Oct 21, 2016

Verizon Communications Inc. (NYSE: VZ)

Zacks Rank 3-Hold

$49.14

Style:Value:

USD ( As of 10/20/16 )

20 Day Average Volume Beta Market Cap Dividend / Div Yld Industry Industry Rank Current Ratio

$56.53 - $44.15 12,248,846 0.30 200.31 B $2.31 / 4.70% WIRELESS NATIONAL 85 / 265 (Top 32%) 0.61

Debt/Capital

81.75%

Net Margin

11.10%

Price/Book (P/B)

9.90

Price/Cash Flow (P/CF)

6.25

Earnings Yield Debt/Equity

Momentum:

VGM:

Summary

Data Overview 52 Week High-Low

Growth:

Verizon reported mixed financial numbers in the third quarter of 2016. While the top line missed the Zacks Consensus Estimate, the bottom line managed to beat the same. Verizon is systematically diversifying its businesses into related fields. The company is set to launch super-fast 5G wireless network in 2017. With 5G network the company will target the vast market opportunity of Internet of Things (IoT). Also, acquisitions of AOL and core assets of Yahoo are designed for the same direction. On the other hand, the U.S. wireless market has become almost saturated and is witnessing intensified cut-throat pricing competition day by day. These may act as near-term headwinds for the company. Notably, the Verizon reported slowing growth of both prepaid and postpaid retail connections in the third quarter of 2016. However, increase in the FiOS customer count is a positive for the company's wireline division.

Elements of the Zacks Rank Agreement

Estimate Revisions (60 days)

7.76% 4.48

75%

100%

100%

80%

Value Score P/E (F1)

12.58

P/E (F1) Rel to Industry

-4.55

PEG Ratio

3.05

P/S (F1)

1.59

P/S (TTM)

1.57

P/CFO P/CFO Rel to Industry EV/EDITDA Annual

Hist. EPS Growth (Q0/Q-1) Qtr CFO Growth 2 Yr CFO Growth Return on Equity (ROE) (NI - CFO) / Total Assets Asset Turnover

Q2 (Next Qtr)

F1 (Current Year)

F2 (Next Year)

Revisions: 4

Revisions: 3

Revisions: 4

Revisions: 5

Up: 1 Down: 3

Up: 0 Down: 3

Up: 0 Down: 4

Up: 1 Down: 4

Magnitude Consensus Estimate Trend (60 days)

6.25 -4.28 6.10

Growth Score Proj. EPS Growth (F1/F0)

Q1 (Current Qtr)

-1.65%

60 Days

30 Days

7 Current Days

60 Days

-1.00%

Q2

Q1

30 Days

7 Current Days

-1.09%

60 Days

30 Days

7 Current Days

F1

-0.26%

60 Days

30 Days

7 Current Days

F2

-0.25%

-0.76 -17.28

Upside Zacks Consensus Estimate vs. Most Accurate Estimate

-7.98 73.99% -7.78 0.55

Momentum Score 1 week Volume change

-3.08%

1 week Price Cng Rel to Industry

-3.26%

(F1) EPS Est 1 week change

-0.13%

(F1) EPS Est 4 week change

-0.20%

(F1) EPS Est 12 week change

0.03%

(Q1) EPS Est 1 week change

-0.35%

Most Accurate:

0.99 Most Accurate:

0.89 Most Accurate:

3.88 Most Accurate:

Zacks Consensus:

0.99 Zacks Consensus:

0.91 Zacks Consensus:

3.91 Zacks Consensus:

Q1

0.00%

Q2

-2.20%

F1

-0.77%

F2

3.99 4.05

-1.48%

Surprise Reported Earnings History

© 2016 Zacks Investment Research, All Rights Reserved

Reported: 0.94

Reported: 1.06

Reported: 0.89

Reported: 1.04

Estimate: 0.93

Estimate: 1.06

Estimate: 0.88

Estimate: 1.02

Q End 06/16

Q End 03/16

Q End 12/15

Q End 09/15

Average 4 Qtr Surprise

10 S. Riverside Plaza Suite 1600 · Chicago, IL 60606

The data on the front page and all the charts in the report represent market data as of 10/20/16, while the reports text is as of 10/21/2016

