U.S. Research Published by Raymond James & Associates

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1 Verizon Communications (VZ-NYSE) Frank G. Louthan IV, (404) , Alexander Sklar, CPA, Sr. Res. Assoc., (404) , Telecommunications Services: Wireline Q1 In Line; Slight EPS Reduction; Maintain Outperform Published by Raymond James & Associates April 21, 2016 Company Comment Rating Outperform 2 Current and Target Price Current Price (Apr close) $50.03 Target Price: $ Week Range $ $38.06 Suitability Medium Risk/Income Recommendation: We maintain our Outperform rating on Verizon after 1Q results as we believe it is well-positioned for sustainable free cash flow growth driven by its wireless and data segments. We continue to believe Verizon s increasing media exposure has the potential to set the company up for better growth over the next three to five years. Event: Verizon reported in-line 1Q results with revenue and EBITDA of $32.17 billion and $11.98 billion versus our $32.53 billion and $11.93 billion estimates, respectively. Wireless service revenues of $16.81 billion were light despite modestly lower installment plan take rates in 1Q. Wireless margins were up 140bp y/y and above our estimate of flat y/y margins, which we now expect to persist in a lower volume 2Q and potentially 3Q. Wireless results showed continued pressure and will require more attention as management digests the cost absorption post the sale to Frontier. Strategic services and content investments are weighing on operations as these platforms start to show improvements and growth, likely to be disclosed later this year. We believe attrition based reductions will help labor costs and move margins higher as well. Meet The New Tech; The Same As the Old Tech. We continue to believe Verizon has sufficient cash for an acquisition like Yahoo in addition to its participation in the Broadcast Incentive Auction. The real challenge will be for Verizon to convince investors that they are able to monetize the digital content investments they are making. AOL showed improved growth and we believe the Hearst transaction is positive, as Hearst has strength in identifying quality content and information based services with the potential for long term growth. We believe a possible Yahoo purchase would be a very different venture compared to the Hearst collaboration, and while it may have synergies with AOL, it is likely to be a hurdle for some investors to get over. Estimates: We are reducing our 16/ 17 EPS estimates by $0.01 each to $3.96/$409. Our wireless revenue estimates fall to account for the lower volumes and EIP plan service revenue pressures. However we maintain almost flat EBITDA and EPS estimates on margin pickups vs. prior estimates. We believe it is too early to assess the risks to estimates from the current labor dispute, and put less emphasis on this assertion. Valuation: VZ currently trades at 13x our 2016E FCF per share estimate of $3.80 with a 4.5% dividend yield, a discount relative to the large-cap cable and telecom space at ~15x. Our $55 price target is based on 14.5x our 2016E FCF per share, in line with the large-cap telecom and cable peer group. We believe the 3% pullback on the earnings release was based on fears of potential earnings revisions (that we believe will not materialize) rather than concerns about potential fundamental shifts in the business; we thus maintaining our rating and price target. Non-GAAP Q1 Q2 Q3 Q4 Full GAAP EPS Revenues EPS Mar Jun Sep Dec Year Full Year (mil.) 2015A $1.02 $1.04 $1.04 $0.89 $3.99 $4.37 $131,620 Old 2016E ,615 New 2016E 1.06A ,202 Old 2017E UR UR UR UR ,443 New 2017E UR UR UR UR ,561 Rows may not add due to rounding. Non-GAAP EPS excludes non-recurring items. UR: Under Review. Please read domestic and foreign disclosure/risk information beginning on page 3 and Analyst Certification on page 3. Market Data Shares Out. (mil.) 4,085.0 Market Cap. (mil.) $204,373 Avg. Daily Vol. (10 day) 15,450,800 Dividend/Yield $2.26/4.5% Book Value (Mar-16) $4.52 ROE % 38% LT Debt (mil.)