23 October 2018 Telecom Services Verizon Comm. Provided for the exclusive use of Research Research at Provisional Access on 2018-10-24T05:17+00:00. DO NOT REDISTRIBUTE Deutsche Bank Research Rating Company Date Buy Verizon Comm. 23 October 2018 Results North America United States Reuters Bloomberg Exchange Ticker Price at 23 Oct 2018 (USD) 57.21 TMT VZ.N VZ US NYS VZ Price target 61.00 Telecom Services 52-week range 55.02 - 44.11 The Wireless Renaissance rolls on Valuation & Risks Matthew Niknam Updating estimates post 3Q18 results Verizon's 3Q18 results continued to showcase the positive inflections the US Research Analyst Wireless market, both in pricing and margins. Post the quarter, our estimates +212-250-4711 are relatively unchanged, with modest increases to revenue/Adj. EBITDA Benjamin Soff largely offset by higher D&A/interest. Increased longer-term forecasts (Wireless Research Associate subscribers/ARPU) boost our 12-month price target to $61 (vs. $59 prior). +1-212-250-3716 We continue to like the Verizon story cleanest play on , viewing it as the Key changes improving US Wireless fundamentals (VZ is the market leader, and derives ~90% TP 59.00 to 61.00 ↑ 3.4% of EBITDA from Wireless). The company's domestic focus, and peer-low leverage EPS (USD) 4.66 to 4.70 ↑ 1.0% (low-2x range) are also key attributes we highlight (in light of recent market Revenue 130,410.2 to ↑ 0.2% volatility). At the same time, we continue to see upside optionality (longer-term) (USDm) 130,689.5 from 5G, given Verizon's aggressive investments in both fiber and mmWave Source: Deutsche Bank spectrum to date. Though the stock has seen meaningful strength in recent months, it still trades at 12x our 2019E EPS estimate, below both its five-year (13x) and ten-year (14x) forward average. Key positives this quarter Wireless stole the show again this quarter, with results outperforming across most key metrics. Postpaid phone net adds of +295k were well ahead of both DBe/street at +160k, while postpaid ARPA (average revenue per account) also improved again qoq. On the call, Verizon noted it is benefitting from both upwards migrations to unlimited, and (within unlimited) uptake of higher-priced tiers. As a result, normalized yoy service revenue growth accelerated to +2.6% yoy this quarter (+10bp qoq despite a tougher comp), while margins improved +150bp yoy (to 47.7%). Looking into 4Q, we note that the competitive environment has remained fairly disciplined (with promotions limited to BOGOs), despite the introduction of the new iPhone XR model. Items to monitor Offsetting the strength in Wireless, trends at both Wireline and Oath remain pressured. As a result, we are trimming estimates in both segments (see figure 2 for more detail). In Wireline, revenues continue to face headwinds from Enterprise/SMB and Consumer Video/DSL/Voice; at the same time, we expect segment margins to dip into the ~19% range (vs. ~20% levels in recent quarters) starting in 4Q. At Oath, (~6% of total VZ revenues), 3Q18 revenues were -7% Deutsche Bank Securities Inc. Distributed on: 23/10/2018 22:15:08 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 091/04/2018. 