America Online 2015 Annual Report Download - page 15

Operating Costs and Expenses
We anticipate our overall wireless operating costs will increase as a
result of the expected increase in the volume of smartphone sales,
which will result in higher equipment costs. In addition, we expect
content costs for our Fios video service to continue to increase. We
also expect to incur costs related to the development of new products
and services in mobile video and IoT. However, we expect to achieve
certain cost efficiencies in 2016 and beyond as we continue to stream-
line our business processes with a focus on improving productivity and
increasing profitability.
Upon the closing of the sale of our local exchange business and related
landline activities in California, Florida and Texas, we expect that
our Wireline segment EBITDA margin and operating income margin
will decline. We expect to continue to undertake initiatives, including
headcount and organizational realignment initiatives, to address our
cost structure to mitigate this impact to our consolidated margins.
Cash Flow from Operations
We create value for our shareowners by investing the cash flows
generated by our business in opportunities and transactions that
support continued profitable growth, thereby increasing customer
satisfaction and usage of our products and services. In addition, we
have used our cash flows to maintain and grow our dividend payout to
shareowners. Verizon’s Board of Directors increased the Company’s
quarterly dividend by 2.7% during 2015, making this the ninth consecu-
tive year in which we have raised our dividend.
Our goal is to use our cash to create long-term value for our share-
holders. We will continue to look for investment opportunities that will
help us to grow the business, acquire spectrum licenses (see “Cash
Flows from Investing Activities”), pay dividends to our shareholders
and, when appropriate, buy back shares of our outstanding common
stock (see “Cash Flows from Financing Activities”). We expect to use
the proceeds from the Frontier transaction to reduce our debt levels.
We also remain committed to returning to our pre Wireless Transaction
credit- rating profile in the 2018 to 2019 timeframe.
Capital Expenditures
Our 2016 capital program includes capital to fund advanced networks
and services, including 4G LTE and Fios, the continued expansion of
our core networks, including our IP and data center enhancements,
and support for our copper-based legacy voice networks and other
expenditures to drive operating efficiencies. The level and the timing
of the Company’s capital expenditures within these broad catego-
ries can vary significantly as a result of a variety of factors outside
our control, including, for example, material weather events. We are
replacing copper wire with fiber-optic cable which will not alter our
capital program but should result in lower maintenance costs in the
future. Capital expenditures were $17.8billion in 2015 and $17.2billion
in 2014. We believe that we have significant discretion over the amount
and timing of our capital expenditures on a Company-wide basis as
we are not subject to any agreement that would require significant
capital expenditures on a designated schedule or upon the occurrence
of designated events. We expect capital expenditures in 2016, which
will be primarily focused on adding capacity to our 4G LTE network in
order to stay ahead of our customers’ increasing data demands, to be
in the range of approximately $17.2billion to $17.7billion. This includes
capital spending up to approximately $150million for the properties to
be sold to Frontier.
Consolidated Results of Operations
In this section, we discuss our overall results of operations and
highlight items of a non- operational nature that are not included in
our segment results. We have two reportable segments, Wireless
and Wireline, which we operate and manage as strategic business
units and organize by products and services. In “Segment Results
of Operations,” we review the performance of our two report-
able segments.
On February21, 2014, we completed the acquisition of Vodafone’s
indirect 45% interest in Verizon Wireless. As a result, for 2014 our
results reflect our 55% ownership of Verizon Wireless through the
closing of the Wireless Transaction and reflect our full ownership of
Verizon Wireless from the closing of the Wireless Transaction through
December31, 2014.
Corporate and other includes the operations of AOL and related
businesses, unallocated corporate expenses, the results of other
businesses, such as our investments in unconsolidated businesses,
pension and other employee benefit related costs and lease
financing. Effective January1, 2014, we have also reclassified the
results of certain businesses, such as development stage businesses
that support our strategic initiatives, from our Wireline segment to
Corporate and other. The impact of this reclassification was not
material to our consolidated financial statements or our segment
results of operations. Corporate and other also includes the historical
results of divested operations and other adjustments and gains and
losses that are not allocated in assessing segment performance due to
their non- operational nature. Although such transactions are excluded
from the business segment results, they are included in reported
consolidated earnings. Gains and losses that are not individually sig-
nificant are included in all segment results as these items are included
in the chief operating decision maker’s assessment of segment perfor-
mance. We believe that this presentation assists users of our financial
statements in better understanding our results of operations and
trends from period to period.
On July1, 2014, our Wireline segment sold a non- strategic business
(see “Acquisitions and Divestitures”). Accordingly, the historical
Wireline results for these operations, which were not material to our
consolidated financial statements or our segment results of operations,
have been reclassified to Corporate and other to reflect comparable
segment operating results. The results of operations related to this
divestiture included within Corporate and other are as follows:
(dollars in millions)
Years Ended December31, 2015 2014 2013
Impact of Divested Operations
Operating revenues $ – $ 256 $ 599
Cost of services – 239 531
Selling, general and administrative
expense – 5 25
13Verizon Communications Inc. and Subsidiaries
Management’s Discussion and Analysis ofFinancialCondition and Results of Operations continued