/% Cap. $109,880/45% Earnings & Valuation Metrics 2015A 2016E 2017E P/E Ratios (Non-GAAP) 12.5x 12.6x 12.2x EBITDA (mil.) Old $46,567 $45,767 $46,552 New $46,567 $45,389 $46,134 FCF/Share Old $4.88 $3.93 $4.18 New $4.88 $3.80 $4.14 P/FCF per Share Ratios 10.3x 13.2x 12.1x Company Description Verizon Communications, headquartered in New York, New York, is one of the largest telecommunications providers in the United States. The company provides local exchange, long distance, Internet, video, and other related services to residential, business, wholesale, and government customers. In addition, the company provides wireless voice and data services to over 100 million customers in the U.S. through Verizon Wireless, which represented more than 69% of revenue in International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

2 Verizon Communications Inc. (NYSE - VZ) (in billions except per share) Q1:14A Q2:14A Q3:14A Q4:14A 2014A Q1:15A Q2:15A Q3:15A Q4:15A 2015A Q1:16A Q2:16E Q3:16E Q4:16E 2016E 2017E Revenue VZ Wireline Mass Markets Y/Y Growth 5.3% 4.5% 3.6% 3.3% 4.1% 2.9% 3.2% 1.8% 1.5% 2.4% 0.0% -31.7% -31.0% -31.4% -23.6% -8.0% Global Enterprise Y/Y Growth -3.9% -1.6% -7.7% -7.5% -5.2% -9.5% -9.9% -5.2% -3.7% -7.2% -3.1% -3.2% -3.8% -3.7% -3.4% -3.4% Global Wholesale Service Y/Y Growth -7.9% -6.9% -7.0% -7.5% -7.3% -4.2% -5.0% -5.5% -0.7% -3.9% -4.0% -4.7% -4.8% -6.1% -4.9% -4.5% Other Y/Y Growth 17.3% 3.3% 5.9% -24.8% -0.4% -30.2% -38.4% -32.8% -23.7% -31.7% -15.6% -9.1% -16.7% -5.4% -12.0% -16.1% Total Wireline Y/Y Growth -0.4% 0.3% -2.4% -2.9% -1.4% -3.3% -3.4% -2.3% -0.9% -2.5% -1.9% -17.5% -17.4% -17.7% -13.6% -5.7% VZ Wireless Service Revenues Y/Y Growth 7.5% 5.9% 4.8% 2.8% 5.2% -0.4% -2.2% -4.1% -5.6% -3.1% -6.2% -5.9% -5.7% -3.1% -5.2% 1.2% Equipment and Other Y/Y Growth 3.5% 17.5% 20.7% 53.5% 25.2% 52.6% 44.6% 55.4% 24.8% 41.7% 17.7% 10.7% 13.4% 12.9% 13.5% 5.0% Total Y/Y Growth 6.9% 7.5% 7.0% 11.0% 8.2% 6.9% 5.3% 5.4% 1.2% 4.6% -1.5% -2.3% -1.2% 1.3% -0.9% 2.2% Other Y/Y Growth NMF NMF NMF NMF NMF NMF NMF NMF NMF NMF NMF NMF NMF NMF NMF NMF Total revenue $30.82 $31.48 $31.59 $ $31.98 $32.22 $33.16 $ $32.17 $30.76 $31.34 $ Y/Y Growth 4.8% 5.7% 4.3% 6.8% 5.4% 3.8% 2.4% 5.0% 3.2% 3.6% 0.6% -4.6% -5.5% -3.9% -3.4% 0.3% Operating expenses Operations and support Wireline Wireless Other 0.41 (0.25) (1.34) Wireline EBITDA EBITDA margin 22.3% 23.2% 23.0% 23.9% 23.1% 22.7% 23.5% 23.5% 24.2% 23.5% 23.4% 18.5% 18.8% 18.9% 19.9% 19.2% Wireless EBITDA EBITDA Margin 44.9% 42.3% 41.6% 32.6% 40.4% 44.8% 43.9% 43.2% 38.4% 42.5% 46.2% 45.9% 45.2% 39.2% 44.1% 44.5% VZ Calculated EBITDA margin 52.1% 50.3% 49.5% 42.0% 48.5% 55.8% 56.1% 56.4% 52.9% 55.3% 60.5% 60.9% 61.9% 56.6% 60.0% 61.1% Corporate EBITDA (0.26) (0.22) (0.24) (0.16) (0.88) (0.20) (0.33) (0.24) (0.47) (1.24) (0.37) (0.33) (0.26) (0.20) (1.16) (1.04) Total EBITDA EBITDA margin 36.7% 35.4% 35.0% 29.4% 34.1% 37.4% 36.6% 35.8% 31.9% 35.4% 37.2% 36.6% 36.6% 32.5% 35.7% 36.2% Y/Y Growth 9.3% 6.4% 0.5% -4.7% 2.9% 5.8% 5.9% 7.5% 11.8% 7.6% 0.3% -4.7% -3.6% -2.2% -2.5% 1.6% non-recurring (0.71) (2.85) (2.51) 0.02 Depreciation and Amortization Total Operating Expenses Operating Income (loss) (2.14) Y/Y Growth 15.1% 17.2% -3.2% % -38.7% 11.2% 1.8% 9.2% % 68.6% -0.2% -4.6% 1.6% -29.5% -9.5% 2.9% Other income (expense) Equity in income from unconsolidated 1.90 (0.04) (0.05) (0.03) 1.78 (0.03) (0.02) (0.02) (0.02) (0.09) (0.02) (0.02) (0.02) (0.02) (0.07) (0.06) Other income (expense) - net (0.89) (0.44) (1.19) Interest expense (1.21) (1.16) (1.26) (1.28) (4.92) (1.33) (1.21) (1.20) (1.18) (4.92) (1.19) (1.05) (1.02) (1.02) (4.28) (4.09) Total other income (expense) (0.21) (1.14) (1.23) (1.75) (4.33) (1.29) (1.19) (1.17) (1.17) (4.82) (1.18) (1.03) (1.00) (1.01) (4.21) (4.04) Income before taxes (3.89) Y/Y Growth 21.6% 5.8% -14.2% % -47.8% -4.1% 1.3% 12.3% % 84.8% 1.5% -3.0% 4.6% -31.7% -8.9% 4.0% Income taxes (1.74) Tax Rate 13.9% 33.9% 32.9% 44.7% 21.7% 35.0% 34.3% 34.5% 35.7% 34.9% 34.5% 35.3% 35.0% 36.0% 35.2% 35.4% Minority interest (2.04) (0.11) (0.10) (0.08) (2.33) (0.12) (0.12) (0.13) (0.12) (0.50) (0.12) (0.12) (0.12) (0.12) (0.48) (0.48) Net income recurring (2.23) Special Items Net income (loss) reported $3.95 $4.21 $3.71 ($2.23) $9.64 $4.22 $4.23 $4.04 $5.39 $17.88 $4.31 $4.04 $4.21 $3.63 $16.19 $16.81 Y/Y Growth 102.2% 87.6% 66.1% % -16.2% 6.9% 0.4% 8.9% % 85.5% 2.2% -4.5% 4.2% -32.6% -9.4% 3.8% Recurring EPS $0.91 $0.91 $0.89 $0.71 $3.43 $1.02 $1.04 $1.04 $0.89 $3.99 $1.06 $0.99 $1.03 $0.89 $3.96 $4.09 Y/Y Growth 33.9% 25.0% 16.0% 7.7% 20.6% 12.5% 13.2% 16.7% 24.1% 16.2% 3.1% -4.6% -1.2% 0.1% -0.7% 3.4% EPS from non-recurring $ 0.24 $ 0.10 $ - $ (1.25) $ (0.91) $ - $ - $ (0.05) $ 0.44 $ 0.39 $ - $ - $ - $ - $ - $ - Reported EPS $1.15 $1.01 $0.89 ($0.54) $2.52 $1.02 $1.04 $0.99 $1.32 $4.37 $1.06 $0.99 $1.03 $0.89 $3.96 $4.09 Y/Y Growth 69.2% 29.7% 14.5% % -37.1% -11.0% 2.1% 11.1% % 73.4% 3.1% -4.6% 3.8% -32.9% -9.4% 3.4% Diluted shares Dividend $0.53 $0.53 $0.53 $0.55 $2.14 $0.55 $0.55 $0.57 $0.57 $2.23 $0.57 $0.57 $0.58 $0.58 $2.28 $2.32 Free Cash Flow Analysis + VZ EBITDA Cash operating taxes (0.30) Total capital expenditures Increase (Decrease) in NWC 1.63 (0.78) (0.03) (1.30) (1.03) (1.00) (2.44) (0.15) (0.53) 0.68 (0.06) Total free cash flow to investors $4.52 $5.28 $5.09 $4.16 $19.05 $5.89 $6.34 $6.33 $6.32 $24.89 $5.26 $4.55 $4.87 $5.13 $19.82 $21.10 Y/Y Growth NMF NMF NMF NMF 85.4% NMF NMF NMF NMF 30.6% NMF NMF NMF NMF -20.4% 6.5% Less interest expense ($1.21) ($1.16) ($1.26) ($1.28) ($4.92) ($1.33) ($1.21) ($1.20) ($1.18) ($4.92) ($1.19) ($1.05) ($1.02) ($1.02) ($4.28) ($4.09) Levered FCF to Investors $3.31 $4.12 $3.83 $2.88 $14.14 $4.56 $5.13 $5.13 $5.15 $19.97 $4.08 $3.50 $3.85 $4.11 $15.53 $17.01 Levered FCF Per Share $0.80 $0.99 $0.92 $0.69 $3.40 $1.11 $1.26 $1.26 $1.26 $4.88 $1.00 $0.86 $0.94 $1.00 $3.80 $4.14 Y/Y Growth NMF NMF NMF NMF 26.9% NMF NMF NMF NMF 43.4% NMF NMF NMF NMF -22.2% 9.0% Source: Raymond James estimate and company reports International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

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Ratings and Definitions Raymond James & Associates (U.S.) definitions Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next months. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

4 Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Ltd. (Canada) definitions Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold. Raymond James Argentina S.A. rating definitions Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Europe (Raymond James Euro Equities SAS & Raymond James Financial International Limited) rating definitions Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments. Rating Distributions Coverage Universe Rating Distribution* Investment Banking Distribution RJA RJL RJ Arg RJEE/RJFI RJA RJL RJ Arg RJEE/RJFI Strong Buy and Outperform (Buy) 56% 66% 59% 47% 19% 43% 0% 0% Market Perform (Hold) 38% 30% 41% 39% 5% 14% 0% 0% Underperform (Sell) 6% 3% 0% 15% 7% 0% 0% 0% * Columns may not add to 100% due to rounding. Suitability Ratings (SR) Medium Risk/Income (M/INC) Lower to