Course Project (Acc504-Managerial Accounting)

Verizon Communications, Inc

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Team Verizon

By: Sanobar Salim Adam Abraham Johnny Ly Salih

December 14, 2014
Executive Summary

Verizon Communications Inc., headquartered in New York, is a global leader in providing broadband and

other wireless and wireline communications services to mass market, business, government and

wholesale customers. Verizon Wireless operates America’s most reliable wireless network, serving more

than 93 million customers. Verizon also provides converged communications, information and

entertainment services over America’s most advanced fiber-optic network, and delivers innovative,

seamless business solutions to customers around the world. A Dow 30 company, Verizon employs a

workforce of 238,000 and last year generated revenues of more than $120.5 billion.

The major asset for Verizon commination is their Financial Stability: According to Verizon

Communications 2013 Annual Report, the company has $227.3 billion in assets, operating revenues of

$120.5 billion, Gross Profit ratio of 19.5, return on asset of 8.6, return on equity of 24 %and cash and

cash equivalents at the end of the year ranging from $1.2 billion – $9.7billion over the last three years.

With substantial assets, revenues with steady increase over the last three years and substantial amounts

of cash on hand consistently year after year, Verizon’s financial backbone is very strong

Company History

Verizon Communications Inc. (Verizon) was formed on June 30, 2000, with the $52 billion merger of

Bell Atlantic Corp and GTE Corp., two of the world’s largest telecommunications companies.

Government regulation and high infrastructure costs largely shaped the evolution of the

Telecommunications industry, necessitating mergers and acquisitions for sustainable growth. During this

merger between Bell Atlantic and GTE, Bell Atlantic and London-based Vodafone Group Plc announced

their agreement to create a new wireless business – Verizon Wireless (VW). Verizon is the majority

owner (55 percent) of VW, with management control of the joint venture. With the acquisition of MCI in

2006 for $8.6 billion, Verizon became a leading provider of advanced communications and information

technology solutions to large-business and government customers worldwide. After the acquisition of

Alltel Corp. in early 2009, VW became the largest wireless service provider in the U.S., as measured by

the total number of customers. In addition to growth through acquisition, Verizon also grew

substantially through its investment in technology and infrastructure. Over a five-year period from 2003-

2007, Verizon invested more than $74 billion – more than any other telecom or cable company in

America – to maintain, upgrade, and expand its technology infrastructure. This includes nearly $30

billion on the VW network alone. Buoyed by these significant network investments, VW has become the

nation’s leading provider according to many important industry measures –customer satisfaction,

innovation, network reliability and cash flow generation.

Competitive Landscape

Verizon operates in a highly competitive telecommunication services market. While the

telecommunications industry is more than 100 years old; the industry today finds itself at the beginning

of a new communications era. The mega-trends in telecommunications – the shifts from analog to

digital technology, from wired to wireless platforms, and from narrowband to broadband services –

have fundamentally changed the way people communicate. Verizon’s primary competitors in the

wireless sector include AT&T, T-Mobile, and Sprint Nextel. In addition, in many markets it competes with

regional wireless service providers such as Metro PCS, Leap Wireless, and U.S. Cellular. Verizon is

currently the #2U.S. telecom services provider overall after AT&T, and the company holds the top spot

in wireless services ahead of AT&T. Verizon can attribute its success to operating the most reliable

wireless network and the most widely available wireless broadband network in the country. The U.S.

Enterprise market, serving large-business and government customers, has consolidated in recent years,

resulting in two major competitors – AT&T and Verizon. Marketing Overview: Verizon Wireless –

Competition Influences All Competition is fierce in the wireless telecommunications industry, especially

between the two largest providers in the US- Verizon Wireless (“VW”) and AT&T. This competition has

influenced every aspect of the value chain including the positioning, brand equity, promotions, pricing,

and products that VW offers. Products: Wireless Network, Mobile Devices, and Customer Service

SWOT Analysis.

The SWOT analysis is shown in its traditionally charted format:

| |STRENGTHS |WEAKNESSES |
| |Established reputation of reliable coverage across the U.S. |Debt to Equity Ratio |
| |and leading wireless and wireline services provider. |Market Exposure |
| |Developing fiber optic network for extreme fast data speeds | |
| |Expanding Operation Margin | |
| |OPPORTUNITES |THREATS |
| |International Expansion |Regulated Business i.e. government regulations |
| |Strategic Acquisitions |Multi-directional competition |
| |Growing popularity and demand for smartphone devices |Technological Advances |

Verizon Communications Inc. –Strengths

Established reputation of reliable coverage across the U.S. and leading wireless and wireline services

Provider Verizon offers communications, information and entertainment products and services to

consumers, business, and governmental agencies with businesses in over 150 countries around the

world. Verizon’s largest revenues are from its wireless and wired services. It is known as one of the

largest wireless service providers in the U.S. At December 31, 2013, Verizon Wireless had 102.8 million

retail connections and FY2013 revenue of approximately US$81 billion, representing approximately 67%

of Verizon’s aggregate revenue. The other 33% is represented by the wireline services with a revenue of

US$39.2 billion.