Overview Based in New York, Verizon Communications Inc. (VZ) was formed through the merger of Bell Atlantic and GTE Corp. The company offers communication services in the form of local phone service, long distance, wireless and data services. In Jan 2006, Verizon completed its merger with MCI Corporation, a leader in long distance and data networking. With the acquisition of Alltel Wireless Corp. in early 2009, Verizon has surpassed AT&T Inc. as the largest wireless carrier in the North America, serving millions of customers nationwide. The company’s operations are classified into two general segments for financial reporting: Wireline and Domestic Wireless. On Jul 1, 2010, Verizon sold its local wireline operations across 14 states to Frontier Communication. Wireline: This segment includes the operations of MCI Corp. and comprises two units, Verizon Telecom and Verizon Business. Wireless: Verizon Communication Inc. provides wireless service to its subscribers through Verizon Wireless, which is a wholly owned subsidiary of Verizon.

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Reasons To Buy: Verizon is the largest wireless operator in the U.S. with respect to subscribers count. The company expects growth from higher penetration of devices and increasing rollout of 4G LTE services. Furthermore, the company is striving to acquire more spectrum licenses in order to support its data services. In the recently concluded AWS-3 auction, the company acquired $10.4 billion worth of spectrums across several large markets in the U.S. Verizon is taking part in the Federal Communications Commission (FCC) conducted broadcast incentive (spectrum with TV broadcasters) auction in 2016.

Upcoming 5G wireless network, diversification into digital advertising and content market, aggressively deployment of high-speed fiber network and vast potential of IoT space are long-term growth prospects.

In July 2016, Verizon achieved a milestone as it became the first company in the world to issue an initial radio specification for the upcoming 5G wireless network. The industry-wide standardization specification by the 3GPP is likely to be ready in Jun 2018. Verizon seems to be far ahead of others in its plans to deploy 5G wireless network. Verizon expects some level of commercial deployment in 2017. Verizon claims that its 5G network will provide a download speed of 1 Gbps (gigabit per second), which is 200 times the throughput of the currently available standard 4G LTE network. The latency period of data delivery will be in single milliseconds. Additionally, superfast 5G mobile networks will be of utmost necessity in managing the exponential growth of Internet-connected devices, popularly known as Internet of Things (IoT). Notably, Verizon’s IoT revenues grew 24 percent year over year on an organic basis at $217 million.

Verizon recently entered into a definitive agreement with Yahoo to acquire the core businesses of the latter for $4.83 billion to create a major player in the mobile media and advertising space. Under the terms of the deal, Verizon will take control of Yahoo's core assets including its search products, digital content brands, advertising and analytics assets. Verizon expects to complete the deal in the first quarter of 2017. The core businesses of Yahoo perfectly complement Verizon’s focus areas. In October 2015, Verizon launched its ad-supported mobile video service go90 targeting the younger generation. To derive maximum benefits from its mobile video platform, in June 2015, the company took over AOL Inc. that provides advertising technology enabling automated buying and selling of ads online. In October 2015, Verizon also acquired Millennial Media, a leading company that sells mobile ads across numerous websites and applications. Its advertising platform is designed to monetize applications for publishers and developers through the use of data-driven ad targeting. At present, Yahoo has more than 1 billion users for its e-mail, finance, sports and video sites, AOL has 2 million users and Verizon commands over 113 million wireless subscribers. Verizon is currently focusing on online content delivery, mobile video and online advertising for future growth. These businesses have the potential to generate significant revenues for the company, especially given that its legacy telecom business is presently facing serious pricing competition. Verizon is an already active player in the fleet management and telematics business through its Verizon Telematics subsidiary, which has operations in 40 countries. The company recently decided to acquire Fleetmatics Group plc for $2.4 billion. Fleetmatics is a market leader in North America which has a portfolio of a wide-range of compelling SaaS-based products and solutions for smalland medium-sized businesses. The deal is expected to be closed in the fourth quarter of 2016. Verizon successfully completed a trial run of a new technology on its state-of-the-art fiber-to-the-premises (FTTP) network for both residential and business customers. Popularly known as next-generation passive optical network (NG-PON2), this technology can deliver an exceptional 10 Gbps (gigabit per second) of upload and download speeds. Management further stated that the system has the capability to set up transmission speeds up to 40-80 Gbps data transmission speed in the future. Verizon has decided to acquire and install dark fiber based network throughout its footprint in order to support the existing 4G LTE network and more importantly to transition into the upcoming 5G wireless network. Dark fiber provides abundant bandwidth which is of utmost necessity for the smooth functioning of super-fast wireless networks such as 4G and 5G. Dark fiber based backhaul provides scalability and efficiency to bandwidth management. This will eventually lead the company to significantly reduce its backhaul costs. Verizon acquired dark fiber through its acquisition of MCI in 2006. In Feb 2016, the company entered into a definitive agreement to acquire XO Communications Inc.’s dark-fiber optic network. The deal, valued at $1.8 billion, is expected to be closed by the first half of 2017.

Reasons To Sell: The U.S. wireless is almost saturated. Smaller competitors like T-Mobile US and Sprint are aggressively launching cut-throat pricing competition day by day. In addition, Verizon’s principal competitor AT&T has acquired largest satellite TV provider DIRECTV. In the third quarter of 2016, Verizon’s postpaid wireless customer addition was down 65.7% year over year. Quarterly retail postpaid churn rate was 1.04% compared with 0.93% in the year-ago quarter whereas total retail churn rate was 1.28% versus 1.21% in the year-ago quarter. Prepaid customers growth slowed too by 5.5% year over year, adding just 83,000 prepaid customers in the third quarter.

Cut-throat pricing competition in the U.S. wireless market and competitive threat from cable MSOs in the highspeed Internet market are near term concerns.

Spectrum crunch has become a major issue in the U.S. telecom industry that has a saturated wireless market. Most of the carriers are finding it increasingly difficult to manage mobile data traffic, which is growing by leaps and bounds. The situation has worsened with the growing popularity of iPhone and Android smartphones as well as rising online mobile video streaming, cloud computing and video conferencing services. If Verizon fails to acquire substantial bands of spectrum under the upcoming 600 MHz low-band spectrum auction, the company’s business prospects could be hurt. Notably, low-band spectrum is crucial for wireless operators as the signals can be transmitted over longer distances and through brick-and-mortar walls in cities.

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Verizon has predicted that its earnings may be flat on a year-over-year basis in 2016 as it does not see enough variables for growth in the year. Moreover, the company restated its growth outlook for the year 2017. Initially, Verizon perceived return to higher growth in the coming year. However, the company has now stated that the 2017 growth will be consistent with the growth of U.S. GDP. Thus, we expect Verizon to face the brunt in the near term since it has been lagging the price transformation drive in the industry. Also, in an effort to expand its customer base, Verizon is spending heavily on promotion and is also offering lucrative discounts. These strategies are likely to impact the company’s wireless segment EBITDA and EBITDA service margins in the coming quarters. The company’s wireline division is struggling with persistent losses in access lines owing to competitive pressure from voice-overInternet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by cable companies. Notably, Total revenue at the segment was $7,787 million, down 2.3% year over year. These are weighing on the company’s revenues and margins. In order to make wireline profitable, Verizon is making significant investments and is streamlining its cost structure. It remains unclear if and when a reasonable return can be achieved from such investments. However, the company did register growth in FiOS connections in the third quarter of 2016, therefore offering some hope for the wireline division.

Last Earnings Report Verizon Posts Mixed Q3: Earnings Beat, Revenues Lag

Quarter Ending 09/2016

Verizon reported mixed financial numbers in the third quarter of 2016. While the top line missed the Zacks Consensus Estimate, the bottom line managed to beat the same.

Report Date

Adjusted earnings per share came in at $1.01 in the reported quarter, beating the Zacks Consensus Estimate of $0.99. Quarterly GAAP net income was $3,747 million compared with $4,171 million in the year-ago quarter.

Oct 20, 2016

Sales Surprise

-0.66%

EPS Surprise

1.08%

Quarterly EPS

0.94

Annual EPS (TTM)

3.93

Quarterly total revenue decreased 6.7% year over year to $30,937 million. The Zacks Consensus Estimate for the same was pegged at $31,141 million. Total operating expenses in the third quarter of 2016 were $24,397 million, down 4.8% year over year. Operating income came in at $6,540 million compared with $7,535 million in the year-ago quarter. Adjusted EBITDA was $11,279 million against $11,079 million in the prior-year quarter. Cash Flow & Liquidity In the third quarter of 2016, Verizon generated $4,800 million of cash from operating activities. Free cash flow in the reported quarter was $674 million. At the end of the third quarter of 2016, Verizon had $6,441 million in cash and $102,739 million in long-term debt compared with $4,470 million and $103,240 million, respectively, at the end of fiscal 2015. The debt-to-equity ratio was 4.67 at the end of third quarter of 2016 compared with 5.78 at the end of 2015. Wireless Segment Total revenue was $22,101 million, down 3.9% year over year. Service revenues were down 5.2% to $16,684 million. Equipment revenues decreased 3.9% to $4,124 million. Other revenues totaled $1,293million, up 16%. Operating expenses decreased 5.8% to $14,454 million. Operating income declined 0.3% to $7,647 million. Quarterly operating income margin was 34.6% in comparison with 33.3% in the year-ago comparable period. Segment EBITDA increased 0.1% to $9,934 million. EBITDA margin was 44.9% compared with 43.2% in the prior-year quarter. At the end of the third quarter of 2016, Verizon had 113.676 million retail subscribers, up 2.6% year over year. Out of the total, retail postpaid subscriber count was 107.780 million, up 3.9%; and retail prepaid user count was 5.456 million, down 4.9%. During the reported quarter, the company added 0.442 million postpaid customers (down 65.7% year over year) while prepaid customer count increased by 0.8 million. Quarterly retail postpaid churn rate was 1.04% compared with 0.93% in the year-ago quarter whereas total retail churn rate was 1.28% versus 1.21% in the year-ago quarter. Of the total activated phones, smartphones accounted for 93.1% compared with 91.3% in the prior-year quarter. Wireline Segment Total revenue at the segment was $7,787 million, down 2.3% year over year. Consumer retail revenues were up 0.2% to $3,174 million. Small business revenues grossed $411 million, down 5.3%. Global Enterprise revenues contracted 3.4% to $2,886 million. Global wholesale revenues dropped 3.9% to $1,239 million and Other revenues decreased 12.5% to $77 million. Operating expenses decreased 5.5% to $7,631 million. Quarterly operating income stood at $156 million. Quarterly operating margin came in at 2% against a loss margin of 1.4% in the year-ago quarter. Segment EBITDA was down 10.1% to $1,654 million. EBITDA margin was 21.2% compared with 18.9% in the year-ago quarter. At the end of the third quarter of 2016, FiOS video subscriber base was 4.673 million (up 1.3% year over year), FiOS Internet subscriber count was 5.585 million (up 4.7%) and FiOS digital voice residence connections totaled 3.382 million (up 1.4%). During the

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quarter, Verizon gained 36,000 FiOS video subscribers, 90,000 FiOS Internet customers and 3,000 FiOS digital voice residential connections. High-speed Internet connection tally dropped 16.2% year over year to 1.453 million while total broadband connection number stood at 7.038 million. Primary residence switched access connections decreased 15% to 3.359 million and Primary residence connections fell 22.4% to 7.241 million. Total retail residence voice connections declined 7.3% to 7.482 million and total voice connections contracted 7.4% to 14.194 million.

Recent News Verizon Signs MoU with SK Telecom, Strengthens 5G Alliance - Aug 17, 2016, Verizon recently signed a Memorandum of Understanding (MoU) with SK Telecom to merge their 5G technical specifications on a global basis in order to strengthen their collaboration. The tie-up will witness a number of joint studies and researches which will further be utilized for the development of 5G technical specifications and innovative use cases. Verizon- NBC Universal Jointly Offers Rio Olympiad Games Coverage - Aug 4, 2016 Verizon signed an agreement with NBCUniversal to form a multi-platform content which will offer NBCUniversal's coverage of the Rio XXXI Olympiad Games from Aug 5 – Aug 21,2016 . Fios TV subscribers will have access to NBCUniversal's unprecedented 6,755 hours of Olympic programming, including coverage of all competition sessions, on-demand. Verizon Attempts to Expand in Indian Markets - Aug 2, 2016 Verizon Digital Media Services signed a partnership deal with Bharti Airtel Limited ("Airtel") to expand in Indian markets by launching new points of presence (PoPs) in four cities in India - Mumbai, Chennai, Bangalore and New Delhi.

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Industry Analysis Zacks Industry Rank: 70 / 265 (Top 26%)

Top Peers ATN INTL INC (ATNI) COGENT COMM HLD (CCOI) CENTURYLINK INC (CTL) GOGO INC (GOGO) HC2 HOLDINGS (HCHC) ID SYSTEMS INC (IDSY) INTELIQUENT INC (IQNT) NII HOLDINGS (NIHD) SPRINT CORP (S)

Industry Comparison Wireless National | Position in Industry: 3 of 17

Market Cap # of Analysts Dividend Yield

VZ 205.36 B

X Industry 279.55 M

Industry Peers

S&P 500 18.42 B

ATNI 1.06 B

CCOI 1.62 B

CTL 15.39 B

25

6

14

3

9

15

4.54%

0.00%

1.79%

2.01%

2.33%

6.93%

-

12.00

Growth Score Hist. EPS Growth (3-5 yrs)

-1.65%

5.37%

7.57%

-15.90

2.62

Proj. EPS Growth (F1/F0)

-2.08%

3.43%

6.94%

6.49

16.37

4.88

Curr. Cash Flow Growth

8.31%

-5.09%

4.50%

NA

4.57

-6.10

Hist. Cash Flow Growth (3-5 yrs)

8.42%

3.73%

8.07%

1.32

NA

1.10

0.61

1.70

1.37

8.65

17.48

3.09

Debt/Capital

81.75%

39.26%

42.88%

81.01

89.20

10.97

Net Margin

11.10%

2.45%

9.55%

2.35

3.64

0.87

Return on Equity

73.99%

-9.64%

15.45%

1.23%

1.12%

9.05%

Current Ratio

Sales/Assets Proj. Sales Growth (F1/F0)

0.55

0.54

0.54

0.06

-19.24

1.30

-4.05%

0.00%

2.81%

5.38

1.65

10.37

-

-

Value Score Cash/Price

9.00

-4.39

6.36

-52.07%

195.30%

-0.57%

EV/EBITDA

6.10

6.10

11.49

-55.00%

345.68%

-5.94%

PEG Ratio

3.05

1.63

1.89

-14.77%

3.27%

-3.43%

Price/Book (P/B)

9.90

2.01

2.97

-4.34%

3.73%

18.25%

6.25

5.13

12.40

4.03

3.16

0.58

12.58

9.21

18.41

5.96%

NA

56.50%

Price/Cash Flow (P/CF) P/E (F1) Price/Sales (P/S)

