Strong wireless profitability and customer loyalty, renewed Fios growth highlight Verizon’s 3Q results

3Q 2016 highlights

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• Consolidated: 89 cents in earnings per share (EPS); adjusted EPS (non-GAAP) of $1.01, excluding non-operational items related to pension re-measurement and severance costs.
• Wireless: 442,000 retail postpaid net additions, including 357,000 new 4G LTE smartphones.
• Wireline: 90,000 Fios Internet net additions, 36,000 Fios Video net additions.

NEW YORK – Third-quarter 2016 earnings at Verizon Communications Inc. (NYSE, Nasdaq: VZ) showed continued strong profitability and customer loyalty at Verizon Wireless, and renewed customer growth for Fios fiber-optic services.

The company reported third-quarter 2016 EPS of 89 cents, compared with 99 cents per share in third-quarter 2015.

Adjusted third-quarter 2016 EPS (non-GAAP) of $1.01 excluded 12 cents per share related to mark-to-market pension re-measurement and severance costs. This compares with adjusted third-quarter 2015 earnings of $1.04 per share, which excluded 5 cents per share due to pension re-measurement.

 “Verizon continues to deliver strong financial and operational results in highly competitive markets while positioning itself for future growth,” said Chairman and CEO Lowell McAdam. “While we transform our company in a challenging environment, we have maintained the financial flexibility to invest in our industry-leading networks to better serve customers, add scale to bring innovation to the mobile media and Internet of Things (IoT) markets, and increase dividends for a 10th consecutive year.”

Consolidated results

• Total operating revenues in third-quarter 2016 were $30.9 billion, a 6.7 percent decrease compared with third-quarter 2015. Excluding third-quarter 2015 revenues from since-divested local landline businesses, total operating revenues on a comparable basis (non-GAAP) would have declined 2.9 percent year over year.
• Cash flows from operations totaled $4.8 billion in third-quarter 2016. Third-quarter 2016 proceeds of $2.6 billion from asset-backed securitization transactions, which in prior quarters under the off-balance-sheet securitization model would have flowed through cash flow from operations, are reflected in cash flows from financing.
• Cash taxes were higher compared to a year ago, due primarily to tax payments of $2.4 billion in third-quarter 2016 related to the gain on sale of wireline operations divested earlier this year. Verizon also made a discretionary pension contribution in third-quarter 2016, bringing full-year pension funding payments to approximately $750 million.
• Operating income was $6.5 billion in third-quarter 2016, and operating income margin was 21.1 percent. EBITDA (non-GAAP, earnings before interest, taxes, depreciation and amortization) totaled $10.5 billion, and the consolidated EBITDA margin (non-GAAP) was 33.9 percent in third-quarter 2016.

In September, Verizon’s Board of Directors approved a 2.2 percent dividend increase, the 10th consecutive year with an increase.

In July, Verizon announced an agreement to acquire Yahoo! and closed on the acquisition of Telogis, which added to Verizon’s suite of connected vehicle solutions. In August, Verizon announced an agreement to acquire Fleetmatics, a global provider of fleet and mobile workforce management solutions, in a transaction expected to close in fourth-quarter 2016. In September, Verizon announced the acquisition of Sensity Systems, adding to Verizon’s suite of smart city solutions when the transaction closed in October.

Growth continued in new markets, with strong demand from advertisers for AOL’s expanding programmatic capabilities and high-quality data analytical tools. Organically, IoT revenues, led by telematics, increased 24 percent on a comparable basis to third-quarter 2015, to $217 million.

Maintaining its network leadership, Verizon launched LTE Advanced in more than 460 markets in third-quarter 2016. The company is advancing its software-defined network (SDN) architecture, building a next-generation fiber network in Boston and aggressively densifying its nationwide wireless network. Based on the outcome of its commercial pilot program, Verizon intends to be the first company to launch a 5G fixed wireless broadband solution in the United States.

