VZ: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Verizon's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on January 26, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Verizon.

Verizon Communications is a major provider of wired and wireless voice and data communications services to U.S. businesses and consumers. The company took its current form in 2000 when Bell Atlantic merged with GTE.  Verizon's wireless business is second only to AT&T in the U.S., and in September 2020, Verizon announced it would acquire Tracfone, the leading pre-paid and value mobile service provider.  The industry is now transitioning to 5G technology. 

Shares of Verizon now trade for about $59 each, and the company's market value is about $240 billion.  These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, New York Stock Exchange Composite, and Russell 1000 stock indices.

Verizon recorded profits of $18 billion on revenue of $128 billion during the last year. In the quarter that ended on 30 September 2020, Verizon earned $1.25 per share (excluding certain items), which beat the $1.22 Wall Street consensus forecast. See https://tinyurl.com/y5ej5n6w for Verizon's most recent quarterly report.

Revenue in the September 2020 quarter totaled $31.5 billion, 4% less than last year's $32.9 billion. The Consumer business was responsible for 69% of overall revenue, and this unit's revenue fell by 4.3% compared to the year-earlier result. The Business business contributed 25% of revenue, and this unit's revenue fell by 1.7%.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Verizon's management communicated their expectations for the December 2020 quarter last October.  

Outlook and guidance

Based on three quarters of resilient earnings and projected trends into fourth-quarter 2020, Verizon is updating financial guidance for full-year 2020:

•The company now expects adjusted EPS growth (non-GAAP) of 0 to 2 percent, an update from prior guidance for 2020 adjusted EPS growth (non-GAAP) of -2 to 2 percent. This update includes the previously discussed accounting headwinds, impacts from COVID-19, and new device launches in fourth-quarter 2020.

•The company now expects total wireless service revenue growth of at least 2 percent in fourth-quarter 2020 compared to last year.

Verizon expects the following results for full-year 2020:

•Capital spending to now be at the higher end of the guided range of $17.5 billion to $18.5 billion.

•Adjusted effective income tax rate (non-GAAP) in the range of 23 percent to 25 percent.

Adjusted earnings per share (non-GAAP), excluding special items, in 2019 was $4.81, which indicates the company expects the equivalent figure for 2020 to be between $4.81 (zero percent growth) and $4.91 (2 percent growth) per share.  During the first nine months of 2020, adjusted EPS was $3.69.  This suggests adjusted EPS in the fourth quarter will be between $1.12 to $1.22.  GAAP EPS is typically lower, but the difference varies widely from quarter to quarter.

It's interesting that Verizon expects revenue from its wireless services to grow "at least 2 percent" in the fourth quarter because revenue from these services only increased 0.3 percent in the third quarter.  Wireless service revenue is just over half of Verizon's total revenue, and we can use the wireless guidance to predict overall revenue.

The following baseline Income Statement tries to take into account the information mentioned above, and it is more or less consistent with the company's historical results.  GAAP earnings are estimated at $4.72 billion ($1.14 per share).

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #verizon  #vz  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis