Verizon Wireless 2014 Annual Report Download - page 14

In our Wireline segment, we have experienced continuing access line
losses as customers have disconnected both primary and secondary
lines and switched to alternative technologies such as wireless, voice
over Internet protocol (VoIP) and cable for voice and data services. We
expect to continue to experience access line losses as customers con-
tinue to switch to alternate technologies. We also expect Consumer retail
revenuestoincrease,primarilydrivenbyourFiOSservices,asweseekto
increaseourpenetrationrateswithinourFiOSserviceareas.
Despite this challenging environment, we expect that we will be able
to grow key aspects of our Wireline segment by providing network reli-
ability, oering product bundles that include broadband Internet access,
digital television and local and long distance voice services, oering more
robust IP products and service, and accelerating our cloud computing
and machine-to-machine strategies. We will also continue to focus on
cost eciencies to attempt to oset adverse impacts from unfavorable
economic conditions and competitive pressures.
Operating Revenue
We expect to experience revenue growth in our Wireless segment in
2015, primarily as a result of continued growth in postpaid connections
driven by sales of smartphones and tablets, partially oset by declining
prices in response to increasing competitive pressure from other wire-
less carriers. We also expect the activation of devices on Verizon Edge
to contribute positively to our Wireless segment revenue and operating
income. In 2015, we expect the rate at which customers activate devices
on Verizon Edge to increase. As more customers adopt Verizon Edge,
we expect equipment and other revenue to be positively impacted,
whileweexpect retailpostpaidaveragerevenueperaccount(ARPA)
and service revenue, in each case when considered as a percentage of
total revenue, to continue to be negatively impacted. We expect that
our future service revenue growth will be substantially derived from an
increase in the usage of innovative mobile services in addition to our
pricing structure that will encourage customers to continue adding
data-enabled devices onto existing accounts. We expect that continued
emphasis on increasing smartphone penetration, including continuing
to migrate customers from basic phones to smartphones and from 3G
devices to 4G LTE devices, in addition to increasing our tablet penetration
will positively impact our revenue.
WeexpectFiOSbroadbandandvideopenetrationtopositivelyimpact
our Mass Markets revenue and subscriber base.  Although we have
recently experienced decelerating revenue growth within our Strategic
services business, we expect our Strategic services business to be posi-
tively impacted by additional enterprise revenues from application
services, such as our cloud, security and other solutions-based services
and from continued customer migration of their services to Private IP and
other strategic networking services. We believe the trend in these growth
areas as well as our oerings in telematics and video streaming will help
oset the continuing decline in revenues in our Wireline segment related
to retail voice connection losses as a result of technology substitution,
as well as the continued decline in our legacy wholesale and enterprise
markets. 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. Prior to closing this transaction, we expect to undertake initia-
tives to address our cost structure to mitigate this impact to our margins.
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.However,weexpectto
achieve certain cost eciencies in 2015 and beyond as data trac con-
tinues to migrate to our lower-cost 4G LTE network and as we continue
to streamline our business processes with a focus on improving produc-
tivity and increasing protability.
Capital Expenditures
Our 2015 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 expen-
ditures to drive operating eciencies. The level and the timing of the
Company’s capital expenditures within these broad categories can
vary signicantly as a result of a variety of factors outside our control,
including, for example, material weather events. We are replacing copper
wire with ber-optic cable which will not alter our capital program but
should result in lower maintenance costs in the future. Capital expen-
ditures were $17.2 billion in 2014 and $16.6 billion in 2013. We believe
that we have signicant 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 signicant capital expenditures on a
designated schedule or upon the occurrence of designated events. We
expect capital expenditures in 2015, which will be primarily focused on
adding capacity to our 4G LTE network in order to stay ahead of our cus-
tomers’increasingdatademands,tobeintherangeofapproximately
$17.5 billion to $18.0 billion. We also expect our capital expenditures as a
percentage of revenue to decline in 2015 from 2014 levels.
Cash Flow from Operations
We create value for our shareowners by investing the cash ows gen-
erated by our business in opportunities and transactions that support
continued protable growth, thereby increasing customer satisfaction
and usage of our products and services. In addition, we have used our
cash ows to maintain and grow our dividend payout to shareowners.
Verizon’sBoardofDirectorsincreasedtheCompany’squarterlydividend
by 3.8% during 2014, making this the eighth consecutive year in which
we have raised our dividend.
Our goal is to use our cash to create long-term value for our shareholders.
We will continue to look for investment opportunities that will help us
to grow the business. We expect to use our cash to reduce our debt
levels in order to return to our pre-Wireless Transaction credit metrics
by2019,investinthebusiness,including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”).
12
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued