April 17, 2009

TELECOMMUNICATIONS (DOMESTIC TELECOMMUNICATIONS)

Henry Fund Research

Verizon Communications, Inc. (VZ)

Carl Schumacher
carl-schumacher@uiowa.edu

Investment Recommendation
Current Price Target Price Range

BUY
$31.78 $40.33

INVESTMENT THESIS
Led by the strength of its wireless segment, Verizons top-line revenues grew by over 4% in 2008, a strong accomplishment in the face of one of the worst economic recessions in over a generation. Moving forward, we expect revenues to continue their upward climb, largely on the heels of Verizons acquisition of Alltel and increasing wireless data average revenue per user (ARPU). As consumers demand advanced data services such as mobile internet, mobile online banking and even mobile TV, Verizon has significant opportunities for growth of its wireless data revenues, which have grown to make up 25% of wireless service revenues in FY 2009, a number that is expected to continue to increase with the increasing popularity of smartphones. We expect that within the next five years, data revenues will make up nearly 50% of total wireless ARPU. Verizons acquisition of Alltel has made Verizon the largest wireless service provider in the United States (US), providing increased opportunity to grow wireless data revenues from a larger customer base. Additionally, we anticipate that the combined Verizon/Alltel wireless segment will realize 150 bps of combined operating synergies, improving overall operating margins for Verizon. Verizons wireline operating segment saw a 4.2% revenue decline in FY 2008, largely because of the current economic recession, compounded by a willingness of consumers to substitute wireless voice services for traditional home access lines. Although wireless revenue increased in FY2008, the growth was less pronounced than it has been recently, due to a maturity in the wireless voice service industry, with domestic wireless penetration rates now into the mid-80% range. As this segment matures, a slowdown in wireless voice revenues will be a serious concern for industry players.

Key Stock Statistics

52-Week Price Range Market Capitalization (B) Shares Outstanding (M) Institutional Ownership 60-Month Beta Dividend Yield Price/Earnings (ttm) Price/Book Price/Sales ROA (ttm) ROE(ttm) Projected 5-Year Growth $23.07-$39.94 $90.27 2840 61.2% 0.67 5.8% 12.27 2.16 0.93 5.78% 13.93% 5.11%

EPS ($)
Year EPS 2007 1.91 2008 2.26 2009E 2.46 2010E 2.62 2011E 2.69 2012E 2.83
All earnings represent earnings from operations and have been filtered from net nonrecurring gains.

Valuation Models
Discounted Cash Flow Economic Profit Relative Valuation $40.33 $40.33 $32.51

Important disclosures appear1 the last page of this report. on

Henry Fund Research

EXECUTIVE SUMMARY
Verizon continued to see overall revenue gains in FY 2008, even in the face of one of the worst economic periods in recent history. Despite the pressure on wireline revenues and the maturity of the voice services portion of the wireless telecommunications industry, Verizon is well-positioned for the future due to its status as the largest wireless service provider in the US and its strong investments in continued technology such as FiOS and the LTE platform that will eventually allow it to rollout a 4G network. Like much of the overall market, Verizon stock has seen its value decline significantly during the economic recession, which presents a discounted buying opportunity and a strong dividend yield of 5.8%.

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in revenues for the first time in, generating $49.332 billion in revenue during the year. As of 2008, service revenues made up the majority (approximately 86.5%) of domestic wireless revenues, and data service revenue, derived from such services as text and picture messaging services and mobile broadband had grown to represent 25% of Verizon Wireless service revenues, up from less than 14% of service revenues only two years earlier. Equipment and other revenues made up the remaining 13.5% of wireless operating segment revenues.

COMPANY DESCRIPTION1
Verizon Communications, Inc. is one of the worlds leading providers of communications services. Verizon was incorporated in 1983 as Bell Atlantic and began doing business as Verizon Communications in 2000 1 following a merger with GTE Corporation. Verizon derives its revenues from its two main operating segments, Domestic Wireless and Wireline. In 2008, Verizons Domestic Wireless operating segment overtook the companys Wireline segment in total revenues. In 2008, revenues from Domestic Wireless We expect a significant jump in wireless revenues in accounted for approximately 51% of the companys 2009, largely because of the Alltel acquisition, completed in January, which makes Verizon the largest revenues, compared with 49% for Wireline. wireless carrier in the United States, based upon number of customers. Our estimates project that revenues from the wireless segment with be in excess of $65 billion in 2009, or an increase of over 32%. This includes a wireless services ARPU increase of 1.7%, to $52.49, made up of a 25% increase in data ARPU, offset by a decline in wireless voice ARPU of 6%. As estimated in our model, we expect that the company will experience an uptick in its average monthly customer churn rate in 2009, up to 1.5% from the 1.25% experienced in 2008. As wireless voice services become commoditized and family voice plans become increase in popularity, we expect wireless voice ARPU to continue to experience a decline. Within the next five years, we believe that data ARPU will grow to make up Domestic Wireless nearly 50% of total wireless service ARPU. Verizons domestic wireless segment, Verizon Wireless, is a joint venture with Vodafone Group Plc (Vodafone). Verizon owns a controlling 55% interest in Verizon Wireless and Vodafone owns the remaining 45%. The products and services offered by the Domestic Wireless operating segment include wireless voice, data services and other value-added services and equipment. In 2008, the domestic wireless segment outpaced Wireline

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Enterprise Business, which provides voice, data and Internet communications services to medium and large business customers, both domestically and internationally. In 2008, Enterprise Business revenues were $14.4 billion and accounted for approximately 29.9% of Wireline revenues. Wholesale: The Wholesale sales channel offers domestic and international voice, data and IP services over Verizons global network to carriers and service providers. Wholesale (from Verizon Business) revenues were $3.3 billion in 2008, representing approximately 29.9% of Wireline revenues.

International and Other: This sales channel serves retail and wholesale customers outside the United States Wireline with voice, data, Internet and managed network services. Revenue from International and Other was Verizons Wireline segment consists of two strategic $3.4 billion in 2008, or 7% of Wireline revenues. units, Verizon Telecom and Verizon Business. In 2008, wireline revenues accounted for 49% of Verizons total revenues, or approximately $48.2 billion. Verizon Telecom provides voice, video and data service to residential and small business customers in 28 states and the District of Columbia. Verizon Telecoms three sales channels are broken down as follows: Mass Markets: Mass Markets offers broadband (including high speed internet and FiOS Internet services), video and voice services to residential and small business customers. Video services include FiOS TV and other television services. In 2008, Mass Markets revenues were nearly $21 billion and accounted for approximately 43.5% of wireline Moving forward, we expect wireline revenues to revenues (before intersegment eliminations). continue to see pressure as access lines decrease due Wholesale: The Wholesale channel markets Verizons to the substitution of wireless voice services as a long distance and local exchange network facilities for replacement for wireline services. Additonally, the resale to interexchange carriers, competitive local current economic recession will further acclerate the exchange carriers, wireless carriers and Internet recent downturn that Verizon has seen in its wireline services providers. Wholesale revenues represented revenue, as more consumers are unable to afford voice internet services. Additionally, as the approximately 15.7% of wireline revenues, or nearly and unemployment rate increases, business customers with $7.6 billion, in 2008. have less of a need for access lines. The current Other: Verizons Other sales channel consists of economic climate may also increase customer account defaults, further affecting the companys wireless operator services, public telephones and dial around segment revenues. services such as 1-800-COLLECT and prepaid phone cards. In 2008, revenues from Other accounted for 2.8% of wireline revenues, or approximately $1.37 In 2009, we anticipate that total wireline revenues will decrease by nearly 3.5%, led downward by an billion. expected 20% decline in access lines (to approximately 29 million), offset by increases in net broadband The Verizon Business strategic unit offers advanced connections and FiOS TV customers of 6% and 80%, voice data, security and wireless solutions to medium respectively (to approximately 9 million and 3.5 million). and large business and government customers Looking further out, it is our expectation that, within a throughout the world by way of the following three sales few years, wireline access lines decline will reach a channels: flattening out, and the segment will operate in a steady

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state competition against wireless, with access lines holding steady or even beginning to increase slightly after years of steady declines that have resulted from shifting consumer preferences and the severe economic downturn that we are presently experiencing.