average risk equities of companies with sound financials, consistent earnings, and dividend yields above that of the S&P 500. Many securities in this category are structured with a focus on providing a consistent dividend or return of capital. Medium Risk/Growth (M/GRW) Lower to average risk equities of companies with sound financials, consistent earnings growth, the potential for long-term price appreciation, a potential dividend yield, and/or share repurchase program. High Risk/Income (H/INC) Medium to higher risk equities of companies that are structured with a focus on providing a meaningful dividend but may face less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and potential risk of principal. Securities of companies in this category may have a less predictable income stream from dividends or distributions of capital. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

5 High Risk/Growth (H/GRW) Medium to higher risk equities of companies in fast growing and competitive industries, with less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial or legal issues, higher price volatility (beta), and potential risk of principal. High Risk/Speculation (H/SPEC) High risk equities of companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, significant financial or legal issues, or a substantial risk/loss of principal. Raymond James Relationship Disclosures Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months. Company Name Verizon Communications Disclosure Raymond James & Associates makes a market in shares of VZ. Raymond James & Associates received non-investment banking securities-related compensation from VZ within the past 12 months. Stock Charts, Target Prices, and Valuation Methodologies Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have target prices and thus valuation methodologies. Target Prices: The information below indicates our target price and rating changes for VZ stock over the past three years. Valuation Methodology: Our valuation methodology for Verizon is based on an FCF/share multiple compared with peers, and also considers forward earnings relative to the S&P 500 and an EV/EBITDA multiple analysis. Risk Factors General Risk Factors: Following are some general risk factors that pertain to the businesses of the subject companies and the projected target prices and recommendations included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. International Headquarters: The Raymond James Financial Center 880 Carillon Parkway St. Petersburg, Florida

6 releasable resear ch Raymond James International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. Specific Investment Risks Related to the Industry or Issuer Company-Specific Risks for Verizon Communications Verizon faces a significant amount of competition from other wireless providers, cable companies, and competitive telecom carriers, which could significantly impact the company's revenue and earnings. In turn, competition could negatively impact pricing, both for traditional telephony services and for broadband, wireless, and other services. These growing services are offsetting currently declining traditional telephony services, a mix-shift that could negatively impact overall company margins. Other risks include, but are not limited to, increasing pension expenses, a highly unionized workforce, a large debt load, and a continued weak business spending environment. Dividends are not guaranteed and may fluctuate or be eliminated in future quarters. The company is highly regulated and subject to regulatory risk on multiple fronts. Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at rjcapitalmarkets.com/disclosures/index. 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