Developing fiber optic network for extreme fast data speed

Verizon was one of the first major U.S. carriers to offer fiber to the home with the FiOS product lines for

television, internet, and phone services. In May 2013, Verizon announced they had passed 18 million

homes with FiOS and 5 million customers. As of September 2013, Verizon FiOS is available in 16 states.

While expansion of fiber optic network in other areas has slowed, Verizon has a competitive edge where

these services are offered. In establishing a reputation with their fiber optic network speeds, Verizon

can increase their footprint in this field.

Expanding Operation Margin

Verizon reported improved operating margin in FY2013 as compared to FY 2012, with 26.5% in FY2013

as compared to 11.3% in FY2012. While Verizon services are considered the most expensive in the

wireless industry, it still remains the #1 wireless carrier in the U.S. known for its reliable services and

excellent customer service. This is why Verizon customers are less likely to switch to other carriers even

though the prices may cheaper.

Opportunities:

International Expansion

Verizon has the opportunity to expand into other global markets with its services by using its strong

national reputation in the U.S. The business should capitalize on this advantage while it last as nobody

knows what may happen in the future. As more and more consumers and business rely on fast speed

data services, Verizon can make an impact in other global locations to gain new customers and clients.

Strategic Acquisitions

The company acquired Vodafone Group for approximately US$130 billion. In Jan 2014, Verizon and Intel

Corporation reached an agreement where Verizon would acquire assets of Intel Media, a business

division focused on the development of Cloud TV products and services. A month prior, in December

2013, Verizon acquired EdgeCast, a content delivery network. Verizon hopes the combination of

EdgeCase and Verizon Digital Media Services to help expand growth in Internet media consumption and

online business performance. As media has shifted from physical to digital media, more consumers are

looking for cloud or web-based media services. In combination with Verizon’s available network speeds,

it will remain a competitive force for rivals in the industry.

Growing popularity and demand for smartphone devices

Competition in mobile devices have drastically increased with many big-name companies such as Apple,

Samsung, and even Microsoft entering the market. With each major model release, consumers race to

stores to buy these new devices. A prime example would be the recent release of the Iphone 6 from

Apple. Even now, the phone is hard to find in stock as Apple is not close to meeting customer demand.

Verizon can modify its marketing strategy to match whatever models are the most popular to draw new customers.

Weaknesses:

Debt to Equity Ratio

FY2013 had ratio at 2.41 compared to 1.56 in FY2012. If Verizon does not meet anticipated revenues,

the debt could become due before its maturity. It may need to maneuver a portion of its cash flow from

business operations for these service and principal payments.

Market Exposure

For emerging markets, consumers develop a choice for established carriers. If Verizon enters a market

too late, it will have little to no impact on the existing market. This is especially true for international

markets where there are more barriers of entering markets with established names. This may limit

which areas to expand business operations depending on existing competition.

Regulated Business i.e. government regulations

Regulations regarding business operations and financial reporting can change from year to year. Verizon

may have to use additional resources or funding to meet new requirements. This can hinder the growth

and development of the company.

Multi-directional competition

Numerous competitors can come to different areas in telecommunication. This could cause Verizon to

lose focus of maintaining their strongest areas and attempt to be competitive in all of its respective

markets. Some examples would be T-Mobile introducing phone plans with no contract and help new

customers pay their termination fees when switching from another carrier. Sony has only announced its

own cloud-based media software.

Technological Advances

Introduction of products using new technologies or the adaptation of new industry standards could

make existing products or products in development to be obsolete, or unmarketable. If Verizon does not

keep up with these technological changes; it could impact the company’s

The Financial Ratios Used in This Analysis

Effective planning and financial management are the keys to running a financially successful business. Ratio analysis is critical for understanding financial statements, for identifying trends over time and for measuring the overall financial state of the business. In addition, lenders and potential investors often rely on ratio analysis when making lending and investing decisions.

Liquidity Ratio

|Liquidity Ratio |Verizon |AT&T |
|Current Ratio |2.62454713 |0.66283755 |
|Quick Asset Ratio |2.46092421 |0.57485355 |
|Working Capital |43,944 |-11,799 |

Interpretation and Analysis

This is obviously a good position for the firm to be in. It can meet its short-term debt obligations with no

stress. If the quick ratio was less than 1.00, then the Verizon would have to sell inventory to meet its

obligations So, a quick ratio great than 1.00 is better than a quick ratio of less than 1.00 with regard to

maintaining liquidity and not being forced into the position of having to sell inventory. Overall Liquidity

is 2:1 approx. which is much better than its competitor AT&T.

