威訊通訊 (VZ) 2002 Q2 法說會逐字稿

Good morning.

My name is Brian, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Verizon Communications second quarter 2002 earnings conference call.

All lines have been been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Dericksen, you may begin your conference.

[ no audio ] [ Pause ]

[speaker comes on in middle of briefing due to technical difficulties at their end]

-- also with us, and will be available during the question and answer period.

The presentation materials which will be used have been available on our website since 8 a.m. this morning.

If you are unable to retrieve these materials, they are available through our fax on demand at 1-800-329-3710.

We intend to complete today's call in about an hour.

The replay of this conference call can be accessed directly from Verizon's Investor Information website at www.verizon.com/investor.

We are currently webcasting this call.

The call will also be rebroadcast for 48 hours beginning at 11 a.m. today.

The dial-in number is: 1-800-642-1687 and the conference ID number is 4361303.

I would like to draw your attention to our Safe Harbor statement.

This presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties.

For those statements we claim protection of the Safe Harbor for forward-looking statements contained in a Private Securities Litigation Reform Act of 1995.

Discussion of those factors that may affect future results is included and contained in our filings with the Securities and Exchange Commission.

We continue to remain in the quiet period with respect to Verizon Wireless, as the registration statement is still on file with the SEC.

Therefore, we are limited in our comments with respect to any forward-looking statements regarding the wireless business.

With that, let me turn it over to Doreen, who will review our second quarter results followed by a Q&A session.

Doreen?

Thanks, John.

And thanks for joining us as we review our second quarter results.

I'm pleased to report that our second quarter financial results reflect our strong business focus, and are in line with expectations.

While our growth metrics continues to show solid gains.

Our results also indicate that the economy continues to impact demand for our services, particularly in the business market.

I'll talk a little bit more about that as we discuss our results.

We are also pleased with our ability to continue to lower our debt levels, manage cash, and maintain our excellent cost profiles.

We also feel we continue to be uniquely positioned to mitigate the effects of technology substitutions and competition that have produced an ongoing and anticipated shift in our traditional revenue base.

Our business focus during this time of industry change has shown that our wireless business continues to be the industry standard because we have developed the best customer profile, and the best network quality of any domestic wireless provider.

Our market share growth in financials in this quarter are indicative of that.

Long distance and DSL are fueling customer growth and retention, and repositioning our future sources of revenue.

Our continued focus on cost management has given us the advantage of being able to maintain our margins by effectively controlling costs.

We are also aware of the current investor environment and that the legitimate concerns investors have about our sector.

As such, we have divided today's agenda up into a review of our consolidated results, along with a discussion on investor concerns, in which I have asked Ivan Seidenberg and Fred Salerno to participate.

Today we hope to convey to you that we continue to be a strong and vibrant business.

We are taking the right steps to manage our balance sheet.

We are a company that fosters a strong financial control environment.

We continue to look for ways to maximize our capital efficiency.

Finally, we want to spend a little time discussing the Vodaphone, and the issues related to their ability to put their interest to us in the future.

Genuity -- starting with the Genuity reintegration decision. I'd like to give you a little bit more color into the Genuity decision.

Our decision not to reintegrate Genuity is one of the outcomes of the work of a multidisciplined team that has been assessing the integration of Genuity from an operational, competitive and financial perspective.

With respect to ongoing commitments to Genuity, the conversion of most of our class B shares into Class A shares representing almost 10 percent of the economic and voting interest in Genuity, resulted in a default under the existing credit facilities that Genuity had with both Verizon and the banks.

As a result, Verizon is not obligated to make further loans to Genuity on the two billion facility.

Verizon did not provide any loans to guarantee Genuity with respect to their bank debt.

Our approach to the enterprise market does not significantly change as a result of this decision.

The enterprise segment remains a long-term viable market.

We think a relatively small Verizon share can increase.

A success base approach matches investment with revenue and minimizes dilution.

Our organic growth plan leverages our existing base.

We supplement intraLATA networks with products like gigabit Ethernet and DWDM.

We expand our interLATA capabilities. For example we are now carrying our wireless LD traffic, as well.

Before we begin our second quarter review, I wanted to address the economy.

We continue to see little sign of a significant turnaround until 2003.

So we expect our revenues to remain basically flat year over year.

When we look out over the balance of this year, we feel that the economy is still soft but fundamentally healthy.

We feel a rebound will occur but not in 2002.

Business formation and expansion are still weak.

We'll continue to monitor the economy and wait like everyone else for the turnaround.

In this challenging economic environment, we will still -- we still net consensus for earnings before non-recurring items of 77 cents per share.

Now I'm going to talk to you about the second quarter 2002 highlights.

We've added an industry-leading 723,000 wireless net adds, which include 1.1 million retail net adds offset by 378,000 reseller net disconnects.

