Verizon Communications Inc. (VZ) November 16, 2017

Transcription

1 The Henry Fund Henry B. Tippie School of Management Siddhanta Chandra Verizon Communications Inc. (VZ) November 16, 2017 Telecom Services & Mass Media Stock Rating HOLD Investment Thesis Target Price $52-58 Verizon Communications is an American telecommunication giant and a recent entrant Henry Fund DCF $60.69 into the global mass media markets. With a market cap of almost $200B and over 144M Henry Fund DDM $52.24 subscribers, Verizon is the largest telecom company in the US. While its telecom Relative Multiple(EPS17) $ operations are exclusively present in the US, it has a global mass media presence via its Price Data acquisitions of AOL and Yahoo! - merged into a new entity called Oath. Verizon has a Current Price $48.40 strong dividend yield and recently announced its 11 th consecutive dividend increase. While it remains one of the brightest names in the defensive telecom industry, Verizon 52wk Range $ faces great obstacles in maintaining and creating future growth. With shrinking margins Consensus 1yr Target $50 and saturation of the telecom market, Verizon needs to find growth from non- Key Statistics traditional business. Oath is a start in that direction but it hasn t shown enough promise Market Cap (B) $197.4 to generate sizable confidence. Shares Outstanding (M) 4079 Drivers of Thesis Institutional Ownership 64.60% Stable Dividend Yield Five Year Beta 0.68 Verizon s dividend yield has been a big factor for investor interest in the company. Dividend Yield(TTM) 4.8% Even though historically the Verizon stock has underperformed the market in price Price/Earnings (TTM) returns, a 10Y total return matches the S&P500 returns over the period. In a Bull market with flyaway valuations, a correction seems imminent. A strong dividend Price/Sales (TTM) 1.60 yield from a company with strong cash flows could be a good defensive move to Price/Book (MRQ) 7.85 balance a portfolio out. Profitability Loyal Customer base. Best network quality. Aims to be first to 5G. Operating Margin 24.24% In recent years, Verizon has faced stiffer competition in the telecom space. While a Profit Margin 12.88% price war initiated by the competition saw Verizon s margins suffer, they have since Return on Assets (TTM) 6.55% rebounded. Verizon remains the most expensive of the major carriers but also commands unmatched loyalty on the back of its strong network performance. We foresee Verizon to continue being the biggest telecom service provider at healthy Return on Equity (TTM) 71.80% margins, going forward. Risks to Thesis 30 VZ AT&T TMUS Sprint High Debt Levels 25 Verizon has a debt to equity ratio of 4.66 which is almost 4 times its peers. It has been aggressive in funding assets with debt than dilute equity. While this may be a good approach to build shareholder value, it can backfire if growth doesn t catch up or interest rates go up Oath remains unfulfilled The AOL and Yahoo! Properties were bought when on a decline. It is still uncertain if these subsidiaries Earnings Estimates P/E EBIT Margin Year E 2018E 2019E Source: Factset, Fidelity, YCharts EPS D/E growth 7% 49% -22% -12% 3% 3% 20% 15% 10% 5% 0% -5% -10% -15% -20% Source: Yahoo Finance 12 Month Performance Company Description VZ S&P 500 O N D J F M A M J J A S Important disclosures appear on the last page of this report. Verizon Communications, Inc. is one of three current companies who trace their roots to Baby Bells formed after AT&T gave up control of the Bell Corp. It operates in the telecom industry with a fledgling subsidiary in mass media in Oath. Verizon reports in two major segments - Wireless and Wireline. The Wireless segment provides wireless communications services and products. The Wireline segment offers broadband video and data; corporate networking solutions; data center and cloud services; security and managed network services; and local & long-distance voice services. Through its subsidiary, Oath, Inc. the company engages more than a billion people globally. The company was founded in 2000 and is HQ d in NYC.

2 EXECUTIVE SUMMARY Better Matters While the DCF model gives Verizon significant upside, we believe it is currently a HOLD. A very low beta helps in the providing the high upside even though Verizon faces significant challenges in growing its business in the face of market saturation, increased competition, and margin pressures. While it has moved to diversify its operations away from telecom by acquiring AOL and Yahoo in the past couple of years, the new subsidiary created using these properties is still to show concrete growth potential. It doesn t help that the acquired properties where on the downturn when bought. A positive of that downturn is that Verizon bought both entities at a bargain, paying under $10B combined for both. In return for that $10B, Verizon gains a legitimate diversified business and the ability to reach a much wider audience than its telecom business. Even so, Verizon remains best in class for the Telecom sector and as such merits a look for investors looking to diversify their portfolio. The telecom sector is seen as a defensive sector with stable earnings and growth. During a downturn, telecom stocks typically fare better than market and during a weak economy, very rarely are wireless or internet plans deactivated by the general population. Though there might be increased margin pressures during such an environment as customers move to lower priced plans. While, we do not see significant growth potential in Verizon s core telecom business, we see it maintain its status as the best in the telecom sector with stable earnings and an attractive 4-5% dividend yield. We also predict that Verizon will be the first to 5G network rollout and will continue being the benchmark in network performance which would enable Verizon to sustain or improve its margins and ward off competition. The Oath subsidiary merits a wait and watch approach as its unclear what direction Verizon takes with it and how much traction it can gain in its efforts to diversify operations. At time when S&P 500 PE ratios are hitting 26, a PE multiple of 12 is highly attractive as a defensive option. Further burnishing this view is the solid dividend yield which has seen 11 consecutive increases and is in no immediate danger of being cut. Verizon recently announced that it can cut $10B in costs by 2022 with the savings going to fund the dividend, showing a long-term commitment to returning value to investors via dividends. We recommend that we HOLD Verizon for another cycle to give Oath a chance to demonstrate potential or the lack thereof. Price Return and Total Returns for VZ over a 10Y period Source: YCharts COMPANY DESCRIPTION Verizon Communications is a holding company operating in the telecommunications and mass media industries. It is primarily a telecommunications company providing wireless communications services and products across one of the most extensive wireless networks in the United States. Verizon Wireless is the largest wireless service provider in the United States as measured by retail connections and revenue. As of June 30, 2017, Verizon Wireless had million retail connections and FY2016 revenues of approximately $89.2 billion, representing approximately 71% of Verizon s aggregate revenues. Page 2