1.59

1.40

2.24

3.73%

3.10%

5.47%

7.76%

0.96%

5.37%

3.80%

-33.14%

10.58%

Debt/Equity

4.48

0.06

0.69

0.35

0.68

0.38

Cash Flow ($/share)

7.94

1.44

5.37

27.02%

10.72%

-1.90%

-

-

Daily Price Chg

0.22%

0.03%

0.30%

0.11%

0.42%

1.00%

1 Week Price Chg

-3.26%

-1.09%

-0.01%

-0.34%

1.43%

1.15%

4 Week Price Chg

-2.87%

0.00%

-1.35%

-1.62%

-1.77%

4.68%

12 Week Price Chg

-8.93%

-6.32%

-2.42%

-16.18%

-17.44%

-8.24%

Earnings Yield

Momentum Score

52 Week Price Chg

12.31%

-12.70%

6.23%

-17.19%

21.50%

3.60%

11,531,529

156,674

0

61,312

336,567

3,901,037

(F1) EPS Est Wkly Chg

-0.13%

0.00%

0.00%

0.00%

-3.48%

0.11%

(F1) EPS Est Mthly Chg

-0.20%

0.00%

0.12%

0.00%

-3.35%

0.28%

(F1) EPS Est Qtrly Chg

0.03%

0.03%

0.88%

-16.50%

-8.32%

-1.31%

(Q1) EPS Est Mthly Chg

-0.75%

0.00%

0.00%

0.00%

-8.09%

1.79%

20 Day Average Volume

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Zacks Rank Education The Zacks Rank is calculated from four primary inputs: Agreement, Magnitude, Upside and Surprise.

Agreement This is the extent which brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of estimates being revised higher, the better the score for this component. For example, if there were 10 estimate revisions over the last 60 days, with 8 of those revisions up, and the other 2 down, then the agreement factor would be 80% positive. If, however, 8 were to the downside with only 2 of them up, then the agreement factor would be 80% negative. The higher the percentage of agreement the better.

Magnitude This is a measure based on the size of the recent change in the current consensus estimates. The Zacks Rank looks at the magnitude of these changes over the last 60 days. In the chart to the right, the display shows the consensus estimate from 60-days ago, 30-days ago, 7-days ago, and the most current estimate The difference between the current estimate and the estimate from 60-days ago is displayed as a percentage. A larger positive percentage increase will score better on this component.

Upside This is the difference between the most accurate estimate, as calculated by Zacks, and the consensus estimate. For example, a stock with a consensus estimate of $1.00, and a most accurate estimate of $1.05 will have an upside factor of 5%. This is not an indication of how much a stock will go up or down. Instead, it's a measure of the difference between these two estimates. This is particularly useful near earnings season as a positive upside percentage can be used to help predict a future surprise.

Surprise The Zacks Rank also factors in the last few quarters of earnings surprises. Companies that have positively surprised in the recent past have a tendency of positively surprising again in the future (or missing if they recently missed). A stock with a recent track record of positive surprises will score better on this factor than a stock with a history of negative surprises. These stocks will have a greater likelihood of positively surprising again.

Zacks Style Score Education The Zacks Style Score is as a complementary indicator to the Zacks Rank, giving investors a way to focus on the best Zacks Rank stocks that best fit their own stock picking preferences. Academic research has proven that stocks with the best Growth, Value, and Momentum characteristics outperform the market. The Zacks Style Scores rate stocks on each of these individual styles and assigns a rating of A, B, C, D and F. An A, is better than a B; a B is better than a C; and so on.

Value Score Growth Score Momentum Score VGM Score

As an investor, you want to buy stocks with the highest probability of success. That means buying stocks with a Zacks Rank #1 or #2, Strong Buy or Buy, which also has a Style Score of an A or a B.

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Disclosures The analysts contributing to this report do not hold any shares of this stock. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts' personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market.

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