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smartphones continue to increase in popularity and data options for consumers continue to expand. We expect data revenues to continue growing into the near future and we predict that within five years, data revenues will account for nearly 50% of all wireless service revenues.

RECENT DEVELOPMENTS
FY 2008 saw Verizon increase top line revenues by 4.2% and operating revenues by 8.4%, compared with a top-line revenue increase of 6% and an operating income increase of 16% in FY 2007. The slowdown in revenue growth can be attributed to a number of factors, with the economic recession first and foremost. The current recession helped to put a strain on Verizons wireline segment revenues, which experienced negative growth for the second consecutive year, with segment revenues declining 4.2%. Even before the onset of the economic recession, industry-wide wireline revenues were under siege, largely because of the acceptance of wireless telecommunications as a substitute, however the economic recession has accelerated the decline in wireline revenues by creating less demand from both businesses customers that now have fewer employees and from residential customers who have chosen to go wireless only because of tightened incomes and employment worries. Operating revenues from the wireless segment increased by 12.4%, largely on the strength of data ARPU, which increased by 30% to $12.89, and an increase in total wireless customers at year-end of nearly 8.5 million, or 13%. The growth in wireless revenues was able to offset the decrease in wireline enough to account for the increase in Verizons consolidated revenues. FY 2008s 12.4% growth in wireless revenues represented a slowdown in growth compared to a 15.3% growth in FY 2007. Average Revenue Per User (ARPU) grew to $51.59 from $50.96, an increase of 1.2%. The slowdown in wireless revenue growth can be attributed to the fact that the market for wireless voice services is quickly reaching maturity, as evidenced by a domestic penetration rate 2 that has reached 84% as of June 2008 . As a reflection of this trend, wireless voice services revenue grew by just 4.4% in FY 2008, as compared to 8.2% in FY 2007. Despite the maturity of the wireless voice services market, the prospects for growth in the wireless segment remain strong, largely because of the increasing potential for data service revenues. In 2008, data ARPU grew to make 25% of total wireless service revenues, compared with only 13.6% of wireless service revenues just two years earlier. Total wireless ARPU is expected to continue its growth, as data revenue will continue to rapidly increase as

Alltel Acquistion In January of 2009, Verizon closed on its purchase of Alltel, which made Verizon the largest wireless service provider in the United States in terms of total number of customers. By the end of 2009, we expect Verizon, including Alltel customers, to have over 90 million wireless subscribers and account for approximately 34% of the US wireless market, as measured by number of customers. The total value of the Alltel transaction was $28.1 billion, with Verizon assuming approximately $22.2 billion of Alltel debt and paying $5.9 billion in cash for Alltels equity. At the time of the acquisition, Alltel had nearly 13 million wireless th subscribers, making it the 5 largest wireless carrier in the US on a stand-alone basis. Because Alltel uses the same primary network platform technology as Verizon Wireless, CDMA, it is expected that Verizon will be able to rapidly integrate Alltels network operations rapidly and with relative ease. Verizon expects to realize substantial operational benefits from the acquisition. During the companys Q408 earnings call, Verizon executives indicated that they believe the net present value of expected operating synergies to be worth approximately $9 billion, which is reflected in our model in the form of improved operating margins of the combined companies, beginning in 2009. Additionally, with the Alltel acquisition, Verizon executives estimate that wireless revenue now makes up 55% of 3 consolidated Verizon revenues. We feel that Verizons acquisition of Alltel is a strong strategic move, allowing Verizon to continue to expand its presence in the wireless industry by growing its wireless voice revenues through the acquisition and providing the company with an opportunity to

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organically grow its already rapidly increasing data revenues. Verizon and Alltels shared CDMA platform technology will allow for rapid integration, and will allow Verizon to increase both wireless revenues and profit margins going forward.