800,000 new LD customers, 150,000 new DSL customers. We saw continuing progress in our cost reduction efforts which were responsible for our strong EBITDA margins.

We generated $1.4 billion in free cash flow, which we used primarily to reduce our net debt by $3.3 billion, and get our commercial paper down to $8.5 billion.

Drilling down on our financial highlights here, adjusted EPS for the second quarter was 77 cents, same as 2000 -- second quarter 2001.

At the consolidated level, second quarter operating revenues were over $16.8 billion, a decrease of 1.8 percent.

Continued outstanding cost controls resulted in operating expenses of a decrease of 1.3 percent compared with second quarter.

Total cash expenses for the quarter were down $95 million last year, or 1 percent reduction.

The reduction was driven by telco, where cash expenses were $5.6 billion, a decrease of $312 million or 5.3 percent.

EBITDA was over $7.4 billion, down 2.7 percent versus a year ago.

Our EBITDA margin was 44 percent, down 40 basis points from a year ago.

Free cash flow margin improved by $2.6 billion from a year ago, driven mainly by lower capital spending and improved cash flow from operating activities compared to second quarter 2001.

We were also able to reduce net debt by $4.7 billion since the end of last year.

We also reduced our commercial paper balance by $2.1 billion for the quarter, and $4.3 billion since December of '01.

We are going to talk about more of these in a few minutes.

I'll talk to you now about the earnings reconciliation.

Adjusted earnings in the second quarter were $2.1 billion, or 77 cents per share, versus 77 cents for the same period in 2001.

On a reported basis, excluding adjustments for special items, we reported a net loss of $2.1 billion, or a loss of 78 cents per share, versus a loss of 38 cents per share for last year.

There's really two types of, uhm, uhm, earnings right off that we are going to talk about. One is really a market-to-market which, you know, every quarter we evaluate, uhm, our investments and the impairment, and for those that are no longer we think temporary, we take action.

As I look at that, we took an after-tax charge of $2.4 billion for Genuity, or 89 cents per share, to write down our Genuity equity investment and the loan outstanding.

Our determination that Genuity's debt is impaired is consistent with our policy of evaluating the recover ability of equity and debt investments under FAS-115.

Regarding Telus, we are writing down after tax, $430 million or 16 cents per share, to reflect the actual market value of our investment.

We are also writing down our investment in C&W to reflect market values, by $201 million or 7 cents per share.

We are also writing down several other investments which include Telecom Asia, Tyco, Crown Castle, aggregating up to about $231 million after tax, or 8 cents, to reflect their current market values.

After a careful review of our Worldcom exposure, we determined that we had an exposure of about $183 million, or after tax of 7 cents per share for the period.

North Point litigation settlement also required to us take an after-tax charge of 4 cents per share.

On severance, we took a charge of $475 million or 17 cents per share, to provide for severance and related items of over 8,000 employees.

Finally, on transition costs and other special items combined were 4 cents per share.

Moving on to free cash flow, we generated $1.4 billion of free cash flow.

This chart demonstrates the improvement in the cash generation of our business during the past six quarters.

On a year-to-data basis, cash from operations was $10 billion, up 31 percent over last year.

And free cash flow generation has improved by $6 billion on a year-to-data basis versus last year, due to improve cash flow from operations and reduced CAP-X.

Balance sheet liquidity highlights.

Our first priority for the use of the free cash flow is to further strengthen our balance sheet, and we continue to make significant strides in this area.

During the quarter, we reduced our net debt by $3.3 billion through strong operational cash performance, as well as the return of most of the NextWave deposit.

We also continued to reduce our commercial paper levels through a combination of debt reduction and terming out of CP.

We ended the quarter at $8.5 billion, a reduction of $2.1 billion during the quarter, and as of today our commercial paper balances are even lower due to additional actions that we have taken.

During the second quarter, we also closed on a $7 billion backup facility that we will anticipate will more than cover our commercial paper balances on a going-forward basis.

We anticipate that we will be meeting with the rating agencies during the third quarter to provide them an update on our progress and outlook.

We are very focused on this issue, and solidly on track from an operational perspective in reducing our debt profile, as our debt-to-EBITDA ratio has decreased from 2.2 times at year end to just under 2.1 times.

To summarize, very strong cash flow generation and a demonstration of the strength of our business and our commitment to reduce debt.

Moving on to Telecom's second quarter highlights. Revenue for the quarter decreased $485 million or 4.4 percent compared to second quarter.

Once again, the impacts of the economy and technology substitution and competition were clearly evident.

However, the decline it is not as dramatic considering the following.

Verizon logistics, the former GTE supply company, represented $95 million of the decrease.

Regulatory regulations -- reductions had the effect of reducing growth by about another $103 million.

And access line and usage declines contributed approximately $200 million of the decrease.

Total switched access lines declined 3.3 percent for the quarter.

Clearly, this declining trend in business lines is economy-related.

We expect this decline will improve.

The trend in residential may not be economy-related but more related to technology substitution.

Within our revenues I'd like to highlight long distance.

IntraLATA revenues were up $369 million, up about 21 percent from the same quarter last year.

IntraLATA toll revenues, which also included on this line decreased by $45 million, or 10 percent.

This is a decrease in the rate of decline,

attributed to our win-back efforts.

Data transfer revenues were nearly $1.7 billion, representing a 7.5 percent increase compared with a year ago quarter.

Advanced data services and fast packet services grew very strongly, while our high cap services continued to be very solid.

The slowdown we are experiencing is due to several economic factors.

A continuation of cautious spending by enterprise IT customers, and a sharp reduction of wholesale demand.

Many of which were CLECs, and we had CLEC pricing issues, and we also had issues with the ISPs compared to a year ago.

A final thought on revenues.

We believe that the secular changes and revenue decline we are experiencing is also masked by certain artificial regulatory pricing policies.

The real economic impact of competition and secular shifts will be far more manageable with a more evenhanded regulatory approach.

The underlying strength of the business is strong, which is proved by the volume performance we are producing.

In time, we believe the current industry crisis will cause regulators to reexamine their policies.

Moving to expenses. Telecom operating expenses were down $263 million or 3.2 percent.

Excluding depreciation and amortization, they were down 5.3 percent.

This reduction is due primarily to head count reductions and productivity improvements.

Head count, about 173,000 which is down 21,006 since June of '01, and 6400 since 12/31/01.

We have also eliminated a number of IT contractors and significantly reduced overtime.

We'll talk a little bit more on productivity in a minute.

In order to give you a better sense of the revenue trends of the telco, I thought I would spelled a few minutes talking about what we see happening in our major lines of business.

Starting with the residential or consumer markets, revenues in the consumer market, which includes local and LD, and DSL, are actually growing.

Albeit very slightly.

Revenues in the general or small business market which, trended down in 2001, were slightly improved in second quarter '02. Actually we had some small growth in '02 -- second quarter versus first quarter of '02.

Obviously, our enterprise market revenues have been the most impacted by the economy.

You'll see it in our business, uhm, access line losses which I will illustrate in a minute.

We remain hopeful that we'll see a turnaround in this trend once the economy recovers and the business market in general picks up.

Lastly, wholesale revenues, which include switched and special access, as well as our resale [UNE-P] business, which also continued to trend down.

We are adversely impacted in this market by regulatory pressures and pricing in [INAUDIBLE], as well as a decrease in demand in minutes of use.

And also CLEC liquidity issues in this market.

We are concentrating on improving areas we can control as we work our way through a very challenging environment and a very unique time in this rapidly changing industry.

Moving on to access line analysis. In an attempt to better illustrate for you what's happening with access lines, the chart shows 7 quarters of history back to fourth quarter 2000.

First on the residential lines, both retail and wholesale, first quarter '02 to second quarter '02, sequential line losses were impacted by the economy and seasonality issues such as college student disconnects.

You can see the trends in retail and the net loss over these seven quarters is about a million lines.

The second thing I would point out is that wholesale, that is both resale and UNE-P, are flat.

We look different than our peers in this regard.

What is interesting to note is the number of DSL customers we have added over the same period of time.

Close to the same amount of retail lines lost.

Although we know this is not an exact one-to-one.

Looking at the business market, obviously we see more line loss and a declining trend.

However, on the wholesale front, once again I would point out that the rate of growth in resale and UNE-P has not shown dramatic increases over the past seven quarters.

Unbundled loops have increased at a somewhat steady state although the increases in the last two sequential quarters have been slower and lower than in the prior four or five quarters.

The main takeaway here is a simple one: The rate of growth in UNE-P and resale lines is fairly flat for the quarter.

To further evaluate wholesale growth trends, let's look at the next chart which details the quarterly trends of both resale and UNE-P.

As you can see, the totals have not changed much but the mix has.

We are seeing resale customers switching to UNE-P.

This is not a big surprise given the regulatory decisions which lower our UNE-P pricing even further to below cost, to the detriment of facilities-based competition.

Moving to the data growth metrics, DSL equivalents continue to grow, increasing $2.3 million sequentially and $12 million since the second quarter last year, 19.2 percent year-over-year.

Voice grade equivalents, which is the sum of DSL and switched access lines, grew compared to last year 2nd Q.

The slowing gross in voice grade equivalents is more of a function of decline in switched access lines.

While DSOs have slowed, there is still steady growth, as you can see on the chart.

We continue to invest smartly in data to position us for an expected surge in demand once the economy rebounds.

Despite the challenges in our industry, we are pleased with our progress in strategic growth imperatives, LD and DSL.

We're on the chart telco growth metrics.

LD we continued to lead our ILEC peers in states receiving 271 approval, eight states.

We have 9 million customers and LD revenue of $369 million in the quarter.

As you can see on this chart, we are on a fairly steady upward trend, adding 1.6 million new customers during the first six months of the year, bringing our total to 9 million.

This is 3 million more than a year ago, a 51 percent increase.

In DSL, we added 150,000 new lines, bringing our base to 1.5 million.

660,000 higher, or 79 percent, than a year ago.

We recently signed an agreement with Microsoft that will provide us with applications we can run over our DSL network.

We are excited about this and expect to see new products and services from this agreement in 2003.

Our ordering -- going to telecom growth measurements, our ordering provisioning interval in DSL was 5 business days during the quarter, and we are driving it to three days.

Virtually all of our subscribers use self-installation.

Our network reliability has been very good.

And currently our loop qualification rate is 55 percent of total access lines.

I'd like to talk to you for a few minutes about bundling.

Of the bundle offers designed to provide savings for our customers, while at the same time increasing our base and driving more revenue over our network.

Bundles give customers our best prices, the convenience of one-stop shopping, and the ability to receive all services on a single bill.

When we roll out our bundled plans in August, this is how we think they will look.

Local, LD, DSL and wireless.

A compelling consumer offer that we will be able to and deliver nationwide.

Adding wireless to the bundle is new and key.

No cable company or competitor will be doing this, and we are very excited about how this differentiates us from the rest of the industry.

For Verizon, the bundle lowers churn and helps to retain our customer base.

We feel that acquiring and keeping customers is key to the success of any telco company.

Our strong brand presence in the marketplace will also help drive bundle sales.

We have already seen in our single bill, which is the wireline wireless product that we have, a reduction in both LD and wireless churn.

Looking at the long distance entry process, we have added 2 more states, New Jersey and Maine, to our impressive list.

We expect to be largely through the process by the first quarter of next year.

We're focused on getting New Hampshire, Delaware and Virginia FCC approvals in the third and fourth quarters of '02.

I think it is important to note that we have also achieved more approvals in more major markets than our peers which is a greater impact on our ability to sell and bundle LD.

With our approach, even if one of our peers completes the 270 process first, we will still have more major markets.

Turning to productivity metrics, overtime for employees down 38 percent.

Installation productivity is up 9.1.

Repair productivity is up 6.4.

Installation rework down 11.7.

Repair precent reworked down 20.9 percent.

Great results.

Looking at standing cost management, suffice it to say I feel really great about our ability to control costs.

At telco, the cash expenses -- that is, expense excluding depreciation amortization -- are down $700 million alone in the first half.

I believe this is a very sustainable number for the second half of this year.

As I said earlier, a major component of our expense control has been our ability to reduce our force levels without sacrificing service.

While the bulk of our head count reductions have occurred in telcom, we continue to explore other business units for further efficiencies.

Moving to Verizon Wireless. Simply put, they had an outstanding quarter.

Verizon Wireless substantially improved its market share of the national wireless carriers during the second quarter as compared to the first quarter on both a growth and a net add basis.

As we captured over 25 percent of the growth adds and 26 percent of the net adds during the second quarter, which is an improvement from 21 percent of the growth adds and 7 percent of the net adds during the first quarter.

We had solid revenue growth with total revenues up 8.1 percent.

Operating income grew 33.6 percent to $907 million, driven by the implementation of FAS-142.

Excellent cost performance, with cash expense for subscriber declined by 1.7 percent to 2982, even with strong growth add performance.

All resulting in EBITDAs of $1.7 billion with margins of 38.7, slightly higher than last year in a very competitive marketplace.

Taking a look at the wireless operating metrics on the quarter, significant gains in market share with 1.1 million retail net adds up 33.9 percent from last year.

Our success was due to our focused marketing efforts that differentiated the quality of Verizon Wireless service, and the value proposition of our America's Choice plans, and our continued focus on customer quality -- quality customer additions.

Our flagship product, America's Choice, accounted for about two-thirds of our growth adds during the quarter, and we continue to make competitive gains, as 58 percent of those subscribers are new to Verizon Wireless.

Our prepaid products tribute about 16 percent of growth adds during the quarter, consistent with prior trends.

Retail churn performance continued to improve to 2 percent, a 20 basis point improved.

Service RPU was solid at almost $49 a decrease of 1.4 percent primarily due to the results of lower roaming revenues due to lower intercarrier rates.

Our digital subscriber base grew from 17.9 million customers to 25.2, up 41 percent from last year.

A great quarter across all fronts.

Taking a closer look at net adds and churns, as I indicated earlier, net adds were up 1.1 million.

However, on a net basis after resale, net adds were 723,000 due to a net reduction of 378,000 resale customers.

Looking at the piece parts, non-Worldcom resellers were down 117,000 during the quarter, as they continued to experience difficulties in the market.

Worldcom-related subscribers were down 261,000, to just over 300,000 remaining subscribers.

As previously announced, we have reached an agreement with Worldcom on a referral mechanism by which Worldcom subscribers will be referred to an 800 number to transfer service to Verizon.

Worldcom -- Verizon, will receive a fee for each customer that activates a Verizon Wireless retail service, keeps the same wireless phone number, and signs a 1-year contract.

We feel that this is a very economic transaction that mitigates the potential down side from an outright purchase of the Worldcom customer base.

Taking a closer look at churn. While total churn performance which includes all of the Worldcom disconnects of 2.3 percent was excellent, our retail performance was outstanding.

Total churn of 2 percent, down 20 percent -- 20 basis points from last year, retailed post paid churn of 1.7 percent, a 30 basis point improvement.

Our branding retention efforts and network quality focus continue to pay benefits and churn reduction which is a key cost driver for the business.

High quality profile, a few more key points before moving on.

As a result of our continued focus on the quality of our base and the shifts in the resale environment, our base is now 95 percent retail, a percentage that we expect to continue increasing.

We continue to expand digital subscribers which now stands at 83 percent of our customers.

Finally, a note on our 1X rollout.

We are making significant progress in our 1X market launch, and continue to enjoy a time-to-market advantage with our coverage.

We have national 1X coverage in 300 cities, and 145 million pops covered with 1X.

In summary, a very strong quarter in terms of growth and profitability that we think further demonstrates differentiation of Verizon Wireless as a premiere wireless provider.

Moving to information services. Revenue for the second quarter decreased $48 million, or 4.9 percent compared with first quarter, primarily driven by shifts in publications schedules.

Operating expenses increased 4.2 percent or $20 million in the quarter.

Operating income decreased $68 million, or 13.3 percent.

EBITDA margins December decreased 500 basis points in the quarter.

We feel confident that as the year goes on and higher margin revenue books are published, that our margins will get back into the 50 percent range.

Finally, we continue to see significant growth in our Internet directory service super pages, where we saw an 82 percent increase in revenue.

Moving to international. The economy has also impacted our international portfolio.

On a consolidated base, international revenue decreased 8.9 percent compared to second quarter '01.

However, we were able to hold the line on operating expenses, they decrease 8.7 percent, while EBITDA decreased $23 million, or 7.6.

Equity income increased 26.7 percent to $275 million, driven by our decision to deacon some date CTI increases and increases in Omnitel.

Proportionate wireless subscribers grew 9.8 percent to 8.7 million.

Moving on to financial controls. Every CFO wants to ensure that their reported numbers are not only understandable to the average investor, but also conform to GAAP.

Given all of the recent concerns regarding corporate accounting practices, I have authorized our corporate controller to review our accounting policies, especially those relating to capitalization policies.

The outcome of that review only confirmed what I knew.

We have very strong controls, reporting practices and compliance procedures that are ingrained in our financial reporting process.

Regarding our capitalization policies, they have been consistently followed.

We have a standard policy in line with FCC guidelines for capitalization of labor, benefits and software.

The AICPA statement in 1999 for software was the basis of our non-software capitalization standards. Interest is capitalized based on work in process, balance and borrowing rates. Repair and maintenance costs are expensed as incurred.

Capitalization of labor where appropriate is based on actual time reporting.

In addition to having policies that are consistently followed, we also have a strong program of regular internal and external audits.

Our telcom unit is audited both at the federal and state levels, and strong corporate govern and active involvement by the board and management audit committees.

In the final analysis, we have a long history and commitment to financial transparency and open communication with the investment community that I am proud of and intend to continue.

I'm going to talk a couple of minutes about the Vodaphone put now.

As we believe this is a significant issue and sometimes misunderstood, I would like now to take a minute and walk you through the Vodaphone put and its key provisions.

Vodaphone has the ability to put a total of $20 billion in value to Verizon from 2003 to 2007 in two $10 billion-dollar [INAUDIBLE].

The first $10 billion could be put to Verizon in 2003 and '04, and the second $10 billion in '05 through '07.

With respect to the first put, Verizon has the option to satisfy the obligation with either Verizon Communications stock or cash.

Verizon could also require Verizon Wireless to satisfy the put.

With respect to the second put, Vodaphone has the option to require Verizon Wireless to satisfy up to $7.5 billion of the put, with cash or contributed debt.

So those are the basic mechanics.

