verizon communications report

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Verizon Communications, Inc.

Integrated Company Analysis

By: Amanda Frederick, Eric Hansch, Tawa Rasheed-Rahji, Kyle Schmitz, Ida Shea

December 14, 2010

On our honor, we have neither given nor received unauthorized aid in completing this academic work.



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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 195,000 and last year

generated revenues of more than $107 billion.

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



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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 MetroPCS, Leap Wireless, and U.S. Cellular. Verizon is currently the #2 U.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.

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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

The wireless telecommunications industry is highly commoditized, and therefore, it is important for

VW to differentiate itself in order to create unique added value. VW’s product offerings can be simplified into

three groups: the actual service (or network), the mobile device, and customer service.

Networks are the backbone of any telecommunication company’s operations, adding long-term value

for their customers. These networks require heavy investment which limits market entrance threats. However,

the strong competition within the industry forces companies to constantly maintain and improve these networks.

VW has put a great deal of time and money into improving its network and has the highest capital expenditure

of any wireless provider over the last three years (Appendix A). CDMA and GSM are the two major families of

wireless technology. CDMA is generally only used in the U.S., whereas GSM is the predominant technology

used across the globe. Each family has different generations of technology which lend to the 3G, third

generation, and 4G, fourth generation, marketing nomenclatures. A wireless tech reference guide has been

included to make this clear (Appendix B).

VW’s 3G network depends on CDMA technology and is the most expansive 3G network in the U.S.

(Appendix C). VW’s network showcases superior reliability, capacity and coverage. Consumer Reports ranks

VW as the top overall wireless provider and they are the clear winner in JD Power’s wireless call quality

performance study (Appendix D). VW’s strong network operations have allowed them to differentiate

themselves and it is vital that VW continues to deliver on this differentiator as they launch their 4G network.

VW has selected GSM’s LTE technology for its 4G wireless network because of their confidence in the

potential and acceptance of this technology. VW needs to upgrade towards a 4G network to satisfy customers’

increasing data requirements, as well as transitioning to the GSM family to give their wireless devices global

reach. Transitioning from CDMA to GSM is a complete overhaul for VW and it will be a challenging



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endeavor. However, VW cannot continue to influence standards and device innovation if it does not begin

operating with the most prevalent network technology. VW’s 4G decision signals a strong management team

that is willing to lead with long-term value in mind.

In regards to mobile devices, VW is constrained to the innovations of others. But, they have positioned

themselves well by creating an open development program that publishes the technical interface standards

required to design products that are compatible with their network, thereby allowing devices not sold by VW to

work on their network. VW has also shown their willingness to support their supplier’s products with

substantial marketing dollars. Increasing product demand and sales is mutually beneficial, but this support

urges device manufacturers to create innovative designs that can be launched as a VW flagship product. These

characteristics allow VW to offer a vast line of wireless products without becoming tied to one particular brand

or device – like AT&T with the iPhone.

Many sources, including the WSJ, have reported that Apple is finalizing a version of its iPhone 4 that

will work on VW’s 3G network. This deal, which has not been confirmed by Apple or Verizon, would end

AT&T’s exclusivity of the iPhone. The iPhone is a highly demanded wireless device, but its success has placed

an excessive burden on AT&T’s wireless network. AT&T was not prepared for the load increase and has a

tarnished quality record thanks to the iPhone’s rapid success. The iPhone would increase VW’s customer base

and thus its network load significantly (Appendix E). VW knows this and seems prepared to maintain its high

level of quality and service to support a Verizon iPhone.

Customer service is another link into the value chain where a company can differentiate its product

offerings. Consumer Reports ranks VW highest in customer support, though it received mixed signals in JD

Power’s customer care and wireless retail sales satisfaction surveys (Appendix E). However, and most

importantly, VW has shown the lowest post-paid churn rate (the proportion of contractual customers who leave

in a given time period) for the last three years (Appendix F). VW should continue to strive to further separate

themselves with pronounced customer service levels.



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Distribution Channels

VW distributes products predominately through direct channels. Company-operated stores are a core

component of its distribution and have the highest customer retention rate of all distribution channels. Indirect

retail stores, such as Best Buy, Wal-Mart, Costco and Target, also sell VW products and services. Additionally,

VW operates business-to-business organizations that focus on the wireless communications needs of business

customers. Finally, VW offers fully-automated end-to-end web-based sales of wireless phones, accessories and

service in all markets.

Pricing

Pricing plays an important role in the competitiveness of the wireless industry. In general, wireless

pricing plans are numerous and confusing. VW has tiered pricing plans that allow for the different data- and

voice-usage needs of its customers. In 2010, VW launched a streamlined group of plans with unlimited minutes

and messaging to provide their customers with simplified pricing options. Simplifying these plans is one

example of how VW has improved its added-value through means other than network quality. Accordingly,

VW able to take a premium pricing position, capturing the value it brings to the market.

Promotions

The VW value proposition has been successful because the company has delivered consistent and

credible messaging. Even the name, Verizon, a word coined from “veritas” and “horizon,” conveys company

value: certainty, reliability, and horizon, or forward thinking.

VW has communicated the attribute of reliability and certainty since the introduction of the “test man”

campaign in 2002. This campaign features a man in the desert asking “Can you hear me now?” followed by

the slogan, “We never stop working for you.” As VW’s network has grown and investment in advertising has

ramped up, (Verizon now has the second largest advertising spend annually in the country behind Proctor &

Gamble) the value of its network and its reliability remains the pillar of its differentiating factor in the

competitive market place.

Beginning in 2005, VW’s campaigns shifted from service to the actual advantages of its network. This

single-attribute campaign highlighted VW’s strength as a larger and more reliable network over the



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competition. Consumer insights played a large role in the 2008 campaigns that played off of old horror films

where characters would warn VW customers to be aware of the “Dead Zone.” The scenarios showed typical

scenes where access to a working cell phone and network are critical: during storms, travel, or when relied upon

for a comforting form of entertainment- i.e. while doing laundry. The VW customer confidently retorts, “I’ve

got Verizon.”

It was not until 2009 that VW directly went after competition. The company did so in a number of

ways; however, both models stayed true to VW’s value- the network. In response to AT&T and its exclusive

ability to sell the iPhone, VW launched its “There’s a map for that campaign” underlining that a phone is only

as good as its network. At this time, AT&T customers, and more specifically iPhone users, were flooding the

internet with complaints regarding bad service, dropped calls, and lag time. VW was able to approach this

consumer gap by investing $100 million in billings and launching the Droid to compete directly with the iPhone

(Appendix H). Droids are exclusive VW smartphones that employ Google’s Android OS. Largely thanks to

VW, smartphones with the Android OS now serve more consumers overall. Additionally, according to NPD’s

Q3 2010 report, the Android OS is the most popular smartphone platform. The Android OS accounted for 44%

of overall smartphone purchases in Q2, while Blackberry fell to 22% and Apple moved up to 23%. However,

the NPD report shows that the iPhone 4 is still the most popular individual smartphone.