Verizon Wireless highlights

• Verizon reported 442,000 retail postpaid net additions in third-quarter 2016. These net adds exclude wholesale device and wholesale IoT connections. At the end of third-quarter 2016, Verizon had 113.7 million retail connections, a 2.6 percent year-over-year increase. Verizon’s industry-leading retail postpaid connections base grew 3.0 percent to 108.2 million, and retail prepaid connections totaled 5.5 million.
• Total revenues were $22.1 billion in third-quarter 2016, a decline of 3.9 percent compared with third-quarter 2015, as more customers continued to choose unsubsidized device payment plans. Service revenues plus device payment plan billings increased 2.3 percent, to $19.3 billion, comparing third-quarter 2016 with third-quarter 2015.
• The percentage of phone activations on device payment plans was about 70 percent in third-quarter 2016, compared with about 67 percent in second-quarter 2016. The company expects this percentage to be around 70 percent in the fourth quarter. About 60 percent of postpaid phone customers are on an unsubsidized pricing plan, and Verizon expects to return to year-over-year service revenue growth by the end of 2017.
• At the end of third-quarter 2016, Verizon Wireless had a total of about 35.8 million device payment plan phone connections, representing about 41 percent of the postpaid phone base.
• Segment operating income was $7.6 billion, and segment operating income margin was 34.6 percent. In third-quarter 2016, Verizon Wireless generated $9.9 billion in segment EBITDA (non-GAAP), a year-over-year increase of 0.1 percent. Segment EBITDA margin (non-GAAP) was 44.9 percent, compared with 43.2 percent in third-quarter 2015.
• Customer loyalty remained high. Retail postpaid churn was 1.04 percent in third-quarter 2016, a year-over-year increase of 11 basis points, as strong retention in the phone base was offset by increased churn in tablets. Retail postpaid phone churn was up 2 basis points year over year and remained below 0.90 percent for the sixth consecutive quarter.
• The 442,000 retail postpaid net additions in third-quarter 2016 included 357,000 4G LTE smartphones. Net phone additions decreased sequentially to a loss of 36,000, as the net gain in 4G phones was offset by a net decline in basic and 3G phones. Tablet net additions totaled 221,000 in the quarter. All other postpaid net additions totaled 257,000, primarily due to sales of hum, Verizon’s telematics device.

Wireline highlights

• Total wireline revenue decreased 2.3 percent, to $7.8 billion, comparing third-quarter 2016 with third-quarter 2015. Retail consumer revenues grew 0.2 percent, to $3.2 billion, supported by consumer Fios revenue growth of 4.2 percent.
• Total revenues for Fios services grew 4.4 percent, to $2.8 billion, comparing third-quarter 2016 with third-quarter 2015. Rebounding from net connection declines in second-quarter 2016 due to a work stoppage, Verizon added a net of 90,000 Fios Internet connections and 36,000 Fios Video connections in third-quarter 2016.
• Fios revenue growth has been driven by a larger customer base, strong customer loyalty and consumer demand for higher internet speeds. Approximately 16 percent of the company’s Fios Internet base has opted for speeds of 100 megabits per second or higher, compared with 11 percent in second-quarter 2016. Customer demand for Custom TV remains strong and is consistent with prior quarters.
• Wireline operating income was $156 million in third-quarter 2016, compared with a loss of $109 million in third-quarter 2015. Segment EBITDA (non-GAAP) was $1.7 billion in third-quarter 2016, up 10.1 percent from third-quarter 2015. Segment EBITDA margin (non-GAAP) was 21.2 percent in third-quarter 2016, compared with 18.9 percent in third-quarter 2015, due to Fios growth and cost management. Verizon believes it will continue to make progress in expanding wireline EBITDA margin.
• During the third quarter, Verizon Enterprise Solutions entered into new agreements or began work with a number of clients, including The American Red Cross, ADP, CA Technologies, CDK, Citrix, Colgate-Palmolive Company, Concentrix, ICON Clinical Research, Juniper Networks, the National Weather Service, PTC, Sage, Steptoe & Johnson LLP, Vantiv, Inc., Viacom, Virginia Information Technologies Agency and the French subsidiary of Allianz Worldwide Partners.