Activity Ratio

|Activity Ratio |Verizon |AT&T |
|Accounts Receivable Turnover |9.69129351 |9.96686794 |
|AR Days Level |37 |36 |
|Inventory Turnover |44.0068627 |23.6181735 |
|Inventory Days Level |8days |15days |
|Asset Turnover |0.46349181 |1.69803082 |

Interpretation & Analysis

Asset Turnover is shows that Verizon is not using its assets efficiently which is also reflecting from

Inventory turnover rate which is almost double then its competitor and reflecting that Verizon is not

selling its assets specifically inventory effectively and inventory is not converting to sales.

Credit term is 30 days but receivable is greater than 30 days. its seems that its industry as reflected from

A/R Turnover and A/R days.

Solvency Ratio

|Solvency |Verizon |AT&T |
|Debt to Total Asset Ratio |0.99217025 |1.60150094 |
|Times Interest Earned |12 |3 |
|Debt To Equity |1.87266287 |2.03652085 |

Interpretation & Analysis

Debt to asset ratio represent that in long run Verizon might have issues to pay its long term debt also

they might need to use equity for paying off its long run.

Profitability Ratio

|Profitability |Verizon |AT&T |
|Gross Profit Ratio |0.195 or 19.5% |0.144 or 14.4% |
|Net Profit Margin |N/A |N/A |
|Return on Asset |0.086 or 8.6% |0.06569422 or 6.5% |
|Return on Equity |0.246 or 24% |0.202 or 20% |
|Earnings per share |$4 |$3.16 |

Interpretation & Analysis

Verizon Profitability Ratios are better than its competitors specifically ROA is most useful for comparing

companies in the same industry as different industries use assets differently. A positive ROA ratio of

Verizon indicates an upward profit trend as well. Moreover, EPS reflects lucrative investment for investors.

Recommendations:

1-VW must continue to invest more than its competitors in capital expenditures to maintain their position as the highest quality wireless provider. This position has proven to provide excess free cash, even with the heavy spend in capital expenditures and advertising, over the last five years.

2- Evaluation of assets will such as network towers, services center and inventory is required to increase efficiency of assets. Merge service centers which is not viable in terms of cost/benefit analysis, inventory which has obsolete technology should be discarded and returned to vendor and reduce network towers where it is not efficiently utilized.

3-In contract negotiations, VW should not sacrifice pricing structure to obtain the rights to market the iPhone and Samsung and other smartphone companies because it is their key selling proposition. Moreover, advance technology and latest trend will help in increasing account receivable turnover and days accounts receivable.

4-VW must continue to seek out operating partnership with companies such as Apple and google to avoid missing out on the next big thing. VW needs to make sure that it does not miss out on “the next big thing.” This means continuing to strengthen relationships with Google and Apple including Samsung Company. Additionally, the future will lead to many new applications for 4G LTE network. For example, the network may allow your home appliances to communicate with each other in an energy management system. VW should recognize potential industry leaders for new products and invest time and intellectual knowledge into these relationships.

5- Verizon should closely monitor Wireline performance and continue to look for opportunities to divest unprofitable business and focus on the more profitable Mass Market (FiOS) operating segment. We forecast that traditional Wireline (home landline telephone service) will continue to decline.

Conclusion

VW has been able to build itself an extremely strong base by way of its entire marketing

platform, over the past 14 years. The attention to competition has been a common threat

through every aspect of the wireless business: pricing, products, promotion, and placement

(distribution). Furthermore, VW has positioned a single attribute – the strength of its network-at

the core of its brand. VW’s brand leans on this attribute for relevance, differentiation, and

credibility. As VW continues to evolve and grow its target market, the company must

continue to protect - through investing in research and development - and leverage - through

promotion and products - its most important asset, the network. Moreover, it is the added value

that the network provides which VW relies upon: its superior network and service allows VW

consumers to use their mobile devices to the fullest capacity, providing an experience unrivaled

\by any other wireless provider.

Referances:

1-http://bizfinance.about.com/od/financialratios/f/finratioanal4.htm

2-"Corporate Responsibility." Verizon Communications Corporate Responsibility. Web. 26 Oct. 2010. http://responsibility.verizon.com/home/results/community/

3-“The History of Verizon Communications” Verizon Wireless http://invest.verizon.com/profile/history/

4- 2007.Verizon Wireless Announces 4G Path Bases on GSM.” Telecommunications Report 73,no24:8-9. Business Source Premier, EBSCOhost (acceded Dec 13, 2010)