Financial Analysis

Financial Statement Analysis

Verizon reports financial information on a consolidated basis, reporting a single net income result for its

combined wireline, wireless and other business segments. While Verizon reports operating revenue and

expense information for each segment, it does not explicitly report net income figures for each business unit.

This is of importance for an analysis of Verizon because of the 45% ownership stake that Vodafone holds in

VW. Verizon reports this ownership stake as a “non-controlling interest” on its financial statements. Aside

from Verizon’s special ownership structure, Verizon’s financial statements are in line with financial reporting

for their main competitors, AT&T and Sprint and the statements are reliable and comparable.



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Verizon recognizes revenue (from access and usage of network both voice and data) for their postpaid

wireless segment when revenue is earned, though payment is received one month in advance. Revenue for

equipment sales, including activation fees, is recognized when products are delivered to and accepted by the

customer. Wireline earns revenues based upon usage of network and facilities. The company charges a fixed

monthly fee for voice, video, data, and certain other services which is billed one month in advance and revenue

is recognized when earned. Revenue for Wireline equipment is recognized when equipment is installed and

ready for customer use. Wireline also provides maintenance and monitoring services, for which revenue is

recognized monthly over the term of the contact. Long-term contracts are recognized by percent-of-completion

method. Customer activation fees are deferred and amortized over the estimated customer relationship period.

Verizon recognizes inventory costs, primarily for wireless and wireline equipment, at the lower of cost

(generally on an average cost or FIFO basis) or market price. Verizon’s inventory also includes new and

reusable supplies and network equipment of local telephone operations, which are stated principally at average

original cost. For large individual items, Verizon uses specific costs.

Important intangible assets owned by telecommunications companies are wireless spectrum licenses.

These licenses provide companies with the right to utilize designated radio frequency spectrum and are essential

to the wireless business. The FCC sells wireless licenses at auction for a 10-year period. However, renewal of

licenses has historically been a routine process at a nominal cost. Therefore, Verizon and other wireless carriers

treat wireless licenses as indefinite-lived intangible assets, which they test periodically for impairment.

Accounting Performance Metrics

Verizon and its closest competitor, AT&T, are very similar in many of the accounting performance

indicators. For the fiscal year ending December 31, 2009, Verizon had a Return on Equity of 8.8%, compared

to a Return on Equity of 12.6% for AT&T. Sprint, another wireless competitor, had a ROE of (12.8%), and had

much lower performance indicators overall. Verizon net income in 2009 was approximately $10.4 billion, $2

billion less than AT&T’s net income of $12.5 billion, and Sprint incurred a loss of $2 billion. Both AT&T and

Verizon had dividend yields for the year of approximately 5.5%. A factor affecting Verizon’s results in 2009

was the acquisition of Alltel.



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The Alltel acquisition impacted both revenues and expenses for the year, as well as significantly

increased Verizon debt in 2009. In the acquisition, Verizon acquired approximately $24 billion of Alltel

principal debt in return for 100% of the equity in the company and cash consideration of $5.9 billion. The

addition of new customers increased revenues and expenses for Verizon. Additionally, Verizon spent

approximately $954 million for merger integration and acquisition costs related to the Alltel acquisition.

Throughout 2009, Verizon entered into credit facilities and issued notes that the company used to purchase

Alltel debt obligations. Resultantly, Verizon’s long term-debt increased from $46 billion to $55 billion from

2008 to 2009, primarily related to the Alltel acquisition.

Verizon has a consistent policy of paying substantial dividends. In 2009, Verizon paid out 144% of its

portion of net income in dividends. The Board of Directors increased dividends in 2009 by 3.3%, making it the

third year in a row they increased dividends based on a belief that the company’s cash flows and balance sheet

were strong.

Future Financial Performance

To analyze Verizon’s current and projected financial performance, we performed a Discounted Cash

Flow analysis. As a result of this analysis, we calculated an equity value per share of $43.60, approximately

$10 above Verizon’s share price of $34.04 on December 10, 2010. We believe this to be an accurate

assessment of Verizon’s growth potential given the strength of Verizon’s technology and network, plus

continued high levels of advertising spending, resulting in increased customer growth.

To arrive at this estimate, we reviewed past financial performance by Verizon, as well as market analyst

reports. As a result of Verizon’s record of acquisitions (Alltel in 2009 and MCI in 2006), historical growth

rates are not a reliable indicator of future performance. Following analyst recommendations, we projected

revenue growth for Verizon as a whole of -1% for 2010, 2% for 2011, and 2.7% per year for the next 5 years.

Two main segments drive Verizon’s growth: Wireless, which has experienced growth through acquisition and

increase data usage and smartphone adoption, and Wireline, which includes FiOS and traditional wired

telephone service. Wireless has been experiencing substantial growth in recent years, while Wireline has

experienced steady declines in customers, despite some customer addition due to the implementation of FiOS.



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One of the critical assumptions that we made was for capital expenditures. Verizon has differentiated

itself based on superior network quality, which requires significant capital expenditures. In the previous three-

years, Verizon spent an average of $17 billion on capital expenditures each year. We forecast that spending on

capital expenditures would increase from 2009 levels at the yearly revenue growth rate. To maintain its

technological advantage, Verizon must continue to significantly invest in its network and infrastructure.

Verizon primarily finances its capital expenditures through bank loans and commercial paper.

Recommendations

• VW launched its 4G LTE network in 38 cities and 60 airports on December 5th 2010. As VW expands its

4G network, the company must continue to invest more in capital expenditures than any other wireless

provider to maintain their differentiated 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.

• VW is currently offering mobile broadband USB modems with two pricing tiers. VW is capping the data

usage of their 4G consumers to avoid network congestion issues, but speed tests have shown that these

limits can be exceeded within hours due to the 4G LTE network’s increased data transfer speeds. To fully

align with customers’ desires, VW needs to find a way to increase data limits without compromising the

network. VW should pay attention to how quickly it releases new 4G products, making sure to allow time

to build out and test the network.

• VW does not need the iPhone to outperform the competition. Likewise, the fact that Apple is losing out to

Google in the smartphone battle allows VW to control negotiations with Apple to acquire the iPhone. VW

should not make the contract and pricing sacrifices that AT&T did to sell the iPhone. VW is the only

company (of U.S. wireless carriers) who can lend supplementary brand equity to the iPhone and Apple is

aware of this.

• 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. Additionally, the future will lead to many new



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applications for the 4G 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.

• 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 10 years. The attention to competition has been a common thread 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.



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Appendices

Appendix A: Capital Expenditure Comparison – Wireless Industry

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Appendix B: Wireless Technology Quick Reference Guide

Wireless Technology – Family Trees

3G-4G Technology Comparisons



16

3G & 4G Technologies – Company Comparisons

4G – Current Company Offerings



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Appendix C: 3G Network Coverage Maps



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Consumer Reports Wireless Provider Rankings 2010



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Appendix E: iPhone Potential Customer Survey (Credit Suisse)

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Appendix F: Customer Acquisition and Churn Rates

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Appendix G: Verizon Wireless Value Chain

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" I @ @ - & & - * ) 5 > = - ( 7 A

I @ 9 1 * $ E B ) 2 & $ A

" # $ % $ ( < ( * + G & 2 E ' % ) A

" J K > D $ % 3 : 2 ( * )

@ ( & $ = $ A A 0 $ ) 1 2 & 3

" 6 - ( * ) - ( * ( * + 4 F ' ( : 8

" L ' ( = E ( * + 9 ' )

" J ' - = ( ) 5 C * A : $ % ) ( 2 *

I @ 9 1 * $ E B ) 2 & $

A

- * E 9 * = ( * $ # $ ) - ( =

" C * < $ * ) 2 & 5 6 + 7

) 8

; ( A ) & ( ? ' ) ( 2 * > D - * * $ = A

" > 2 2 & E ( * - ) ( * +

B D ( : 7 $ * ) A ) 2 C * E ( & $ % )

# $ ) - ( = B ) 2 & $ A

" B D ( : 7 $ * ) A H 2 &

9 * = ( * $ # $ ) - ( =

6 - & 3 $ ) ( * +

6 - * - + $ 7 $ * )

" M ( + D J ' - = ( ) 5 G 2 A ( ) ( 2 *

" N - & + $ A ) > 2 < $ & - + $

" K E < - * % $ E 0 $

) 1 2 & 3 A

" K E < - * % $ E ; $

< ( % $ A

" M ( + D $ & G & ( % $

K E < $ & ) ( A ( * + O G &

2 7 2 ) ( 2 *

" L ( + B : $ * E

" 6 ' = ) ( : = $ 6 $ E ( -

" B ' : : 2 & ) B ' : :

= ( $ & A 1 O

I @ P

= - + A D ( : 6

2 E $ = A

B - = $ A P 2 & % $

" > 2 7 : - * 5 B ) 2

& $ A

" L ' A ( * $ A A 0 $ $

E A

" B $ & < ( % $ # $ : A

" 0 $ ) 1 2 & 3 B ' : : 2 & )

- * E # $ : - ( & A

1 4 A ; 8 4 ? = ; < 1 6 7 1 . 6

; @ 9 2 5 7 1 ; 4 6

; 8 7 A ; 8 4 ?

= ; < 1 6 7 1 . 6

3 5 2 B 9 7 1 4 < C 6 5 = 9 6

6 9 2 ! 1 . 9

. 5 @

7 8 2 9 ?

! 5 = 8 9



23

Appendix H: Verizon Wireless Promotional Timeline

! " " "

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) # * % ( +

, % $ # - # + +

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6 1 6

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< # $ 9 % 4 # 1 ( 6

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( ' , / 0 #

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> 1 $ * # / 5 1 $ : # /

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* $ ' + +

% ( *

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% ( / 0 #

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! " " %

F # , 4 1 5 7 1 % * (

7 - 1 = + ' 8 8 ' 8 ' - 6

0 ' $ $ ' $ 8 % - 5 + 1 ( 6

4 . + / ' 5 # $ % ( + % * 0 / +

) = - # 9 # $ 1 * % ( * 8 # 1 $

' 8 6 $ ' 7 7 # 6 4 1 - - +

% ( / 0 # 6 # 1 6 & ' ( # 2

" # $ % & ' (

4 . + / ' 5 # $ + 1 $ #

% 5 7 # $ 9 % ' . + 2

! " " &

C $ ' % 6 - 1 . ( 4 0 # + % (

F ' 9 # 5 ) # $ ' 8 G H H E I

1 ( 6 " # $ % & ' ( + 7 # ( 6 +

J K H H 5 % - - % ' ( ' (

7 $ ' 6 . 4 / - 1 . ( 4 0 2

L

/ / 1 4 : + % 7 0 ' ( #

1 ( 6

L > M > N O 5 1 7 2

P

# 4 # % 9 # + - # * 1 -

8 - 1 4 : 8 $ ' 5 L > M >

) . / % + 6 $ ' 7 7 # 6

6 . # / ' - 1 4 : ' 8

+ . 7 7 ' $ /

! " " '

P . - # / 0 # L % $

4 1 5 7 1 % * ( ) # * % ( + / '

7 $ # 7 1 $ # 5 1 $ : # / 8 ' $

Q O R > S $ # - # 1 + # 2

> 1 $ * # / # 6 / ' ,

1 $ 6 +

= ' . ( * 5 1 - # +

1 ( 6

' / 0 # $ # 1 $ - = ;

1 6 ' 7 / # $ + 2 C $ ' % 6

7 0 ' ( # 4 1 5 7 1 % * ( + / % - -

# T / $ # 5 # - = 7 $ # + # ( / 2

U ' 4 . + 0 1 + ( ' /

! " ( "

" # $ % $ & ' $ ( ) *

+ ' % , * ' ( ,



24

Appendix I: Core Brand Value Analysis

" # $ % & ' ( ) * + , - , . / # & 0 # + ) (

1 ( + ' 2 $ 3 , 0 % & ( #

- # 3 . ( , $ $ , 3 ' 4 + % ' / ' , . 3 , 5

' * ( 6 3 # + & % + ' ,

& % 7 7 ( 3 ( + ' $ 3 , & 4 ) ' - % + ( 2

8 % 3 ( - ( 2 2 2 ( 3 0 % ) ( # + & 1 , 6 % - ( % + ' ( 3 + ( ' # 3 (

6 ( ) , 1 % + . # 2 ' # + & # 3 & # 1 ,

+ . 1 # + / 9 ( /

& ( 1 , . 3 # $ * % ) 2 : ; ( 3 % < , + 2 ( 3 0 ( 2 ' * ( 1 # - -

; ( 3 % < , + ) , + ' % + 4 ( 2 ' , % + 0 ( 2 ' % + ' ,

% + 7 3 # 2 ' 3 4 ) ' 4 3 ( : $ 3 , & 4 ) ' # &

0 # + ) ( 1 ( + ' 2 : # + &

3 ( 2 ( # 3 ) * # + & & ( 0 ( - , $ 1 ( +

'

= > ? @ A ) , 4 - & . % 0 ( # ) ) ( 2 2 '

, 0 , & # 7 , + ( B 2

% + ' ( 3 + # ' % , + # - + ( ' 5 , 3 9 # + &

, $ ( + & , , 3 2 7 , 3

# . - , 6 # - + ( ' 5 , 3 9

? # 3 .

( 2 ' C ( ' 5 , 3 9 2 ( 3 0 % + . ' * ( 1 , 2 '

) 4 2 ' , 1 ( 3 2

D $ ( + & 2 2 ( ) , + & - # 3 . ( 2 ' # 1 , 4 + ' , 7 & , - - # 3 2

% + ' * ( ) , 4 + ' 3 / :

7 % 3 2 ' % + ' * ( 5 % 3 ( - ( 2 2

' ( - (

) , 1 1 4 + % ) # ' % , + 2 % + & 4 2 ' 3 /

E % + #

+ ) % # - - / : ; ( 3 % < , + 8 % 3 ( - ( 2 2 * # 2 * # &

# ) ) ( 2 2 ' , 2 ' 3 , + . ) # 2 * 7 - , 5 2 5 * % ) * * # 0 (

6 ( (

+ 3 ( % + 0 ( 2 ' ( & % + ' , + ( ' 5 , 3 9 # + &

' ( ) *

+ , - , . / & ( 0 ( - , $ 1 ( + '

F

, + + ( ) ' 2 $ ( , $ - ( & # % - / , + # 2 , ) % # - - ( 0 ( -

F

, + + ( ) ' 2 $ ( , $ - ( & # % - / 7 , 3 6 4 2 % + ( 2 2

$

4 3 $ , 2 ( 2

G

, 6 % - ( # ) ) ( 2 2 ' , % + ' ( 3 + ( ' $ 3 , 0 % & ( 2 # ) ) ( 2 2

'

, % + 7 , 3 1 # ' % , + # - ' , , - 2 ' * # ' 1 # 9 ( - % 7 (

(

# 2 % ( 3

H I J , 5 ( 3 K L 2 2 , ) % # ' ( 2 6 ( 2 ' 0 , % ) (

M 4 # - % ' /

F , + 2 4 1 ( 3 2 ' ( 2 ' ' * (

2 ( 3 0 % ) ( M 4 # - % ' /

( 0 ( 3 / & # / # + & $ 3 , 0 % & ( $ , 2 % ' % 0 ( 7 ( ( & 6 # ) 9

? # 3 . ( 2 ' 5 % 3 ( - ( 2 2 $ 3 ,

0 % & ( 3 % + ) , 4 + ' 3 /

F 3 ( & % 6 % - % '

D ' 3 ( ' ) *

" ( - ( 0 # + ) (

I % 7 7 ( 3 ( + ' % # ' % , +

! " # $

! & ' ( ) ' * + ,

- * . / ( 0

@ * (

2 4 $ ( 3 % , 3 % ' / , 7 ' * ( + ( ' 5 , 3 9 # + & 2 ( 3 0 % ) ( # - - , 5 2 ; ( 3 % < , + 8 % 3 ( - ( 2 2 ) , + 2 4 1 ( 3 2 ' , 4 2 (

' * ( % 3 1 , 6 % - ( & ( 0 % ) ( ' , ' * ( 7 4 - - ( 2 ' ) # $ # ) % ' / % & ( # - % < ( & 6 / ' * # ' $ # 3 ' % ) 4 - # 3 ' ( ) * + , - , . / 6 ( ' ' ( 3

' * # + # + / , ' * ( 3 5 % 3 ( - ( 2 2 $ 3 , 0 % & ( 3 N

! & ' ( ) ' * + , - * . / (



25

Appendix J: Discounted Cash Flow Model for Verizon Communications

Discounted Cash Flow Model for Verizon Communications

All figures in millions, except per share data

Operating scenario: Base CaseLast fiscal year end date: 12/31/09Valuation / deal date: 12/10/10Stub year fraction: 5.8%

Weighted average cost of capital: 6.9%

Free cash flow buildup

2010 2011 2012 2013 2014 2015 201612/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16

Total Revenues 106,729.9 108,864.5 111,803.9 114,822.6 117,922.8 121,106.7 124,376.6EBITDA 33,552.1 34,223.1 35,147.1 36,096.1 37,070.7 38,071.6 39,099.5EBIT 17,185.4 17,529.1 18,002.4 18,488.4 18,987.6 19,500.3 20,026.8Tax rate 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%EBIAT 13,748.3 14,023.3 14,401.9 14,790.7 15,190.1 15,600.2 16,021.4Depreciation & Amortization 16,366.7 16,694.0 17,144.8 17,607.7 18,083.1 18,571.3 19,072.7 Accounts receivable 125.7 (248.9) (342.8) (352.1) (361.6) (371.3) (381.3)Inventories 193.3 (41.9) (57.7) (59.3) (60.9) (62.5) (64.2)Deferred income taxes (assets) 0.0 0.0 0.0 0.0 0.0 0.0 0.0Prepaid expenses 52.5 (103.9) (143.1) (146.9) (150.9) (155.0) (159.1)Other current assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Accounts payable (366.3) 79.4 109.4 112.3 115.3 118.5 121.6 Accrued expenses (94.4) 187.0 257.4 264.4 271.5 278.9 286.4Taxes payable 72.2 75.8 79.6 83.6 87.8 92.1 96.8Other current liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0Deferred tax (liabilities) 965.5 1,013.8 1,064.5 1,117.7 1,173.6 1,232.2 1,293.9Cash from working capital 948.5 961.2 967.3 1,019.7 1,074.9 1,132.9 1,194.0

Capital expenditures (16,876.5) (17,214.1) (17,678.8) (18,156.2) (18,646.4) (19,149.8) (19,666.9)Unlevered free cash flows 14,186.9 14,464.4 14,835.1 15,261.9 15,701.6 16,154.6 16,621.2Unlevered FCFs attributable to Verizon 7,802.8 7,955.4 8,159.3 8,394.1 8,635.9 8,885.0 9,141.7

Discount factor 0.996 0.932 0.871 0.815 0.762 0.713 0.667

Midyear adjustment factor 1.002 1.034 1.034 1.034 1.034 1.034 1.034

Present value of free cash flows 7,787.8 7,664.1 7,351.6 7,073.6 6,806.3 6,549.3 6,302.3Sum of present values of FCFs 49,535.0

Terminal value Equity value calculations Shares Outstanding Worksheet

Growth in perpetuity method Enterprise value 179,876.6 Basic Shares Outanding : 2,836.0Long term growth rate 3.5% Calculation of net debt: Current Share Price: $34.04Free cash flow (t+1) 9,461.6 Current portion of long-term debt 6,105.0 Options / Warrants DataTerminal value 276,548.1 Short term debt 1,100.0 # of options $ strike # In-the-$Midyear adjusted terminal value 285,958.4 Long term debt 55,051.0 Batch 1 28.905 $53.00 0.000Present value of terminal value 190,653.3 Convertible debt 0.0 Batch 2 0.000Enterprise value 240,188.3 Minority interest 0.0 Batch 3 0.000

Convertible preferred stock 0.0 Batch 4 0.000Exit multiple method Less: Excess cash (2,499.0) Batch 5 0.000Exit EV / EBITDA multiple 5.0x Less: Equity investments (3,535.0) Batch 6 0.000LTM EBITDA at end of projection 39,099.5 Net debt 56,222.0 Total in-the-$ options: 0.000Terminal value 195,497.6 Equity value 123,654.6 Total $ proceeds: $0.0Present value of terminal value 130,341.6 Shares outstanding 2,836.0 Total shares repurchased: 0.000Enterprise value 179,876.6 Equity value / share $43.60 Basic shares outstanding 2,836.0

New shares from options: 0.0Select a terminal value method New shares from convert. pref. stock:Perpetual growth = 1 / Exit multiple = 2 2 New shares from convertible debt:Enterprise value 179,876.6 Total Shares Outstanding: 2,836.0Terminal value as percent of total value 72.5%

Analysis of WACC

Cost of debt Capital structureCost of debt 4.7% Current capital structure Target capital structure

Marginal tax rate 20.0% Market value % Weight override % Weight

Cost of debt after tax shield 3.8% Net debt 56,222.0 36.8% 36.8%Equity 96,537.4 63.2% 63.2%

Cost of equity Total 152,759.4Risk-Free Rate (rf) 3.3%Market Risk Premium (rm-rf) 7.6% Weighted average cost of capitalRaw (observed) beta 0.62 Weighted average cost of capital: 6.9%Cost of equity using relevered industry 8.8%

Industry beta calculation

Comps Raw beta Share price Shares Market cap. Debt D / E Tax rate Unl. Beta Weigh. BetaRelev.Beta

VZ 0.62 $34.04 2,836.0 96,537.4 56,222.0 58.24% 20.00% 0.42 0.15

T 0.67 $28.46 5,910.0 168,198.6 68,966.0 41.00% 32.40% 0.52 0.32S 1.10 $4.03 2,987.0 12,037.6 20,298.0 168.62% 30.30% 0.51 0.02

276,773.7 Average: 0.48 0.49 0.72

Sources: Verizon 2009 10-K, Morningstar Analyst Reports, Bloomberg, and Capital IQ.

Projected Annual Forecast



26

Appendix K: Financial Statement Model for Verizon Communications

Financial Statement Model for Verizon Communications

General assumptions Nonrecurring items

Company NameVerizonCommunications Pre-tax 2007 2008 2009

Latest Fiscal year end (mm/dd/yy) 12/31/09 Nonrecurring expense/(income) in COGSCurrent share price $34.04 Nonrecurring expense/(income) in SG&A and Other Current date 12/10/10 Nonrecurring expense/(income) in nonoperating ( income)/loss

After-tax - LEAVE BLANK IF NO AFTER-TAX DATA PROVIDED BY CO. EXPLICITLYMorningstar EPS estimates Nonrecurring items in COGS12/31/09 $1.29 Nonrecurring items in SG&A12/31/10 $2.24 Nonrecurring items in nonoperating (income)/loss 11.012/31/11 $2.25 Total nonrecurring charges per shareExpected EPS growth rate (2010-2011) 0.45%

Income Statement

Actual Projected Annual Forecast2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16

Total Revenues 93,469.0 97,354.0 107,808.0 106,729.9 108,864.5 111,803.9 114,822.6 117,922.8 121,106.7 124,376.6Cost of goods sold - REPORTED 37,547.0 39,007.0 44,299.0Cost of goods sold - PRO FORMA 37,547.0 39,007.0 44,299.0 40,557.4 41,368.5 42,485.5 43,632.6 44,810.7 46,020.5 47,263.1SG&A - REPORTED 25,967.0 26,898.0 32,950.0SG&A - PRO FORMA 25,967.0 26,898.0 32,950.0 32,620.5 33,272.9 34,171.3 35,093.9 36,041.4 37,014.6 38,014.0Depreciation and Amortization Expense - REPORTED 14,377.0 14,565.0 16,532.0Depreciation and Amortization Expense - PRO FORMA 14,377.0 14,565.0 16,532.0 16,366.7 16,694.0 17,144.8 17,607.7 18,083.1 18,571.3 19,072.7

Operating profit - EBIT 15,578.0 16,884.0 14,027.0 17,185.4 17,529.1 18,002.4 18,488.4 18,987.6 19,500.3 20,026.8Interest expense 1,829.0 1,819.0 3,102.0 3,858.3 3,485.7 3,107.5 2,707.2 2,281.9 1,830.3 1,580.1Nonoperating income / (loss) - REPORTED 211.0 282.0 90.0Nonoperating income / (loss) - PRO FORMA 211.0 282.0 90.0 90.0 90.0 90.0 90.0 90.0 90.0 90.0

Pretax income - EBT 13,960.0 15,347.0 11,015.0 13,417.1 14,133.4 14,984.9 15,871.2 16,795.7 17,759.9 18,536.7Taxes - REPORTED 3,982.0 3,331.0 1,210.0Taxes - PRO FORMA 3,971.0 3,331.0 1,210.0 2,683.4 2,826.7 2,997.0 3,174.2 3,359.1 3,552.0 3,707.3Equity in income of affiliates, after tax (enter as +) 585.0 567.0 553.0 547.5 558.4 573.5 589.0 604.9 621.2 638.0Minority interest expense, after tax (enter as - ) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Income 10,574.0 12,583.0 10,358.0 11,281.1 11,865.1 12,561.4 13,286.0 14,041.5 14,829.2 15,467.4Net Income Attributable to noncontrolling interest 5,053.0 6,155.0 6,707.0 5,076.5 5,339.3 5,652.6 5,978.7 6,318.7 6,673.1 6,960.3Net Income Attributable to Verizon 5,521.0 6,428.0 3,651.0 6,204.6 6,525.8 6,908.8 7,307.3 7,722.8 8,156.0 8,507.0Net Income 10,574.0 12,583.0 10,358.0 11,281.1 11,865.1 12,561.4 13,286.0 14,041.5 14,829.2 15,467.4Common dividends 4,773.0 4,994.0 5,271.0 5,740.8 6,037.9 6,392.3 6,761.0 7,145.5 7,546.3 7,871.1

Pro Forma EBITDA ReconciliationEBIT 15,578.0 16,884.0 14,027.0 17,185.4 17,529.1 18,002.4 18,488.4 18,987.6 19,500.3 20,026.8Depreciation & amortization 14,377.0 14,565.0 16,532.0 16,366.7 16,694.0 17,144.8 17,607.7 18,083.1 18,571.3 19,072.7EBITDA 29,955.0 31,449.0 30,559.0 33,552.1 34,223.1 35,147.1 36,096.1 37,070.7 38,071.6 39,099.5

Pro Forma Basic EPS ReconcilliationPreferred dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net income for basic EPS 5,521.0 6,428.0 3,651.0 6,204.6 6,525.8 6,908.8 7,307.3 7,722.8 8,156.0 8,507.0Basic shares outstanding 2,898.0 2,849.0 2,841.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0Basic EPS $1.91 $2.26 $1.29 $2.19 $2.30 $2.44 $2.58 $2.72 $2.88 $3.00

Pro Forma Diluted EPS Reconciliation Adjustment to net income for diluted EPS calc. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Net income for diluted EPS 5,521.0 6,428.0 3,651.0 6,204.6 6,525.8 6,908.8 7,307.3 7,722.8 8,156.0 8,507.0Stock options, restricted stock, and converts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Diluted shares outstanding 2,898.0 2,849.0 2,841.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0Diluted EPS $1.91 $2.26 $1.29 $2.19 $2.30 $2.44 $2.58 $2.72 $2.88 $3.00

Morningstar consensus EPS $1.29 $2.24 $2.25 $2.26 $2.27 $2.28 $2.29 $2.30Model variance from consensus ($0.00) ($0.05) $0.05 $0.18 $0.31 $0.44 $0.59 $0.70

Income statement assumptions

Revenue growth (%) 4.2% 10.7% -1.0% 2.0% 2.7% 2.7% 2.7% 2.7% 2.7%

Gross profit margin (%) 59.8% 59.9% 58.9% 62.0% 62.0% 62.0% 62.0% 62.0% 62.0% 62.0%

SG&A margin 27.8% 27.6% 30.6% 30.6% 30.6% 30.6% 30.6% 30.6% 30.6% 30.6%

D&A margin 15.4% 1 5.0% 15.3% 15.3% 15.3% 15.3% 15.3% 15.3% 15.3% 15.3%EBIT margin (%) 44.4% 45.0% 43.6% 13.1% 16.6% 17.6% 17.6% 17.6% 17.6% 17.6%

Effective tax rate (%) 28.4% 21.7% 11.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

D&A growth (%) 1.3% 13.5% -1.0% 2.0% 2.7% 2.7% 2.7% 2.7% 2.7%Income in equity affiliates growth (%) (3.1%) (2.5%) -1.0% 2.0% 2.7% 2.7% 2.7% 2.7% 2.7%

Minority interest growth (%) 0.0% 0.0% -1.0% 2.0% 2.7% 2.7% 2.7% 2.7% 2.7%

Dividend payout ratio 86.5% 77.7% 144.4% 144.4% 144.4% 144.4% 144.4% 144.4% 144.4% 144.4%



27

Balance Sheet

12/31/ 08 12/ 31/09 12/31/10 12/31/ 11 12/31/12 12/ 31/13 12/31/14 12/31/ 15 12/31/ 16Cash and equivalents (inc. investment securities) 10,291.0 2,499.0 2,134.6 2,177.3 2,236.1 2,296.5 2,358.5 2,422.1 9,432.3 Accounts receivable 11,703.0 12,573.0 12,447.3 12,696.2 13,039.0 13, 391. 1 13,752.6 14,123.9 14,505.3Inventories 2, 092. 0 2,289.0 2,095.7 2,137.6 2,195.3 2,254.6 2,315.4 2,378.0 2,442.2Deferred income taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Prepaid expenses 1, 989. 0 5,247.0 5,194.5 5,298.4 5,441.5 5,588.4 5,739.3 5,894.2 6,053.4Other current assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Investments in unconsolidated businesses 3, 393. 0 3,535.0 4,082.5 4,640.9 5,214.4 5,803.4 6,408.3 7,029.5 7,667.5PP&E 8 6, 54 6. 0 9 1, 46 6. 0 9 3, 82 3. 9 95 ,8 39 .9 9 7, 59 8. 0 9 9, 13 3. 5 1 00 ,2 78 .8 1 01 ,2 45 .3 1 02 ,0 78 .5Wireless Licenses 6 1, 97 4. 0 7 2, 06 7. 0 72,067.0 72,067.0 72,067.0 72, 067. 0 72,067.0 72,067.0 72,067.0Goodwill 6, 03 5. 0 2 2, 47 2. 0 22,472.0 22,472.0 22,472.0 22, 472. 0 22,472.0 22,472.0 22,472.0Other Intangibles 5, 199. 0 6,764.0 4,916.0 3,420.0 2,196.0 1,209.0 627.0 239.0 0.0Other non-current assets 13,130.0 8,339.0 8,339.0 8,339.0 8,339.0 8,339.0 8,339.0 8,339.0 8,339.0

Total Assets 202,352.0 227,251.0 227,572.4 229,088.3 230,798.2 232,554.3 234,357.9 236,210.1 245,057.1

Accounts payable 3, 856. 0 4,337.0 3,970.7 4,050.1 4,159.4 4,271.8 4,387.1 4,505.5 4,627.2 Accrued expenses 7, 822. 0 9,442.0 9,347.6 9,534.5 9,792.0 10, 056. 3 10,327.9 10,606.7 10,893.1Taxes payable 2, 136. 0 1,444.0 1,516.2 1,592.0 1,671.6 1,755.2 1,843.0 1,935.1 2,031.9Other current liabilities (non-debt) 7, 099. 0 6,708.0 6,708.0 6,708.0 6,708.0 6,708.0 6,708.0 6,708.0 6,708.0Employee benefit obligations 3 2, 51 2. 0 3 2, 62 2. 0 32,622.0 32,622.0 32,622.0 32, 622. 0 32,622.0 32,622.0 32,622.0Current portion of long-term debt 3, 506. 0 6,105.0 6,105.0 9,646.0 5,884.0 5,857.0 3,524.0 0.0 0.0Short term debt (Revolving credit facility) 1, 487. 0 1,100.0 1,409.0 1,846.8 5,522.8 5,060.0 4,176.3 548.0 0.0Long term debt 4 6, 95 9. 0 5 5, 05 1. 0 48,946.0 39,300.0 33,416.0 27, 559. 0 24,035.0 24,035.0 24,035.0Convertible Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Deferred income taxes 11,769.0 19,310.0 20,275.5 21,289.3 22,353.7 23, 471. 4 24,645.0 25,877.2 27,171.1Other non-current liabilities 6, 301. 0 6,765.0 6,765.0 6,765.0 6,765.0 6,765.0 6,765.0 6,765.0 6,765.0

Total Liabilities 123,447.0 142,884.0 137,665.0 133,353.7 128,894.6 124,125.7 119,033.2 113,602.6 114,853.3

Noncontrolling interest 3 7, 19 9. 0 4 2, 76 1. 0 47,837.5 53,176.8 58,829.4 64, 808. 1 71,126.8 77,799.9 84,760.2Series Preferred Stock ($.10 par value; none issued) 0.0 0 .0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Common Stock and APIC 4 0, 58 8. 0 4 0, 40 5. 0 40,405.0 40,405.0 40,405.0 40, 405. 0 40,405.0 40,405.0 40,405.0Treasury stock (contra account) (4,839.0) (5,000.0) (5 ,0 00 .0 ) ( 5, 000 .0 ) ( 5, 000 .0 ) ( 5, 00 0. 0) ( 5, 00 0. 0) ( 5, 00 0. 0) ( 5, 00 0. 0)Comprehensive (accumulated) loss (13,372.0) (11,479.0) (11,479.0) (11,479.0) (11,479.0) (11,479.0) (11,479.0) (11,479.0) (11,479.0)Other equity account 79.0 88.0 88.0 88.0 88.0 88.0 88.0 88.0 88.0Retained earnings 1 9, 25 0. 0 1 7, 59 2. 0 18,055.9 18,543.7 19,060.2 19, 606. 5 20,183.9 20,793.6 21,429.6

Total Shareholders' Equity 78,905.0 84,367.0 89,907.4 95,734.5 101,903.7 108,428.6 115,324.7 122,607.5 130,203.8

Total Li abi liti es + Shareholders' Equity 202,352.0 227,251.0 227, 572. 4 229,088. 3 230, 798. 2 232,554.3 234,357.9 236,210.1 245,057.1

Balance check 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Supporting Schedules

12/31/ 08 12/ 31/09 12/31/10 12/31/ 11 12/31/12 12/ 31/13 12/31/14 12/31/ 15 12/31/ 16

Working Capital

1. Grow with revenues (default)2. Override i: Days of revenues (Avg. collection period) 44.0 42.6

3. Overide ii: Absolute projection Accounts receivable 11,703.0 12,573.0 12,447.3 12,696.2 13,039.0 13,391.1 13,752.6 14,123.9 14,505.3

1. Grow with COGS (default)2. Override i: Inventory Days 19.6 18.9

3. Overide ii: Absolute projectionInventories 2,092.0 2,289.0 2,095.7 2,137.6 2,195.3 2,254.6 2,315.4 2,378.0 2,442.2

1. Grow with SG&A (default)2. Overide: Absolute projection

Prepaid expenses 1,989.0 5,247.0 5,194.5 5,298.4 5,441.5 5,588.4 5,739.3 5,894.2 6,053.4

1. Straight-line (default)2. Overide: Absolute projection

Other current assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

1. Grow with COGS (default)2. Override i. Payables Payment Period 36.2 35.7

3. Overide ii: Absolute projection Accounts payable 3,856.0 4,337.0 3,970.7 4,050.1 4,159.4 4,271.8 4,387.1 4,505.5 4,627.2

1. Grow with SG&A (default)2. Overide: Absolute projection

Accrued expenses 7,822.0 9,442.0 9,347.6 9,534.5 9,792.0 10,056.3 10,327.9 10,606.7 10,893.1

1. Grow with taxes (default)2. Overide: Absolute projection

Taxes payable 2,136.0 1,444.0 1,516.2 1,592.0 1,671.6 1,755.2 1 ,843.0 1,935.1 2,031.9

1. Straight-line (default)2. Overide: Absolute projection

Other current liabilities (non-debt) 7,099.0 6,708.0 6,708.0 6,708.0 6,708.0 6,708.0 6,708.0 6,708.0 6,708.0

Intangible assets

Purchase of intangible assets Amortization (enter as -) (1,383.0) (1,970.0) (1,848.0) (1,496.0) ( 1,224.0) (987.0) (582.0) (388.0) (239.0)Intangibles 5,199.0 6,764.0 4,916.0 3,420.0 2,196.0 1,209.0 627.0 239.0 0.0

PP&E

Capital expenditures 17,238.0 17, 047. 0 16,876.5 17,214.1 1 7,678.8 1 8, 156. 2 18,646.4 19,149.8 19,666.9Recurring asset sales (enter as -) 0.0 0.0 0.0 0.0 0.0 0.0 0.0Depreciation (13,182.0) (14,562.0) (14,518.7) (15,198.0) (15,920.8) (16,620.7) (17,501.1) (18,183.3) (18,833.7)PP&E 86,546.0 91,466.0 93,823.9 95,839.9 97,598.0 99,133.5 100,278.8 101,245.3 102,078.5

Diluted Shares outstanding

Treasury share $ repurchases (1,368.0) (166.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0Value of shares issued 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Expected average share price $30.06 $30.19 $30.33 $30.46 $30.60 $30.74 $30.87 $31.01Consensus EPS growth 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4%Shares repurchased 0.0 0.0 0.0 0.0 0.0 0.0 0.0Shares issued 0.0 0.0 0.0 0.0 0.0 0.0 0.0End of period basic shares outstanding 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0

Weighted average basic shares outstanding 2,849.0 2,841.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0 2,836.0

Investments in unconsolidated businesses (Equity method)

Equity in income of unconsolidated businesses 547.5 558.4 573.5 589.0 604.9 621.2 638.0Dividends (enter as -)Equity in unconsolidated businesses ( from balance sheet) 3, 393. 0 3,535.0 4,082.5 4,640.9 5,214.4 5,803.4 6,408. 3 7, 029. 5 7, 667. 5

Noncontrolling interest (Consolidation method)

Noncontrolling interest expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0Income attributable to noncontrolling interest 5,076.5 5,339.3 5,652.6 5,978.7 6,318.7 6,673.1 6,960.3Dividends (enter as -)Noncontrolling interest (from balance sheet) 37,199.0 42,761.0 47,837.5 53,176.8 58,829.4 64,808.1 71,126.8 77,799.9 84,760.2



28

Cash Flow Statement

12/31/10 12/31/ 11 12/31/12 12/ 31/13 12/31/14 12/31/ 15 12/31/ 16Net Income 11,281.1 11,865.1 12,561.4 13,286.0 14,041.5 14,829.2 15,467.4

Depreciation & amortization 16,366.7 16,694.0 17,144.8 17,607.7 18,083.1 18,571.3 19,072.7

Changes in working capital Accounts receivable 125.7 (248.9) (342.8) (352.1) (361.6) (371.3) (381.3)

Inventories 193.3 (41.9) (57.7) (59.3) (60.9) (62.5) (64.2)

Deferred income taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0Prepaid expenses 52.5 (103.9) (143.1) (146.9) (150.9) (155.0) (159.1)

Other current assets 0.0 0.0 0.0 0.0 0 .0 0.0 0.0

Accounts payable (366.3) 79.4 109.4 112.3 115.3 118.5 121.6

Accrued expenses (94.4) 187.0 257.4 264.4 271.5 278.9 286.4Taxes payable 72.2 75.8 79.6 83.6 87.8 92.1 96.8

Other current liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Deferred tax liabilities 965.5 1,013.8 1,064.5 1,117.7 1,173.6 1,232.2 1,293.9Equity income in affiliates (547.5) (558.4) (573.5) (589.0) (604.9) (621.2) (638.0)

Dividends received from affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Minority interest expense 0.0 0 .0 0.0 0.0 0.0 0.0 0.0

Cash from operations 28,048.9 28,961.9 30,099.9 31,324.3 32,594.5 33,912.2 35,096.1

Purchase of fixed assets (capital expenditures) (16,876.5) ( 17,214.1) (17,678.8) (18,156.2) (18,646.4) (19,149.8) (19,666.9)

Proceeds from sale of fixed assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0Purchases of intangible assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Purchases/Proceeds from other long-term assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cash from investing (16,876.5) (17,214.1) (17,678.8) (18,156.2) (18,646.4) (19,149.8) (19,666.9)

Convertible preferred stock 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Common stock and APIC 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Treasury stock repurchases 0.0 0.0 0.0 0.0 0.0 0.0 0.0Comprehensive accumulated loss 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other equity account 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Common and preferred dividends (5,740.8) (6,037.9) (6,392.3) (6,761.0) (7,145.5) (7,546.3) (7,871.1)Dividends to noncontrolling interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Increases / (decreases) in debt (5,796.0) (5,667.2) (5,970.0) (6,346.8) (6,740.7) (7,152.4) (548.0)

Cash from financing (11,536.7) (11,705.1) (12,362.3) (13,107.8) (13,886.1) (14,698.6) (8,419.0)

Total increase/decrease of cash (364.4) 42.7 58.8 60.4 62.0 63.7 7,010.2

Debt

Current portion of LTD 3, 506. 0 6,105.0 6,105.0 9,646.0 5,884.0 5,857.0 3,524.0

Reclassification of LTD to CP of LTD (6,105.0) (9,646.0) (5,884.0) (5,857.0) (3,524.0)

Discretionary (paydown)/borrowing of long term debtLong term debt 46,959.0 55,051.0 48,946.0 39,300.0 33,416.0 27,559.0 2 4,035.0 24,035.0 24,035.0

Discretionary (paydown)/borrowing of convertible debtConvertible debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Calculation of short term debtCash @ beginning of the year (end of last year) 2,499.0 2,134.6 2,177.3 2,236.1 2,296.5 2,358.5 2,422.1

Plus: Free cash flows prior to debt during year % of sales 5,431.6 5,709.9 6,028.8 6,407.2 6,802.7 7,216.0 7,558.1

Less: Minimum cash balance 2.0% 2,134.6 2,177.3 2,236.1 2,296.5 2,358.5 2,422.1 2,487.5

Total cash available / (debt required) for short term debt paydown (309.0) (437.8) (3,676.0) 462.8 883.7 3,628.4 7,492.7Short term debt 1,487.0 1,100.0 1 ,409.0 1,846.8 5,522.8 5,060.0 4,176.3 548.0 0.0

Interest expense

Current portion of long-term debt 3,506.0 6,105.0 6,105.0 9,646.0 5,884.0 5,857.0 3,524.0 0.0 0.0

Short term debt 1,487.0 1,100.0 1 ,409.0 1 ,846.8 5,522.8 5,060.0 4,176.3 548.0 0.0

Long term debt 46,959.0 55,051.0 48,946.0 39,300.0 33,416.0 27,559.0 24,035.0 24,035.0 24,035.0

Convertible debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total debt 51,952.0 62,256.0 56,460.0 50,792.8 44,822.8 38,476.0 31,735.3 24,583.0 24,035.0

Interest expense 1,819.0 3,102.0 3,858.3 3,485.7 3,107.5 2,707.2 2 ,281.9 1,830.3 1,580.1

Average interest rate 6.3% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5%

Sources: Verizon 2009 10-K, Morningstar Analyst Reports, Bloomberg, and Capital IQ.



29

Appendix L: Accounting Performance Indicators

Profitability Return on Assets Return on Capital Return on Equity Total Revenue Net Income

Verizon Communications 5.70% 8.80% 8.80% 107,808,000,000$ 10,358,000,000$

AT&T Inc. 5.00% 7.80% 12.60% 123,018,000,000$ 12,535,000,000$

Sprint Nextel -1.10% -1.60% -12.80% 32,260,000,000$ (2,436,000,000)$

Financial Current Ratio Quick Ratio Total Debt / Equity EBIT/Interest Expense EPS

Verizon Communications 0.8x 0.5x 149.6% 6.3x $1.29

AT&T Inc. 0.7x 0.5x 70.7% 6.4x $2.12

Sprint Nextel 1.3x 1.0x 116.4% - -$0.84

Market Valuation (As of

12/10/2010) Market Cap P/E Ratio Dividend Yield Price / Book

Total Enterprise Value /

EBIT

Verizon Communications $96,223,690,000 15.6x 5.49% 2.0x 9.55x

AT&T Inc. $170,739,900,000 13.25x 5.69% 1.6x 10.12x

Sprint Nextel $12,605,300,000 - - 0.6x NM

Margin Analysis Gross Margin % Operating Margin Net Profit Margin Divident Payout %

Verizon Communications 60.50% 18.10% 3.40% 144.40%

AT&T Inc. 59.00% 17.50% 10.20% 77.10%

Sprint Nextel 49.10% -3.20% -7.60% -

Asset Turnover Total Asset Turnover Inventory Turnover A/R Turnover Fixed Asset Turnover

Verizon Communications 0.5x 19.5x 8.8x 1.2

AT&T Inc. 0.5x 57.7x 7.2x 1.2x

Sprint Nextel 0.6x 28.4x 10.1x 1.6x

Three-Year Growth Total Revenue Net Income EPS Dividend

Verizon Communications 6.90% -16.20% -11.80% 4.90%

AT&T Inc. 25.00% 19.40% 3.90% 6.90%

Sprint Nextel -7.70% - - NA

Sources: Capital IQ; 2009 10-Ks for Verizon, AT&T & Sprint; Yahoo! Finance

Telecommunications Industry Accounting Performance Indicators(All Numbers As Of December 31, 2009, Unless Otherwise Stated)



30

Appendix M: Consolidated Statements of Income



31

Appendix N: Consolidated Balance Sheets



32

Appendix O: Consolidated Statements of Cash Flows



33

Appendix P: Consolidated Statements of Changes in Equity



34

Appendix Q: References

1. Harris, Elizabeth A. 2010. "He Tested the Market", item in "Big Deal" real estate column, page 2 ofthe "Real Estate" section, The New York Times

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