. Investors should look at revenue growth to understand a company's ability to grow its market share, and earnings growth to look at the company's ability to generate returns. Comparing revenue growth to earnings growth helps understand a couple of items: (1) A company's focus on gaining market share vs. generating profits and (2) How additive or dilutive the revenue performance has been to earnings.


Verizon's year-on-year change in top line compared to the same period last year of 4.32% trailed its change in earnings which was 65.55%. The company's performance this period suggests some efforts to help the bottom-line earnings. It remains to be seen how the rest of the peer group results turn out and if Verizon's performance suggests any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by 0.33% and earnings by -12.32% compared to the immediate last quarter.


Earnings Growth Analysis

The company's earnings have gone up year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations -- gross and EBITDA margins are currently at 61.21% and 35.01% respectively and were 63.80% and 36.34% for the same period last year. For comparison, gross margins were 61.61% and EBITDA margins 40.17% in the immediate last quarter.

Operating Cash Flow Growth Versus Earnings Growth

Companies often post earnings numbers that are influenced by non-cash activities. One way to gauge the quality of the declared earnings number is to judge the deviation in the growth in earnings from the growth in operating cash flows. In general, an earnings growth rate that is higher compared to the operating cash flow growth implies a higher proportion of non-operating and even one-time activities - such activities are typically not sustainable over long periods.


Verizon's year-on-year change in Operating Cash Flow of -25.68% trailed its change in earnings suggesting some potential weakening of the balance sheet.
Unusual Items

The company's earnings have gone up despite decline in EBIT margins as well as decline in pretax margins.
EPS Growth Versus Earnings Growth

Verizon's year-on-year change in Earnings per Share (EPS) of 14.10% is less than its change in earnings of 65.55%.
Supporting Data

The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:
2013-09-302013-12-312014-03-312014-06-302014-09-30
Revenues30279.0031065.0030818.0031483.0031586.00
Revenue Growth (Qtr YOY)4.393.394.755.704.32
Earnings2232.005067.003947.004214.003695.00
Earnings Growth (Qtr YOY)40.11219.82102.2087.6265.55
Operating Cash Flow11239.0010431.007139.007665.008353.00
Operating Cash Flow Growth (Qtr YOY)24.6734.96-2.85-29.638.60
Gross Margin63.8061.4963.6961.6161.21
EBITDA Margin36.3433.0037.3140.1735.01
Net Margin7.3716.3112.8113.3911.70
Working Capital Days54.37127.9561.81N/AN/A
EPS0.781.761.151.010.89
EPS Growth (Qtr YOY)39.29218.9269.1229.4914.10
Return on Equity10.0621.8328.90112.8986.99
Return on Assets3.577.366.377.566.56
Company Profile

Verizon Communications Inc. operates as a holding company, which provides broadband and other wireless and wireline communications services to consumer, business, and government and wholesale customers. It also provides converged communications, information and entertainment services over America's most advanced fiber-optic network, and delivers integrated business solutions to customers. The company operates its business through two segments: Verizon Wireless and Wireline. The Verizon Wireless segment provides communications products and services including wireless voice and data services and equipment sales, which are provided to consumer, business and government customers across the United States. The Wireline segment provides communications products and services including local exchange and long distance voice service, broadband video and data, IP network services, network access and other services to consumers, small businesses and carriers in the United States, as well as to businesses and government customers. Verizon Communications was founded in 1983 and is headquartered in New York, NY.


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