7T2se3r0Ot6kwoPa Provided for the exclusive use of Research Research at Provisional Access on 2018-10-24T05:17+00:00. DO NOT REDISTRIBUTE 23 October 2018 Telecom Services Verizon Comm. yoy (DBe: -5%), and the company noted it no longer expects to reach its $10bn revenue target by 2020. Valuation and Risks Valuation: Our $61, 12-month price target is a blended average of DCF ($61, using a 7% WACC and 1.5% terminal growth), sum of the parts ($60), and P/E ($62, using 13x 2019E EPS) analyses. Key risks: Rising interest rates, more aggressive competition, potentially dilutive M&A. Page 2 Deutsche Bank Securities Inc. Provided for the exclusive use of Research Research at Provisional Access on 2018-10-24T05:17+00:00. DO NOT REDISTRIBUTE 23 October 2018 Telecom Services Verizon Comm. Figure 1: VZ 3Q18 Actuals vs. Estimates ($ mns, except per share/operating items) C3Q18 Actuals Estimates $ Diff % Diff Consensus Income Statement Wireless Revenue $22,973 $22,728 $245 1.1% $22,680 Service Revenue $15,966 $15,807 $159 1.0% $15,820 Equipment/Other Revenue $7,007 $6,921 $86 1.2% $6,860 Wireline Revenue $7,371 $7,406 ($35) -0.5% $7,440 Other Revenue $2,263 $2,355 ($92) -3.9% Total Revenue $32,607 $32,490 $117 0.4% $32,503 Cost of Revenue $13,331 $13,813 ($482) -3.5% SG&A $7,094 $6,805 $289 4.3% EBITDA $12,182 $11,872 $310 2.6% $12,144 % of Revenue 37.4% 36.5% 2.2% Wireless EBITDA $10,965 $10,662 $303 2.8% $10,860 Wireline EBITDA $1,502 $1,503 ($1) 0.0% $150 Other EBITDA ($285) ($293) $8 NM D&A $4,377 $4,344 $33 0.7% Operating Income $7,675 $7,527 $148 2.0% % of Revenue 23.5% 23.2% Interest Expense $1,211 $1,193 $18 1.5% Net Income (reported) $4,924 $4,917 $7 0.1% Adjusted Diluted EPS $1.22 $1.19 $0.03 2.6% $1.19 Diluted Shares Outstanding 4,140 4,136 4 0.1% Balance Sheet Gross Debt $112,942 $113,140 ($198) -0.2% Cash $3,575 $3,003 $572 19.0% Net Debt $109,367 $110,137 ($770) -0.7% Cash Flow Operating Cash Flow $9,811 $8,408 $1,403 16.7% Capital Expenditures $4,188 $4,141 $47 1.1% $4,350 Wireless Capex $2,127 $2,519 ($392) -15.6% $2,740 Free Cash Flow $5,623 $4,267 $1,356 31.8% $4,435 FCF/Share $1.36 $1.03 $0.33 31.7% Operating Metrics Postpaid Net Adds 515 488 27 5.5% 499 Postpaid Phone Net Adds 295 160 135 NM 161 Postpaid Churn 1.04% 1.00% 1.00% Postpaid Subscribers 112,135 112,110 25 0.0% Postpaid ARPA $136.58 $134.89 $1.69 1.3% $135.73 Prepaid Net Adds (96) (104) 8 -7.4% (92) Prepaid Subscribers 4,736 4,728 8 0.2% Wireline Voice Net Adds (261) (250) (11) NM Wireline Voice Subscribers 12,009 12,020 (11) -0.1% Broadband Net Adds 2 25 (23) NM FiOS Internet Net Adds 54 73 (19) -26.0% 58 DSL Net Adds (52) (48) (4) NM (56) Broadband Subscribers 6,958 6,981 (23) -0.3% FiOS Video Net Adds (63) (30) (33) NM (32) FiOS Video Subscribers 4,497 4,530 (33) -0.7% Source: Deutsche Bank estimates, company information, FactSet, StreetAccount. Deutsche Bank Securities Inc. Page 3 Provided for the exclusive use of Research Research at Provisional Access on 2018-10-24T05:17+00:00. DO NOT REDISTRIBUTE 23 October 2018 Telecom Services Verizon Comm. Figure 2: VZ Changes to our estimates ($ mns, except per share/operating items) FY18 FY19 FY20 New Old $ Diff % Diff Consensus New Old $ Diff % Diff Consensus New Old $ Diff % Diff Consensus Income Statement Wireless Revenue $91,646 $91,153 $493 0.5% $92,852 $91,694 $1,159 1.3% $93,972 $92,420 $1,552 1.7% Service Revenue $63,157 $62,808 $350 0.6% $64,099 $63,199 $900 1.4% $64,948 $63,590 $1,358 2.1% Equipment/Other Revenue $28,489 $28,345 $143 0.5% $28,753 $28,495 $258 0.9% $29,024 $28,830 $194 0.7% Wireline Revenue $29,737 $29,822 ($85) -0.3% $28,798 $29,045 ($247) -0.8% $28,050 $28,411 ($361) -1.3% Other Revenue $9,307 $9,435 ($129) -1.4% $9,147 $9,720 ($573) -5.9% $9,422 $10,060 ($639) -6.3% Total Revenue $130,689 $130,410 $279 0.2% $130,799 $130,797 $130,458 $339 0.3% $132,085 $131,444 $130,892 $552 0.4% $133,413 Cost of Revenue $55,280 $56,102 ($822) -1.5% $55,181 $56,177 ($996) -1.8% $55,536 $56,529 ($992) -1.8% SG&A $28,090 $27,445 $645 2.4% $27,957 $26,778 $1,179 4.4% $27,743 $26,452 $1,291 4.9% EBITDA $47,319 $46,862 $457 1.0% $47,503 $47,659 $47,503 $155 0.3% $48,635 $48,165 $47,911 $254 0.5% $48,886 % of Revenue 36.2% 35.9% 0.8% 36.4% 36.4% 0.1% 36.6% 36.6% 0.1% Wireless EBITDA $42,532 $42,023 $509 1.2% $43,440 $42,718 $722 1.7% $44,113 $43,186 $927 2.1% Wireline EBITDA $6,072 $6,121 ($49) -0.8% $5,493 $5,704 ($210) -3.7% $5,082 $5,374 ($292) -5.4% Other EBITDA ($1,284) ($1,281) ($4) NM ($1,275) ($918) ($357) NM ($1,030) ($648) ($382) NM D&A $17,423 $17,359 $64 0.4% $17,506 $17,400 $107 0.6% $17,591 $17,535 $56 0.3% Operating Income $28,763 $28,500 $263 0.9% $29,203 $30,153 $30,104 $49 0.2% $31,163 $30,574 $30,376 $198 0.7% $31,366 % of Revenue 22.0% 21.9% 23.1% 23.1% 23.3% 23.2% Interest Expense $4,839 $4,798 $42 0.9% $4,723 $4,566 $157 3.4% $4,574 $4,419 $155 3.5% Net Income (reported) $18,189 $18,117 $72 0.4% $19,584 $19,654 ($70) -0.4% $19,947 $19,901 $46 0.2% Adjusted Diluted EPS $4.70 $4.66 $0.05 1.0% $4.65 $4.74 $4.76 ($0.02) -0.4% $4.74 $4.87 $4.86 $0.01 0.2% $4.84 Diluted Shares Outstanding 4,131 4,130 1 0.0% 4,131 4,131 0 0.0% 4,099 4,098 1 0.0% Balance Sheet Gross Debt $111,442 $111,640 ($198) -0.2% $106,442 $106,640 ($198) -0.2% $104,442 $104,640 ($198) -0.2% Cash $2,176 $2,091 $85 4.1% $5,004 $4,661 $343 7.4% $11,203 $10,723 $480 4.5% Net Debt $109,266 $109,549 ($283) -0.3% $101,438 $101,979 ($541) -0.5% $93,239 $93,917 ($678) -0.7% Cash Flow Operating Cash Flow $33,730 $33,121 $609 1.8% $36,763 $36,609 $154 0.4% $38,531 $38,387 $144 0.4% Capital Expenditures $16,919 $17,179 ($260) -1.5% $17,629 $17,721 ($92) -0.5% $18,107 $18,090 $17 0.1% Wireless Capex $8,952 $9,750 ($798) -8.2% $9,489 $10,253 ($764) -7.5% $9,868 $10,628 ($760) -7.1% Free Cash Flow $16,811 $15,942 $869 5.4% $18,116 $19,134 $18,888 $246 1.3% $19,495 $20,424 $20,297 $127 0.6% $20,515 FCF/Share $4.07 $3.86 $0.21 5.4% $4.63 $4.57 $0.06 1.3% $4.98 $4.95 $0.03 0.6% Operating Metrics Postpaid Net Adds 2,218 2,189 29 1.3% 1,767 1,613 154 9.5% 1,600 1,411 189 13.4% Postpaid Phone Net Adds