Verizon Overview of the Firm

Verizon

Overview of the Firm

Verizon is a telecommunications company that is focused on voice, data and wireless communications services. The company was formed ten years ago and in that time has expanded its network and business to become a national player in telecommunications. The company's key success factors are in its infrastructure investment, its customer service and its ability to expand capacity and deliver innovative services to its customers. In the past couple of years, the smartphone industry has driven substantial growth to the company's wireless division, in particular wireless data services. The need for innovation and capacity growth led Verizon to invest $7 billion in technology upgrades and new services in the past year. Verizon's current projects include building out a 4G network and improving on its broadband service (Verizon 2009 Annual Report).

Verizon is best known for its consumer business, but also has an extensive portfolio of corporate and government clients. The company serves 96 of the Fortune 100, for example. For these clients especially Verizon leverages a worldwide network of infrastructure and partners. The industry remains highly competitive, however, with networks like at&T and Sprint, as well as a number of regional players, all competing for what is a rapidly growing business is voice, data and wireless information transmission.

Financial Performance

Verizon has grown rapidly in the past several years. The 2009 Annual Report is the source for the figures used in these calculations. The company earned $107.808 billion in 2009, up 10.7% from 2008 levels. From this, the company earned $6.707 billion, which gives the company a profit margin of 9.6% for 2009. In the previous year, Verizon earned a profit margin of 12.92%.

As Verizon has grown, that growth has been funded in part by growth in the company's debt. Last year, Verizon's long-term debt to equity ratio was 1.32. In 2008 it was 1.12 and in 2005 it was 0.79. This indicates that the company has been increasing its debt over the past several years. This can be explained by the fact that the company has been compelled to make increasing investments in research and development, in order to continually deliver network upgrades and innovative products and services.

The company's return on equity for 2009 was 24.8% and for 2008 it was 27.2%. This can be attributed primarily to a reduction in the net income for 2009. Equity also declined, but the decline in net income was sharper. The earnings per share at Verizon was $1.29 for 2009; $2.26 for 2008 and $1.90 for 2007. This again is related to the decline in the company's net income in 2009. Verizon saw its costs increase in the year, along with the increase in revenues.

Overall, these four ratios indicate that Verizon, while growing, is having difficulty matching its performance levels of the past several years. The company has faced increases to its costs that it has been unable to match with increases in revenues. As a result, it is being forced to take on additional debt to finance its ventures and this is having the impact of reducing shareholder equity over time. This is not a sustainable path for the company to be on, as it will eventually lead to a permanent erosion of equity value.

However, it is worth noting that 2009 was a terrible year for most firms due to the economic downturn. That Verizon was able to maintain a profit position of over $10 billion is testament to the company's market strength. If the company recovers in 2010, look for many of these ratios to improve, especially the ROE, EPS and possibly even the debt-to-equity ratio as well.

Critical Accounting Disclosures

Verizon utilizes the Generally Accepted Accounting Principles (GAAP) in the production of its financial statements. There are a number of key disclosures and policies that the company has with regards to the production of statements. One of the ratios mentioned above was the earnings per share. This is calculated on the basis of the weighted-average number of shares in the period.

Inventories are recorded on the basis of first in first out (FIFO), although the company does use the average cost method for some inventories. The latter is typically used for network equipment for local telephone operations. Depreciation policies include the recording of plant, property and equipment at cost. Local telephone operations again are subject to different depreciation methods, and use the straight line method and the group remaining life method, depending on the asset. The company also chooses to capitalize all software that has a useful life of over one year. The straight line method is used and the period will be between 2 and 7 years depending on the software.

The company has a significant amount of intangible assets of its balance sheet. These consist primarily of wireless licenses. These licenses are typically granted for a fixed period of time, but renewals occur routinely. Therefore, Verizon treats wireless licenses as indefinite intangible assets and therefore the licenses are subject to re-evaluation each reporting period.

Verizon also enters into derivative contracts in order to manage its exchange rate and interest rate risk. These derivatives are recorded at fair value, and as such they are recorded on the balance sheet as either assets or liabilities depending on whether or not they are under water.

Summary of Findings

Verizon's financial policies are in line with GAAP and there is little out of the ordinary about the company's treatment of inventories, derivatives or intangible assets. The company has grown rapidly in recent years, but there is a cost associated with that growth. Verizon's long-term debt has increased steadily, while its equity has not. That said, Verizon is a profitable company and the investments have been necessary for the company to retain its current favorable position in the market. The industry is driven by technology investment, so Verizon has been compelled to continue its intense investments as a means of retaining competitiveness. The long-term outlook for Verizon is generally positive as it has a large balance of wireless licenses that provide the company with the opportunity for growth, but this must be tempered with the knowledge that Verizon is increasing its costs faster than its revenues and its debt faster than its equity.

Recommendation

Verizon is a long-term investment. The company's income statement and balance sheet indicate that it has fluctuated in terms of profitability, even though it has grown steadily. This is likely due to the massive amount of investment that the company has needed to undertake in order to grow its network and offer innovative products and services. In the coming years, the expansion of 4G and the continuing increase in demand for wireless data service look to fuel continued expansion of Verizon's revenues and its balance sheet. Despite the increase in long-term debt, the company is not yet in a dangerous financial position. However, the capital structure is weighted towards debt financing significantly, so an investor should exercise some caution when investing in Verizon.