Financial statement analysis of Verizon

Verizon is a national telecommunications company, headquartered in New York City. The company was formed from the breakup of Bell and subsequent mergers and acquisitions. The company has divisions for media, network and technology and customer/product operations. The latter is by far the largest component of the company, encompassing Verizon Wireless, and a number of companies aimed at the enterprise market. Verizon competes against AT&T and Sprint, both of which are large companies in their own right, with similar businesses, in particular in wireless and telecommunications. These divisions reflect an organizational structure that is focused on product. The wireless business is nationwide, but the landline-oriented businesses are focused mainly in the northeast, which is the traditional geography for Verizon's predecessor business Bell Atlantic.

Verizon's business has fluctuated over the past three years. In FY 2016, it recorded $125 billion in revenue, down from $131 billion the year previous, and lower than the $127 billion it recorded in FY2014. This indicates that either the company is struggling to maintain its pricing power because its businesses are competitive, or it is actually losing customers. Gross profit has likewise fluctuated. The company's operating expenses peaked in FY2014, but management evidently felt that the cost structure was too high for where the market was headed, and Verizon has been able to reduce its costs over the past couple of years. This resulted in very high net income in FY2015, but the decline in revenue in 2016 resulted in a decrease in net income over the previous year. Whether the decline was a temporary one-year phenomenon or not remains to be seen.

One of the most important elements in the cash flow statement is whether the operating cash flows are aligned with the revenue numbers, and in the case of Verizon they are. FY2016 was the weakest year, and FY2015 the strongest year, in terms of operating cash flows. Thus, the revenue numbers are not unduly skewed by non-cash items. The company remains cash flow positive, despite the downturn in its top line revenue number.

The big number that jumps out in the investing section is that the company spent money in 2015 to acquire more wireless licenses. This was a major investment in its future, one made in a year of strong cash flows. Verizon has otherwise allocated a steady $17 billion per year for capital expenditures.

The major item of note under financing activities is the acquisition of non-controlling interest for $58 billion in FY2014. This relates back to the 2013 purchase of Verizon Wireless stake that was held by Vodafone. Since that point, it was mostly just routine bonds coming due and that sort of thing. Despite being profitable in each of the years, however, Verizon has seen its cash holdings decline since 2014.

The underlying financial performance is generally good. The company has remained profitable through a downturn in revenues. The reality is that they are still healthy financially, though they are highly leveraged. The need for continuous investment in infrastructure to keep up with changing technology is something that causes companies in this industry, especially in wireless, to borrow heavily. The assumption is that the borrowing will pay off with future revenue, especially when borrowing is done at low interest rates. However, Verizon is heavily leveraged at a point when interest rates are rising, so there is definitely some risk there for the company. But overall, Verizon is in good financial health, especially given that it still has strong operating cash flows.