Outlook and forward-looking items

Verizon expects the following:

• 2016 adjusted earnings to be at a level comparable to 2015, excluding a 7-cent-per-share impact of the 2016 work stoppage;
• Consolidated adjusted EBITDA margin for 2016 consistent with full-year 2015;
• Consolidated capital spending for 2016 at the low end of the range of $17.2 billion to $17.7 billion;
• 2016 effective tax rate to be in the range of 35 percent to 36 percent;
• Organic growth in consolidated revenues for full-year 2017 consistent with GDP growth for that year, with adjusted EPS growth at normal levels; and
• A return, by 2018-2019, to the company’s credit-rating profile prior to the acquisition of Vodafone’s indirect 45 percent interest in Verizon Wireless in early 2014.

NOTE: See the accompanying schedules and www.verizon.com/about/investors for reconciliations to generally accepted accounting principles (GAAP) for non-GAAP financial measures cited in this document.

Forward-looking statements

In this communication we have made forward-looking statements. These statements are based on our estimates and assumptions and are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations. Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,” “estimates,” “hopes” or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The following important factors, along with those discussed in our filings with the Securities and Exchange Commission (the “SEC”), could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements: adverse conditions in the U.S. and international economies; the effects of competition in the markets in which we operate; material changes in technology or technology substitution; disruption of our key suppliers’ provisioning of products or services; changes in the regulatory environment in which we operate, including any increase in restrictions on our ability to operate our networks; breaches of network or information technology security, natural disasters, terrorist attacks or acts of war or significant litigation and any resulting financial impact not covered by insurance; our high level of indebtedness; an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations or adverse conditions in the credit markets affecting the cost, including interest rates, and/or availability of further financing; material adverse changes in labor matters, including labor negotiations, and any resulting financial and/or operational impact; significant increases in benefit plan costs or lower investment returns on plan assets; changes in tax laws or treaties, or in their interpretation; changes in accounting assumptions that regulatory agencies, including the SEC, may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; the inability to implement our business strategies; and the inability to realize the expected benefits of strategic transactions.

Important additional information and where to find it

On September 9, 2016, Yahoo! Inc. ("Yahoo") filed with the Securities and Exchange Commission (the "SEC") a preliminary proxy statement regarding the proposed sale of Yahoo's operating business to Verizon Communications Inc. ("Verizon") and related transactions, and the definitive version of which will be sent or provided to Yahoo stockholders. BEFORE MAKING ANY VOTING DECISION, YAHOO'S STOCKHOLDERS ARE STRONGLY ADVISED TO READ YAHOO'S PROXY STATEMENT IN ITS ENTIRETY (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO WHEN THEY BECOME AVAILABLE) AND ANY OTHER DOCUMENTS FILED WITH THE SEC IN CONNECTION WITH THE PROPOSED TRANSACTIONS OR INCORPORATED BY REFERENCE THEREIN BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTIONS. Investors and stockholders can obtain a free copy of Yahoo's proxy statement, any amendments or supplements to the proxy statement, and other documents filed by Yahoo with the SEC in connection with the proposed transactions for no charge at the SEC's website at www.sec.gov, on the Investor Relations page of Yahoo's website investor.yahoo.net or by writing to Investor Relations, Yahoo! Inc., 701 First Avenue, Sunnyvale, CA 94089.

Yahoo and its directors and executive officers, as well as Verizon and its directors and executive officers, may be deemed participants in the solicitation of proxies from Yahoo's investors and stockholders in connection with the proposed transactions. Information concerning the ownership of Yahoo securities by Yahoo's directors and executive officers is included in their SEC filings on Forms 3, 4 and 5, and additional information is also available in Yahoo's annual report on Form 10-K for the year ended December 31, 2015, as amended, and Yahoo's proxy statement for its 2016 annual meeting of stockholders filed with the SEC on May 23, 2016. Information about Verizon's directors and executive officers is set forth in Verizon's annual report on Form 10-K for the year ended December 31, 2015 and Verizon's proxy statement for its 2016 annual meeting of stockholders filed with the SEC on March 21, 2016. Information regarding Yahoo's directors, executive officers and other persons who may, under the rules of the SEC, be considered participants in the solicitation of proxies in connection with the proposed transactions, including their respective interests by security holdings or otherwise, also will be set forth in the definitive proxy statement relating to the proposed transactions when it is filed with the SEC. These documents may be obtained free of charge from the sources indicated above.