Now to the valuation.

The key component here is that there is no fixed value of the put.

The only dollar -- only the dollar amount is fixed.

The value of the put is determined by the market value of Verizon Wireless.

If Verizon Wireless is a public company, this is pretty straightforward.

If Verizon Wireless is not public, there is a third party appraisal process.

Again, this is a market-based valuation and not a fixed valuation.

As market values vary up and down, the value of the put goes up and down.

Let me walk you through a simple example.

Let's say Verizon Wireless equity was worth $40 billion.

Verizon owes 55 percent, Vodaphone owes 45 percent.

And they exercise the put for $10 billion, which would equate to 25 percent of the value of Verizon Wireless.

If Verizon communications pays Vodaphone for the put, Verizon ownership increases from 55 to 80 percent.

Vodaphone's ownership goes to 20.

To take this example further, using the same valuation and new ownership split of 80/20, if Vodaphone exercises the second $10 billion, which again is worth 25 percent of the Verizon Wireless, Vodaphone would receive only $8 billion as they only own 20 percent of the business.

The amount they receive is capped by their ownership level, and they cannot receive more than the value of their ownership regardless of the dollar value of the put.

The key here is market-based valuations and Vodaphone cannot receive any more value than what their ownership is worth.

One provision to bear in mind, that there is non-compete restrictions as long as Vodaphone owns at least 20 percent of Verizon Wireless.

Finally, we believe their best strategic option in the United States is Verizon Wireless, as we continue to demonstrate our market leadership position.

We have a very strong partner relationship with Vodaphone.

In terms -- I'm going to go now to the 2002 outlook. In terms of guidance for the remainder of the year, we are modestly revising our outlook for the remainder of 2002 due to the continued demand weakness.

Revenue growth is now in the zero to minus 1 percent range.

EPS is 305 to 309.

Capital goes from 13 to 13.5.

These targets contemplate the current demand softness persists throughout the remainder of the year, whereas we had a little bit of more optimism in our previous look.

If I bridge the EPS guidance here, it flows pretty straightforward. Uhm, you have a reduction in revenues and your costs offsets to the reduction in the bottom line of 7 to 8 cents, a reduction of less than 3 percent on our earnings base.

Again, a comparatively modest reduction to our guidance.

I'm going to move now to the capital expenditures.

We drilled down on our capital, we would be cutting our capital by about $1.5 billion from $14 billion to 15 to 13 to 13.5.

Before we did this, however, we looked at the following items.

Looked at the economy to get a sense of where it was going and where our volumes would be.

We looked at service quality.

If we took our capital budget down, would we be able to maintain still the high level of service that we have had.

Growth, I wanted to ensure that we would continue to fund our growth areas, wireless, data and LD, in order to assure our customers that we are going to continue to provide them with the right technology.

A return on invested capital. If we made the cuts, I want to make sure that we funded those products that gave us the best return.

The cuts will come primarily from telcom, and other wireless will go down about $100 million.

We will continue to mon or our spending and if needed take additional actions depending on volumes.

The second quarter summary, a few points in closing before we get to your questions.

Cash performance continues to be strong, and our balance sheet continues to improve as we focus on cost reduction and capital efficiency.

Our telecom group is executing on its growth initiatives and competing effectively in the market.

Wireless had an excellent quarter by any measure.

Our guidance adjustment reflects current market realities.

And finally, I am confident in our internal controls and the integrity of our management team as we continue to perform inning times.

I think now we can take questions.

Brian, will you take the first question?

[pause]

Brian?

Your first question comes from Adam Quinton of Merrill Lynch.

Yeah, I got a couple of questions for Doreen related to some specifics on financials.

Firstly Doreen just finishing off on the CAP-X you made the point about revised guidance for the year.

But given you only spent $5.5 billion in the first half, the guidance still implies a very big pickup in the second half.

So I wonder if you can comment on that.

Second question would relate to the balance sheet.

Obviously, you've done a good job taking debt down and particularly highlighted the commercial paper.

But you still have something like $17 billion of short-term debt half commercial paper, half other stuff.

I was wondering if you could indicate what your objectives are through the balance of the year, specifically on the short-term debt, and how much further within that commercial paper will come down.

And then finally, on pensions, I wonder if you could tell us how much by way of net credit was booked to year-to-date profits.

I think the full year credit last year was 2.7.

How much have you booked this year?

Thanks.

Okay.

Let me start with the capital.

Part of it is Price.

When we acquire Price, we have approximately $200 million that will come into the second quarter.

That's a bump-up from the normal run rate.

And I think that the rest of it is really on the telco side some of the remote terminal and additional DSL.

Also there is just generally a timing issue and there's some real estate that comes into the second quarter, as well.

And systems expenses in the second half.

So that said, as I think I mentioned, we'll continue to monitor the volumes.

To the extent that the volumes don't, you know, uhm, pick up, we might, you know, relook at this.

On your second question, which is the commercial paper, we have a target of, I'd say, maybe $7 billion by the end of the year.

What else?

Oh, we have cash on hand of about $3 billion.

And the pension question?

What was the pension question?

[INAUDIBLE, in background]

What was the net credit that you booked year to date?

I guess it's about 32 cents for the year, so we'll say about half of that should flow pretty evenly.

Right.

Okay, thank you.

Brian, next question?

Your next question comes from Jeff Halpern of Sanford Bernstein.

Good morning.

Couple questions for you.

The first one is more at a higher level.

If you look at your run rate for UNE line losses versus BellSouth and SPC, who have already reported, it appears you guys are experiencing significantly less loss to your competitors.

I guess my question is partially for Ivan, and it's -- do you think that that's a function of your early LD entries, or is there something else going on that's driving it?

And then second, just a quick quantitative question.

Can you disaggregate your ISDN numbers out of your switched access lines?

Ivan?

Let's do the second one first.

That is your basic ninja question.

We'll get to you afterwards.

Call John.

We'll see if we can help you.

[ Laughter ]

On the first one, let me just make this comment.

I think what we have been saying for the last several years is that we have had a lot of experience with competition over the course of the last four or five years.

And so our early entry into LD, Jeff, is part of the answer.

I think our bundling of services, I think our focus on some of the new technology we are putting out to business customers, I think the bundling of products and services, I think -- I think if you looked at this in both ways, both at the residential and the business market, I think we just have a lot more experience into the competitive tunnel here.

And a big piece of that is early entry into LD.

Okay.

Brian, next question?

Your next question comes from Simon Flannery of Morgan Stanley.

Thanks a lot, good morning.

Doreen, you talked a lot about return on investment.

Could you discuss the profitability of your long distance business and also DSL, you know, where are we on EBITDA break even, on net income break even and getting to the ROI that you are looking for?

Thanks.

I think if you look at long distance, if you look at it on a state by state base -- for example, we are already profitable in the state of New York, if we are, you know, pushing close to profitability in Massachusetts. So as you would imagine, you know, we have invested in building the network.

It is really -- it is really a, uhm, a scale and scope issue.

So the more traffic you have over this, and we expect, uhm, I guess, LD profitability in total for next year, but we're clearly on track for the operating margins that we were, you know, counting on.

This is a great -- it's been a great retention tool for us as well as far as keeping the lines. so LD story, we're very comfortable with.

How do you define profitability?

We actually do it total costs.

So it is not an incremental cost.

It is -- it is the costs of building the network.

It is all the sales.

It's all the marketing.

It is an all in -- an all in cost.

Okay.

So there is nothing left out.

Actually, we look at DSL the same way.

We don't look at it on an incremental.

We are not profitable at the moment in DSL.

We are making, you know, strides.

We are reducing our costs.

We have made some great progress there.

And John can follow up with you on some further metrics on DSL.

I'll get back to you on that one, Simon.

Because as you know, there are some things that we're working towards in terms of content and other elements, service improvements, shortening provision days as Doreen indicated.

So I'd be more than happy to follow up with you.

Thanks.

Brian, next question?

Your next question comes from Blake Bathe of Lehman Brothers.

Good morning.

A very good quarter.

On the free cash flow, it looks like you've done $2.4 billion year to date.

Certainly as you look at both the cost and CAP-X side, it seems like you should be able to improve that in the second half.

So do you have a full year guidance number? And I apologize if I missed it.

And second of all, on enterprise and wholesale, I heard you say that those declined year over year, but I didn't hear much quantification of how much.

So if you could provide that as well, that would be great.

Thanks.

I guess if I start with the enterprise, they are probably down 7 or 8 percent in that range.

And the wholesale is, you know, I would put that in the sort of the same -- actually, let me get back to you with the exact wholesale number.

And then on the debt level, if that was where you were going, Blake --

The free cash flow.

Uh...

For the full year.

I would say we would just continue to drive it.

I don't have the number.

I would say on -- the change in working capital was a big component of it for the first half.

Let me answer you sort of on a debt level, which would be we would anticipate being lower than where we are today and using free cash flow to do that.

Okay.

Thank you.

Operator, next question.

Your next question comes from Jack Grubbom of Soloman Smith Barney.

Thanks.

Morning.

Couple questions.

On Genuity. Now, the fact that you're not going to reintegrate them, uhm, is there any way that -- I don't know, Genuity management, Genuity shareholders, bondholders, whatever, can make this a messy process, or can you just truly decide not to reintegrate them?