3 Verizon s Wireline segment provides voice, data and video communications products and enhanced services to consumers in the United States, as well as to carriers, businesses and government customers both in the United States and around the world. In 2016, Wireline revenues were $31.3 billion, representing approximately 25% of Verizon s aggregate revenues. Verizon recently acquired both AOL, in 2015, and Yahoo, n 2017, with the aim of diversifying its business by entering into the mass media market. The intended direction for the new properties stands unclear. The two major directions which Verizon can take are: Marketing using the considerable reach of the Yahoo plus AOL combine. OTT Services By creating content provided over its network infrastructure and become a content provider as well as the pipeline which delivers the content. Source: VZ 10K Wireless Wireline Segment Revenue Breakdown($Mn) $ $1, $1, $1, Verizon is the largest wireless telecommunication company in the US by subscriber count. It generates more than 70% of its revenues from this segment. Verizon s Revenue is broken down into two primary categories: wireless and wireline. Wireless is further broken down into service, equipment, and other. Wireline is broken down into mass markets, global enterprise, global wholesale, and other. Both other categories are not significant considering the sizes of the core businesses. Revenue Decomposition Source: VZ 10K Wireless Segment Revenue Breakdown($Mn) $1, $1, $1, Verizon currently operates the largest fourth-generation (4G) Long-Term Evolution (LTE) technology and thirdgeneration (3G) Evolution Data Optimized (EV-DO) networks of any U.S. wireless service provider. Verizon s 4G LTE network is available to over 98% of the U.S. population in more than 500 markets covering approximately 314 million people. Verizon is considered to have the best network performance amongst its peers a tag Verizon hard sells with its ad campaign of Better Matters. Better network performance is one the biggest reasons behind the company enjoying the lowest churn rates in the industry and unwavering loyalty from its users. Page 3

4 RootMetrics considered the most reliable data provider on network performance testing, considers Verizon as the best network in all measured categories. The overall and the data category results are show below. value added services or Over The Top services as price increases on wireless plans are not on the horizon till the launch of 5G services in 2018 end which is when carriers can look at any substantial price increases for service plans. Source: RootMetrics $1, $1, $1, $ $ $ $ $- ARPU New opportunities in wireless include fleet management and telematics where Verizon is trying to leverage its vast network to provide in-vehicle solutions that enable vehicle navigation, GPS tracking, engine diagnostic monitoring and maintenance alerts. Source: RootMetrics While wireless continues to be the core business of Verizon, it no longer offers the growth potential it did in the past. A slowdown in this segment is the main driver behind Verizon s decision to diversify its business. With market penetration in the US reaching saturation levels, new customers are hard to find and often come at higher costs of acquisition via deals and increased equipment subsidies which places downward pressure on margins. The number of customer additions is no longer the magic number it used to be. Verizon surprised analyst by adding 614K subscribers in 2Q17 which was much higher than expectations. But even this number is a portent for how difficult finding new growth in the segment will be. On a positive note, the network performance has insulated Verizon from a price war and Verizon s ARPU (Average Revenue per Account) has weathered the storm nicely. Verizon will look to further boost their ARPU by providing Wireline Wireline makes up about 25% of Verizon s revenues. Verizon demarcates this segment and its product offerings into three further sub-segments mass markets, global enterprise, and global wholesale. Mass market makes up almost half of the segment s revenues and includes wireline voice and internet services. Verizon is differentiating itself from other internet service providers by building a fiber optic network as opposed to the conventional coaxial cable network built by others. This potentially gives Verizon a technological advantage and can enable the company to offer higher speed internet which is more reliable than competition. The network infrastructure also means that Verizon is better equipped to offer high bandwidth services like Video On Demand to a larger gamut of consumers at a higher quality. Global Enterprise offers strategic services and other core communications services to medium and large business Page 4

5 customers, including multinational corporations, as well as state and federal government customers. Verizon offers an array of advanced information and communication technology services, including Global Internet Protocol (IP) network, cloud and IT solutions, and business communications, IoT, data, security and mobility services. Global Wholesale provides other carriers access to Verizon s network in order to enable them to provide their own services. This sub-segment forms 16% of the wireline segment by revenue. While revenues and subscriber counts have stayed relatively flat for the segment as a whole, Verizon s Fiber Optic internet service has been growing. Known as FIOS, the subscriber base for this service has grown by 600K in two years. Going forward, as more content and services are delivered via the internet and the demand for data increase, we see FIOS well positioned to take advantage and continue to grow. Verizon s advantage in building a higher cost fiber optic network will come into play in 2018 when at the launch of 5G, Verizon s data pipelines will be big enough to handle increased throughput even as other carriers scramble to update their infrastructure. Verizon has also made some important acquisitions in the space to build capacity which we will discuss later in the report. RECENT DEVELOPMENTS Fiscal 2017 Second Quarter Earnings Verizon earnings met analyst expectations and beat revenue projections for 2Q17. Earnings per share were up slightly at 96 cents compared with 94 cents in the year-ago quarter. Revenue rose modestly to $30.55 billion from $30.53 billion. Analysts expected profit per share of 96 cents and revenue of $29.91 billion. The net subscriber add was also up at 633,000 wireless customers, from 585,000 in 2Q16. Retail postpaid churn rates, or the percentage of subscribers who cancel their service, was 0.94%. The total was lower, therefore better, than analysts expectation for 1.08%. Verizon continues to enjoy the lowest churn rates in the industry. Closed Yahoo Acquisition On July 13, 2017 Verizon completed its acquisition of Yahoo. The sale was first proposed in July 2016 at a sale price of $4.83B but due to reports of data breaches at Yahoo, Verizon amended that price to finally close the sale at $4.48B - a $350M reduction from earlier. While Verizon acquired most of Yahoo s internet business, Yahoo s stakes in Alibaba and Yahoo Japan weren t part of the transaction. After selling to Verizon, the rest of Yahoo was rebranded as Altaba. We believe that the core decision to buy Yahoo was to gain the ability to become a scaled distributor in mass media. Yahoo s properties reach 1Bn people annually across the globe. Yahoo s acquisition provides Verizon with the ability to create content it can deliver on its network. It also bolsters Verizon s analytics and ad technology portfolio. Since Verizon has considerable user behavior data at its disposal, it can leverage Yahoo to compete with Google and Facebook in the ad technology market. Considering the small size of Yahoo compared to Verizon as a whole, we have accounted for the acquisition by increasing goodwill for 2017 by $5B based on above advantages offered. Since Yahoo s revenue was $5B before sale (less than 4% of Verizon s revenues), we have slightly adjusted growth forecast numbers for the combined company. Network Evolution Verizon is committed to continue building on its network infrastructure and capacity. In order to do so it has made a couple of strategic acquisitions in the recent past. In Feb 2017, Verizon completed its acquisition of XO Holdings which owned and operated one of the largest fiber-based IP and Ethernet networks in the US. This acquisition giver Verizon increased reach as well as capacity for its wireline business. Page 5

6 In May 2017, Verizon acquired Straight Path Communications a company which held millimeter wave spectrum configured for 5G wireless services. The deal was valued at $3.1B. Verizon had been subdued at earlier auctions of spectrum by FCC. But with this acquisition where is beat AT&T in a bidding war means that Verizon is now the largest holder of 5G spectrum. This not only gives Verizon a leg up but also substantially reduced other carriers ability to provide extensive 5G rollout. Verizon is already testing 5G network extensively across the US and aims to be the first to roll it out by the end of INDUSTRY TRENDS IoT and Smart Home Tech: Traffic Explosion Internet of Things(IoT) is the inter-networking of physical devices also referred to as ("connected devices" and "smart devices"), vehicles, buildings, and other items embedded with electronics, software, sensors, actuators, and network connectivity that enable these objects to collect and exchange data. Network Upgrades and 5G roadmaps As the world moves towards data from voice and text, carriers will need to continually upgrade their capacity by adding spectrum and/or towers. With the average user projected to use 22GB mobile data every month, carriers need a clear roadmap to rollout 5G networks will see progress in testing as companies find the best possible technology to use. A big risk in this industry is backing the wrong technology which does not end up as the standard, leading to losses and network complications in the future. Expected consolidation through M&A It will be difficult for telecom companies to embrace a new strategic identity by themselves; many of them don t have the capabilities required to create the product offerings and services needed for repositioning in the marketplace. For that reason, acquisitions are an attractive vehicle. One thing that may help push some deals across the finish line is the prospect of less regulation from government agencies. While the specific policies regarding this by the Trump administration are yet to be determined, early indications are that anything is fair game for reevaluation. MARKETS AND COMPETITION Source: IHS IoT has seen massive growth in recent years and is projected to grow to a massive 75 billion devices by 2025 i. These devices will stress the existing network infrastructure like never seen before. Wireless carriers will need to keep upgrading their capacity to service these devices with a clear roadmap for 5G rollout. Verizon faces stiff competition from AT&T, T-Mobile, and Sprint. Technological changes, like the shift to the LTE network standard, the introduction of new devices, such as the iphone, or the availability of spectrum at auction, can create opportunities for Verizon and AT&T to put their financial firepower to work and expand their advantages versus smaller carriers. Though Verizon has resisted following other carriers in cutting prices, it is not immune to a sustained price war, especially if other carriers build a compelling 5G network. Verizon is subject to broader industry risks, including shifting regulation and consumer habits. We expect the firm will be a net beneficiary on the regulatory front, but issues around service pricing and network usage come up from time to time. Also, the FCC is examining data roaming Page 6

7 rates, which could result in Verizon paying more for this service. Carriers, including Verizon, have slowly migrated pricing structures to reflect growing data usage, adding unlimited voice and text service while charging based on data consumption. This transition is far from complete, however. For example, Verizon s unlimited data plan triples the potential load on the network versus its base plan, but boosts the customer bill by only 30%. Customers may demand increased data usage at current prices or actively seek out alternatives, such as free Wi-Fi. Peer Comparisons A look at the revenue and profit numbers for the competing companies follows. Revenue and Profitability Subscribers (in 000s) Net Income (in $M) Net Margin Verizon 146,243 13, % T-Mobile 71,455 1, % AT&T 134,859 12, % Sprint 58,806-1, % US Cellular 5, % Source: Factset Source: Factset and Strategy Analytics Compared to other players in the industry, the PE ratio is very favorable at 12. PE Key Stats EBIT Margin ROA Verizon % 6.6% T-Mobile % 2.3% AT&T % 3.2% Sprint % -2.4% US Cellular % 0.7% Source: Factset ECONOMIC OUTLOOK Due to the telecom industry s strong position and penetration rates, it is slightly shielded by the economy as people typically don t cellphone connection even in a downturn. But in a heavily saturated market, growth will come from GDP growth and population growth rates. This is force companies to find new avenues for growth. This is why we see Verizon going after Yahoo and AOL or AT&T seeking Time Warner after DirecTV. US GDP Growth Rate We can see that Verizon has the best margins amongst its peers which is a testament to its ability to charge more for similar plans as well as its efficiency in delivering service to the consumer at a lower cost to the company. Verizon leads the pack in terms of Churn, capitalizing on its loyal user base. The ROE number shows a flipside to the high D/E ratio showing Verizon s propensity to avoid diluting equity to fund expansion. Key Stats Q ARPU (in $) Churn ROE Verizon % 70.4% T-Mobile % 7.7% AT&T % 14.2% Sprint % -10% US Cellular % 1.3% The big telecom companies can expect at most a 2%-3% growth in wireless. Page 7

8 Population Growth Rate Source: World Bank With a low.7% population growth rate, new growth/customer adds will be difficult to find. Carriers will have to fight for a bigger piece of the pie but the pie will not get any bigger any time soon. Interest Rates After almost a decade of flat rates, the Fed finally raised the rate to 0.50% in December The current rate stands at 1.25% after three 25bps hikes in January 2017, March 2017, and Jun With the Federal Reserve making it clear that it s looking to take the rate to % range, the cost of debt will increase for all companies, as businesses find themselves in an environment of reduced liquidity. With Verizon s significant debt load, interest payment can start becoming a drag, eventually impacting Verizon s capacity to invest in infrastructure building. CATALYSTS FOR GROWTH Considering the size and stability of the company and the industry s predictable nature, we do not foresee any immediate catalysts to growth. 5G rollout in can be a good opportunity for carriers to re-evaluate pricing but beyond that Verizon s growth needs to lie away from telecom. INVESTMENT POSITIVES Market Leader in service quality and subscriber base. Verizon is consistently rated as the best telecom service provider in the industry in terms of network performance. This will hold Verizon in good stead as competition intensifies in the industry. Verizon s capacity advantages also mean it is better equipped to handle increased demand from users. Attractive Dividend Yield of 5% means that Verizon offers a sheltered cove in case things get stormy. This can be an attraction as it rewards investors even while the company pivots to find new growth. 5G rollout leader position means Verizon is ahead of other competing carriers when it comes to trialing the next gen networks and in term of spectrum holdings. By all accounts, Verizon will be the first to rollout 5G to users, providing first mover advantages. The IoT segment can be a growth driver but that is still some ways into the future. INVESTMENT NEGATIVES Inability to find new growth can mean that the dividend yield is less attractive if the price returns continue to underperform the market. The telecom industry in general is stagnant which means that Verizon needs to pivot to newer industries to fuel new growth. While it has made efforts in the recent past to do that, the results are far from concrete. High Debt Load. In case the fed hikes the rate further, we may see a considerable drag on Verizon s cash flow from its interest payments. It may prompt Verizon to pay down debt which will limit its ability to fund expansion. At a time where the company needs to find new avenues to grow, a financing constraint will limit options. Valuation We valued VZ stock in the $52-58 range using DCF. Verizon s valuation is helped by its relatively low beta which gives it some upside but unless Verizon s pivot in Oath come good and it can increase its margins and ARPU in its core business, the stock will see pressure especially considering the debt on its Balance Sheet and the expected spend in 2020 onwards on 5G rollouts. Page 8

9 Revenue Growth Rate The wireless telecom industry has shrunk by 0.54% over the last 5 years and Verizon hasn t been immune to the trend even though it has done better than its peers. We do not expect large scale changes in revenue growth at least till we see any signs of potential from Oath. We forecast about a 1% growth rate for the company for the next 5 years. Verizon Revenue Growth % % % % % 2017E -2.30% 2018E -0.6% 2019E 1.7% 2020E 1.72% 2021E 1.1% Cost of Goods Sold We forecast a slight decline in COGS as a percentage of revenue for the next 3 years as Verizon s current gen network is reaching maturity and would not require the levels of spending it did in the recent past. Verizon will still need to spend substantially to maintain and expand its foot print but overall the spending will decline as %age of revenues. This will change in 2020 and beyond Verizon will need to build up the 5G infrastructure and will see an increase in spending in the build-out of that network. Current COGS/Rev is at 32.5% and we estimate 2017 COGS/Rev to be 31.5% Continuing Growth Assumptions Using the McKinsey approach to valuation, net operating profit less adjusted taxes (NOPLAT) feeds into the discounted cash flow model that is used to derive the target price. After the forecast period, we estimate a continuing NOPLAT growth amount. We estimate NOPLAT growth at 1% due to the highly-penetrated market. The 1% rate is estimated taking into consideration the US GDP Growth Rate and the Population Growth Rate. KEYS TO MONITOR Regulation: Telecom is a highly-regulated industry. Any adverse FCC rulings might impact T-Mobile and the industry as a whole. REFERENCES 1. VZ 10-K 2. CNBC Verizon 5. Oath 6. VZ investor factbook Q RootMetrics Comscore Rankings/comScore-Reports-December-2015-US- Smartphone-Subscriber-Market-Share? 10. Investors -aims-to-slash-10-billion-in-costs-to-fund-dividend/ 11. IHS 12. Factset 13. YCharts 14. Morningstar 15. Fidelity eresearch 16. S&P Capital IQ 17. Sprint Verizon Statista Page 9

10 IMPORTANT DISCLAIMER Henry Fund reports are created by students enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report. i IHS Page 10

11 Revenue Decomposition Fiscal Years Ending Dec E 2018E 2019E 2020E 2021E 2024E 2024E Wireless Service 63, ,033 72,630 70,396 66,362 65,035 64,384 65,672 66,986 67,655 Equipment 12, ,111 10,959 16,924 17,511 17,861 18,218 18,765 19,140 19,523 Other 3,879 4,057 4,360 5,313 6,110 6,843 7,391 7,760 7,915 Total 75, ,023 87,646 91,680 89,186 89,006 89,446 91,828 93,886 95,094 Wireline Mass Markets 16, ,383 18,047 18,473 14,402 12,386 11,147 10,701 10,594 10,594 Global Enterprise 15, ,156 13,649 12,943 11,620 10,923 10,814 10,814 10,868 10,922 Global Wholesale 7, ,560 6,190 5,979 4,052 3,809 3,771 3,771 3,780 3,790 Other ,271 1,398 1,510 1,540 1,548 1,556 Total 39, ,624 38,429 37,720 31,345 28,516 27,241 26,826 26,790 26,861 Cost of Services 46, ,534 28,306 29,438 29,186 28,037 29,070 30,303 31,921 31,856 Wireline cost of goods 16,353 28,534 23,119 22,238 17,965 17,162 17,168 17,146 17,460 COGS 46, ,887 56,840 52,557 51,424 46,002 46,232 47,472 49,067 49,316 Corporate, Other, and Eliminations ,004 2,220 5,449 5,558 5,669 5,783 5,898 6,016 Consolidated Revenues 115, , , , , , , , , ,971 As % Of Total Rev Wireless Service 55.02% 57.27% 57.15% 53.48% 52.68% 52.84% 52.62% 52.78% 52.92% 52.87% Equipment 10.48% 6.73% 8.62% 12.86% 13.90% 14.51% 14.89% 15.08% 15.12% 15.26% Other 0.00% 3.22% 3.19% 3.31% 4.22% 4.96% 5.59% 5.94% 6.13% 6.19% Total 65.49% 67.21% 68.97% 69.66% 70.79% 72.32% 73.10% 73.80% 74.17% 74.31% Cost of Services % of Segment 35.22% 32.30% 32.11% 32.72% 31.50% 32.50% 33.00% 34.00% 33.50% Wireline Mass Markets 14.42% 14.42% 14.20% 14.04% 11.43% 10.06% 9.11% 8.60% 8.37% 8.28% Global Enterprise 13.21% 11.74% 10.74% 9.83% 9.22% 8.87% 8.84% 8.69% 8.59% 8.53% Global Wholesale 6.25% 5.44% 4.87% 4.54% 3.22% 3.09% 3.08% 3.03% 2.99% 2.96% Other 0.47% 0.44% 0.43% 0.25% 1.01% 1.14% 1.23% 1.24% 1.22% 1.22% Total 34.34% 32.04% 30.24% 28.66% 24.88% 23.17% 22.26% 21.56% 21.17% 20.99% Wireline Cost of goods % of Segment 42.34% 74.25% 61.29% 70.95% 63.00% 63.00% 64.00% 64.00% 65.00% COGS (COGS/Total Rev) 39.95% 37.24% 44.73% 39.93% 40.82% 37.38% 37.78% 38.15% 38.77% 38.54% Corporate, Other, and Eliminations 0.17% 0.75% 0.79% 1.69% 4.33% 4.52% 4.63% 4.65% 4.66% 4.70% Consolidated Revenues % % % % % % % % % % YoY Growth Wireless Service 7.74% 8.32% 5.21% (3.08%) (5.73%) (2.00%) (1.00%) 2.00% 2.00% 1.00% Equipment 10.35% (33.16%) 35.11% 54.43% 3.47% 2.00% 2.00% 3.00% 2.00% 2.00% Other 4.59% 7.47% 21.86% 15.00% 12.00% 8.00% 5.00% 2.00% Total 8.14% 6.79% 8.17% 4.60% (2.72%) (0.20%) 0.49% 2.66% 2.24% 1.29% Cost of Services % of Segment Wireline Mass Markets 2.23% 4.08% 3.82% 2.36% (22.04%) (14.00%) (10.00%) (4.00%) (1.00%) 0.00% Global Enterprise (2.07%) (7.47%) (3.58%) (5.17%) (10.22%) (6.00%) (1.00%) 0.00% 0.50% 0.50% Global Wholesale (9.19%) (9.39%) (5.64%) (3.41%) (32.23%) (6.00%) (1.00%) 0.00% 0.25% 0.25% Other (28.13%) (2.60%) 3.43% (40.15%) % 10.00% 8.00% 2.00% 0.50% 0.50% Total (2.22%) (2.91%) (0.50%) (1.84%) (16.90%) (9.03%) (4.47%) (1.53%) (0.13%) 0.27% Wireless Cost of Equipment % of Segment COGS (COGS/Total Rev) 0.87% (3.00%) 26.63% (7.54%) (2.16%) (10.54%) 0.50% 2.68% 3.36% 0.51% Consolidated Revenues 4.48% 4.06% 5.42% 3.57% (4.29%) (2.30%) (0.59%) 1.70% 1.72% 1.10%

12 Income Statement Fiscal Years Ending Dec E 2018E 2019E 2020E Income Statement Sales 115, , , , , , , , , COGS excluding D&A 46, , , , , , , , , Depreciation 14, , , , , , , , , Amortization of Intangibles 1, , , , , , , , , Gross Income 53, , , , , , , , , SG&A Expense 32, , , , , , , , , EBIT (Operating Income) 21, , , , , , , , , Nonoperating Income - Net , , Interest Expense 2, , , , , , , , , Unusual Expense - Net 8, , , , , , , , , Pretax Income 9, , , , , , , , , Income Taxes , , , , , , , , Consolidated Net Income 10, , , , , , , , , Minority Interest 9, , , Net Income , , , , , , , , Net Income available to Common , , , , , , , , EPS Diluted Shares Outstanding 2, , , , , , , , , Dividends per Share Payout Ratio 81.40% 84.19% 81.08% 56.00% 64.90% 76.77% 79.50% 80.10% 84.52% Div Growth 2.78% 2.96% 3.35% 3.24% 2.47% 1.53% 1.72% 1.69% 2.08%

13 Balance Sheet Fiscal Years Ending Dec E 2018E 2019E 2020E Assets Cash & Short-Term Investments 3, , , , , , , , , Short-Term Receivables 12, , , , , , , , , Inventories 1, , , , , , , , , Other Current Assets 3, , , , , , , , , Total Current Assets 21, , , , , , , , , Net Property, Plant & Equipment 88, , , , , , , , , Total Investments and Advances 4, , , , , , , , , Long-Term Note Receivable 1, , , , , , , , , Net Goodwill 24, , , , , , , , , Net Other Intangibles 83, , , , , , , , , Other Assets 1, , , , , , , , , Total Assets 225, , , , , , , , , Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 4, , , , , , , , , Accounts Payable 4, , , , , , , , , Other Current Liabilities 17, , , , , , , , , Total Current Liabilities 26, , , , , , , , , Long-Term Debt 47, , , , , , , , , Employee Benefit Obligations 34, , , , , , , , , Deferred Tax Liabilities 24, , , , , , , , , Other Liabilities 6, , , , , , , , , Total Liabilities 139, , , , , , , , , Common Equity 38, , , , , , , , , Retained Earnings (3,734.00) 1, , , , , , , , ESOP Debt Guarantee Cumulative Translation Adjustment/Unrealized For. Exch. Gain (346.00) (554.00) (713.00) (713.00) (713.00) (713.00) (713.00) Unrealized Gain/Loss Marketable Securities Other Appropriated Reserves 1, , , , , , , , , Treasury Stock (4,071.00) (3,961.00) (3,263.00) (7,416.00) (7,263.00) (7,263.00) (7,263.00) (8,263.00) (9,263.00) Total Shareholders' Equity 33, , , , , , , , , Accumulated Minority Interest 52, , , , , , , , , Total Equity 85, , , , , , , , , Total Liabilities & Shareholders' Equity 225, , , , , , , , ,442.63

14 Historical Cash Flow Statement Fiscal Years Ending Dec Net Income / Starting Line Depreciation, Depletion & Amortization Deferred Taxes & Investment Tax Credit Other Funds Extraordinaries Receivables Inventories Accounts Payable Other Assets/Liabilities Net Operating Cash Flow Investing Activities Capital Expenditures Net Assets from Acquisitions Purchase/Sale of Investments Other Funds Net Investing Cash Flow Financing Activities Cash Dividends Paid Change in Capital Stock Change in Current Debt Change in Long-Term Debt Other Funds Net Financing Cash Flow Miscellaneous Funds Net Change in Cash

15 Historical Cash Flow Statement Fiscal Years Ending Dec E 2018E 2019E 2020E Operating Activities Net Income / Starting Line 12, , , , Depreciation, Depletion & Amortization 16, , , , Deferred Taxes & Investment Tax Credit , Other Funds Receivables 6, Inventories Accounts Payable Other Assets/Liabilities -8, , Net Operating Cash Flow 26, , , , Investing Activities Capital Expenditures -9, , , , Acquisitions -2, Purchase/Sale Investments Other Sources Net Investing Cash Flow -11, , , , Financing Activities Cash Dividends Paid -8, , , , Change in Capital Stock , , Issuance/Reduction of Debt, Net 2, , Net Financing Cash Flow -5, , , , Net Change in Cash 8, , , Cash Beg. Year 2, , , , Change in BS Cash 8, , , Cash End. Year 11, , , ,473.21

16 Common Size Income Statement Fiscal Years Ending Dec E 2018E 2019E 2020E Income Statement Sales % % % % % % % % % COGS excluding D&A 39.91% 37.24% 39.29% 39.93% 40.82% 37.38% 37.78% 38.15% 38.77% Depreciation 12.88% 12.46% 11.78% 10.88% 11.29% 11.71% 11.46% 11.37% 11.53% Amortization of Intangibles 1.33% 1.32% 1.23% 1.29% 1.35% 1.62% 1.58% 1.57% 1.59% Gross Income 45.88% 48.99% 47.70% 47.90% 46.54% 49.30% 49.17% 48.91% 48.11% SG&A Expense 27.75% 27.87% 32.83% 24.69% 25.97% 28.00% 28.00% 28.00% 28.00% EBIT (Operating Income) 18.13% 21.12% 14.87% 23.21% 20.57% 21.30% 21.17% 20.91% 20.11% Nonoperating Income - Net 0.35% 0.21% 2.12% 0.27% 0.99% 0.27% 0.27% 0.27% 0.27% Interest Expense 2.22% 2.21% 3.87% 3.74% 3.47% 4.10% 4.15% 4.09% 4.11% Unusual Expense - Net 7.72% -5.17% 1.10% -1.71% 1.43% 1.46% 1.47% 1.45% 1.42% Pretax Income 8.54% 24.29% 12.02% 21.46% 16.66% 16.00% 15.82% 15.65% 14.85% Income Taxes -0.57% 4.75% 2.61% 7.50% 5.86% 5.59% 5.53% 5.47% 5.19% Consolidated Net Income 9.11% 19.53% 9.41% 13.96% 10.80% 10.41% 10.29% 10.18% 9.66% Minority Interest 8.36% 10.00% 1.83% 0.38% 0.38% 0.38% 0.38% 0.38% 0.38% Net Income 0.76% 9.54% 7.57% 13.58% 10.42% 10.03% 9.91% 9.80% 9.28% Net Income available to Common 0.76% 9.54% 7.57% 13.58% 10.42% 10.03% 9.91% 9.80% 9.28%

17 Balance Sheet Fiscal Years Ending Dec E 2018E 2019E 2020E Assets Cash & Short-Term Investments 3.08% 44.90% 8.78% 3.66% 2.29% 9.59% 10.68% 9.29% 9.06% Short-Term Receivables 10.87% 10.32% 11.01% 10.23% 14.85% 10.00% 10.00% 10.00% 10.00% Inventories 0.93% 0.85% 0.91% 0.95% 0.95% 0.95% 0.95% 0.95% 0.95% Other Current Assets 3.45% 2.82% 2.61% 2.09% 2.86% 2.09% 2.09% 2.09% 2.09% Total Current Assets 18.33% 58.89% 23.31% 16.93% 20.95% 22.63% 23.72% 22.33% 22.10% Net Property, Plant & Equipment 76.52% 73.79% 70.78% 63.47% 67.27% 67.00% 68.00% 69.00% 70.00% Total Investments and Advances 3.75% 3.57% 1.53% 1.31% 1.44% 1.47% 1.54% 1.53% 1.52% Long-Term Note Receivable 1.26% 0.98% 1.80% 3.23% 3.86% 3.26% 2.58% 1.86% 1.15% Net Goodwill 20.84% 20.43% 19.39% 19.25% 21.59% 26.54% 26.70% 26.25% 25.81% Net Other Intangibles 72.23% 67.65% 63.79% 72.11% 75.86% 75.38% 76.42% 77.43% 78.41% Other Assets 1.49% 2.06% 2.52% 9.58% 2.85% 10.75% 10.75% 10.73% 10.71% Total Assets % % % % % % % % % Liabilities & Shareholders' Equity ST Debt & Curr. Portion LT Debt 3.77% 3.26% 2.15% 4.93% 2.10% 3.09% 5.12% 3.46% 5.77% Accounts Payable 4.09% 4.11% 4.41% 4.86% 5.62% 4.86% 4.86% 4.86% 4.86% Other Current Liabilities 15.41% 15.07% 15.53% 16.85% 15.16% 16.85% 16.85% 16.85% 16.85% Total Current Liabilities 23.27% 22.44% 22.08% 26.63% 24.08% 24.79% 26.83% 25.16% 27.47% Long-Term Debt 41.10% 74.37% 86.98% 78.79% 83.69% 87.00% 86.13% 86.47% 84.50% Employee Benefit Obligations 29.65% 22.96% 26.19% 22.76% 20.77% 20.00% 20.00% 20.00% 20.00% Deferred Tax Liabilities 21.30% 23.76% 32.72% 34.56% 36.49% 37.51% 37.82% 37.97% 38.12% Other Liabilities 5.26% 4.69% 4.39% 9.57% 9.72% 7.00% 6.00% 6.00% 6.00% Total Liabilities % % % % % % % % % Common Equity 33.05% 31.72% 9.11% 8.83% 17.88% 18.30% 18.41% 18.10% 17.80% Retained Earnings -3.22% 1.48% 1.93% 8.54% 11.95% 14.57% 16.68% 18.36% 19.48% ESOP Debt Guarantee 0.38% 0.35% 0.33% 0.33% 0.36% 0.36% 0.37% 0.36% 0.35% Cumulative Translation Adjustment/Unrealized For. Exch. Gain 0.68% 0.71% -0.27% -0.42% -0.57% -0.58% -0.58% -0.57% -0.56% Unrealized Gain/Loss Marketable Securities 0.09% 0.10% 0.09% 0.08% 0.04% 0.04% 0.04% 0.04% 0.04% Other Appropriated Reserves 1.16% 1.15% 1.06% 0.76% 2.65% 2.71% 2.73% 2.68% 2.64% Treasury Stock -3.51% -3.29% -2.57% -5.63% -5.77% -5.90% -5.94% -6.64% -7.32% Total Shareholders' Equity 28.62% 32.22% 9.68% 12.48% 17.88% 29.50% 31.71% 32.32% 32.43% Accumulated Minority Interest 45.21% 46.93% 1.08% 1.07% 1.20% 1.23% 1.23% 1.21% 1.19% Total Equity 73.83% 79.15% 10.76% 13.56% 19.08% 30.73% 32.94% 33.54% 33.62% Total Liabilities & Shareholders' Equity % % % % % % % % %

18 Value Driver Estimation Fiscal Years Ending Dec E 2018E 2019E 2020E 2021E Sales 115, , , , , , , , , , COGS excluding D&A 46, , , , , , , , , , Depreciation 14, , , , , , , , , , Amortization of Intangibles 1, , , , , , , , , , SG&A 32, , , , , , , , , , PV of Interest on Op Leases EBITA 21, , , , , , , , , , % 20.85% % 60.65% % 1.20% -1.19% 0.53% -1.98% 4.85% Pre Tax Income 9, , , , , , , , , , Total Income Tax Provision (inc. tax) (660.00) 5, , , , , , , , , Tax Rate = Pre Tax/Total Inc. Provision % 19.57% 21.70% 34.93% 35.16% 34.93% 34.93% 34.93% 34.93% 34.93% Plus Tax Shield on Interest Expense (171.45) , , , , , , , , Plus Tax on Lease Interest (29.14) Plus Tax Shield on Amortized Goodwill (596.58) (1,219.71) (788.08) Minus Tax on Non-Operating Income (Plus in this formula) (Nonop Int. Income+Other Inc) (27.21) Less Adjusted Taxes (1,429.96) 5, , , , , , , , , Plus Change in Deferred Taxes (383.00) 3, , , , Equals NOPLAT 22, , , , , , , , , , NOPLAT Growth % 7.08% 10.29% 13.49% % % -0.04% -1.76% 5.57% -1.71% 3.32% Normal Cash (2% * Sales) 2, , , , , , , , , , Short-Term Receivables 12, , , , , , , , , , Inventory 1, , , , , , , , , , Other Current Assets 3, , , , , , , , , , Operating Current Assets 19, , , , , , , , , , Accounts Payable 4, , , , , , , , , , Non Interest-Bearing Current Liabilities 4, , , , , , , , , , Net Operating Working Capital 15, , , , , , , , , , Plus Net PPE 88, , , , , , , , , , PV of Operating Leases 10, , , , , , , , , , Net Other Intangibles 83, , , , , , , , , , Other Assets 1, , , , , , , , , , Plus Net Other Operating Assets 95, , , , , , , , , , Less other Liab. (BS line items) 17, , , , , , , , , , Invested Capital 181, , , , , , , , , , WACC 4.56% 3.46% 3.34% 5.14% 5.14% 5.14% 5.14% 5.14% 5.14% 5.14% NOPLAT 22, , , , , , , , , , Beg Invested Capital 173, , , , , , , , , , End Invested Capital 181, , , , , , , , , , ROIC (NOPLAT/Beg IC) 13% 13.65% 15.53% 13.10% 8.97% 8.90% 8.91% 9.32% 8.87% 8.87% FCF (NOPLAT - Change in IC) 13, , , , , , , , , , EP (Beg IC * (ROIC-WACC)) 14, , , , , , , , , ,832.17

19 Weighted Average Cost of Capital (WACC) Estimation 2016 Risk Free Rate (30yr T-Bond as of 9/9/16) 3.01% Market Risk Premium (Henry Fund Team Choice) 4.80% Beta (Bloomberg) Cost of Equity (Risk Free + (Beta * Mkt Risk) 6.85% Cost of Debt (From Bond Maturity: 08/21/2046) 4.43% Cost of Preferred Shares 0 Marginal Tax Rate (Effective) 34.93% Total Shares Outstanding 4, Price $49.14 Mkt Value of Equity ( E ) $ 200, FMV of Debt $ 110, Operating Leases (PV) $ 15, Underfunded Pension Liabilities $ 26, Mkt Value of Debt ( D ) $ 151,478 Mkt Value of Preferred (Pfd) $ - Mkt Value of Firm (E+D+PfD) (V) $ 352, Equity Portion of WACC (Cost of Equity * E/V) 3.90% Debt Portion of WACC (cost of Debt* (1-t) * D/V) 1.24% Preferred Portion of WACC (Cost of Preferred * Pfd/V) $ - WACC 5.14%