And then if that happens, can you maybe expand a little bit more on what the business relationships are between Genuity and Verizon and, you know, if they got untangled, uhm, you know, what, if any, disruption that might cause?

And I guess if they ultimately file Chapter 11, would you have any -- not even so much interest in their assets, but if you did, by virtue of your equity interest, do you have any preferred, uhm, status or -- or no?

And then just a quick question for Doreen.

I know don't want to give out total factor productivity numbers for a whole host of reasons, but just broadly if you think about your productivity as it is now, obviously, some of that is being fueled by the integration savings that you've done.

If you think about a steady state productivity level, once you get past all the integration benefits, how much different is it than what we're seeing now?

Thanks.

Jack, I'll answer the Genuity question.

Yeah.

Because Doreen's ultimately more qualified to answer the second question.

Yeah.

Well, this Genuity question --

[ Laughter ]

Well, this Genuity question is like an answer I gave once about if I could dunk, I wouldn't be in the telephone business.

Yeah, I kind of remember when did you that.

[ Laughter ]

So, I think that you had a lot of what ifs in the Genuity.

Let me perhaps explain the process.

Because what we've done is notify Genuity that as Doreen explained, that we're not converting -- we're not going to maintain the -- maintain a majority ownership, and therefore we have become a 10 percent owner, which cuts off any further funding.

We also released an announcement that indicated we would continue the commercial relationship we have.

Now, Genuity right now as we speak, is in negotiations with their lenders to look at restructuring their company and defining a business plan that will be acceptable to the banks that would be -- who would be funding their business going forward.

So I think what we need to do is let that process play itself out.

And we should also expect that Genuity, of course, will have to make some adjustments to its current business and in my view, go back to their core.

Which is, they are basically an Internet backbone access business.

They're pretty good at it.

And I think to the extent that they can define themselves in that space in a fashion that would produce a business model acceptable to the banks, I think they are going to be in good shape.

I also believe that we'll continue to have some commercial relationship with them because we need to refer services to them, we can jointly sell, and we indicated that in our press release going forward.

I think in terms of anything else related to this, which as you indicate assets sales and stuff. Let me just broaden that answer to suggest, you know, my view hasn't changed on any of that. I think the industry going through such a tumultuous change in everything, I'm not so sure that, other than our own company, that I know what anybody's valuation might be, what anybody's assets might be worth, what anybody's operations might look like.

So I think we need to take a little time and focus on what we do well, and, uhm, and make sure that we don't get out ahead of ourselves.

If I can just take -- since I have the floor, real quickly, if we can focus on what we do well, and what we control, we can take share like we have done in wireless.

We can take share like we have done in consumer LD, and we can incrementally take share in Enterprise. And then allow the dynamics of that to settle, and then, you know, a year from now or whatever, we'll all be in a better shape to look and see what the next steps might be.

But you see no risk at some delay or some monkey wrench in the process, if you just basically declaring you're not going to exercise your option?

You don't see any legal recourse from somewhere out there that would try to stop that?

I don't think you can answer that, Jack.

With total clarity.

I think we've taken the steps that we think are necessary to move forward, and the fact that Genuity is now in negotiations with the banks would suggest that they're following the same process --

That's good.

On the total factor productivity, Jack, I think you know my sensitivity on this one.

I will give you a number that I would say is total company, right.

Now, I'm in wireless and information services and what not.

I would say 5 to 7 percent.

And do you think that's the -- that kind of -- do you think that's a sustainable level, you know, beyond when you get through all of the kind of integration benefits?

Jack, let me jump in on this because this is the guidance that we have been giving for the last four years.

Right.

Because the issue is, we have done all these mergers.

There are huge opportunities for to us continue to learn and take cost out, in addition to the fact that -- that, uhm, Doreen in particular when she was in the telco and Larry Whitman now in it.

Telco are continuing to find enormous opportunities for technology installations and get productivity from that.

The wireless people are doing the same thing.

So we have in effect demonstrated the capacity for 5 to 7 percent.

And my view is, we are going to continue to have in effect productivity gains in the 5 to 7 percent range going out into the foreseeable future.

Just eyeballing your numbers, you mentioned, Doreen, to the last question about enterprise and wholesale being down, but if you kind of include together wireless, DSL, LD, which is probably still 90 percent consumer, with the loss on the local telco, looks like your consumer business actually grew.

I thought I said that Jack.

It did have slight growth.

If I put wireless in, it would have huge growth.

Right.

Thanks.

All right.

That concludes our earnings call.

I want to thank everybody for their participation.

Appreciate it.

Those that are on the call, those that are on the webcast, as well, again, thank you very much.

We will get the information out relative to our third quarter, it will be on our website pretty shortly.

So thank you again.

This concludes today's Verizon Communications second quarter 2002 earnings conference call.

You may now all disconnect.