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take advantage of the evolving revenue opportunities in the wireless segment of the industry. On the wireline side of the industry, bundled services, where one provider supplies a consumer with voice, video and internet services, are becoming increasingly popular and firms are competing largely on network speeds. Verizons continued investment in FiOS technology will position the company well moving forward, increasing its ability to bundle services, as the firm has continued to pick up FiOS Internet and video customers (6% increase in net broadband connections 3 and 80% increase in FiOS TV customers in FY 2008) even in the face of declining access lines and the downturn in the economy.

INDUSTRY TRENDS

The US telecommunications industry has diversified into both the wireless and wireline segments, with many players competing in either one segment or the other and a few firms that compete in both. Firms that compete in the traditional wireline telecom market have seen revenues pressured in recent years by the entries of new competitors such as cable providers as well as the increasing popularity of wireless voice communication. The wireless penetration rate in the MARKETS AND COMPETITION US has rapidly grown over the recent history, from a level of only 11% in 1995 to 84% in 2008. The telecommunications industry in which Verizon competes has evolved into a diverse industry made up of two distinct segments: Domestic Wireless and Wireline. Verizon and AT&T, Inc., the other giant of the domestic telecommunications sector are the only firms to dually compete in both the wireless and wireline segments on a large scale. In the wireless segment, Verizon primarily competes against three other national wireless service providers: AT&T, Sprint Nextel and T-Mobile (owned by Deutsche Telekom AG). In addition, Verizon also competes in many markets with various regional wireless service providers, such as US Cellular, Metro PCS and Leap 1 Wireless. The rise in popularity of wireless communications has led to a number of consumers choosing to substitute wireless voice services for traditional wireline voice services and contributed largely to the overall deceleration of traditional wireline revenue growth. Companies such as Verizon and AT&T, which have a strong presence in both the wireline and wireless segments, are better positioned than most companies, but even these business models have the firms producing one product that can have a tendency to cannibalize the other. While the wireless segment of the industry has been characterized by high growth over the past 15 years, with penetration rates now in the mid-80% range, wireless players are now looking to diversify their wireless revenues away from a strong reliance on voice services, making data service revenue growth very important for the future growth prospects of the wireless sector. Verizons position as the leading wireless service provider in the US, along with their continued rollout of 3G technology and development of a 4G network with LTE technology, positions the firm well to

Verizon P/E Sales (B) ROE ROA EV/EBITDA Market Cap (B) Churn ARPU (Wireless)
Reports

AT&T 12.01 124.03 12.16 5.33 5.27 $152.93 1.70% $50.82

Sprint Nextel n/a 35.64 -13.4 -0.85 3.92 $11.77 2.78% $53.66

TMobile* n/a n/a 3.61 3.6 n/a $55.25 n/a n/a

14.09 97.35 13.93 5.48 4.05 $90.27 1.20% $51.59

*Reported figures for Deutsche Telekom

Figures from Yahoo! Finance & Company 10K

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The wireline segment is currently highly competitive and becoming ever-increasingly so as non-traditional players such as cable and satellite companies emerge to join traditional industry players in competing for market share. Verizon itself indicates that cable operators represent the most significant threat to their 1 wireline business.

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business or home. Although in down economic times some consumers may choose to eliminate either their wireline service or their wireless services, we believe that few customers would elect to go without having any telecommunications services. Despite the resiliency of its business model, Verizon was not unaffected by the economic downturn in 2008. Although both top-line revenues and operating income both experienced positive growth, the growth rate experienced in each instance represented a decline from 2007 figures. This is largely due to the economic recession, combined with the fact that growth in the wireless voice services market is beginning to slow as the domestic wireless penetration rate increases and the wireless voice segment approaches maturity.

The primary area in which wireline telecommunications companies are competing with cable providers is for broadband services. As of November 2008, the Leictman Research Group estimates that of the top 20 largest telecom and cable providers of Broadband, which represent approximately 94% of the current US market, cable providers hold a 55% to 45% advantage 4 over telecos in the number of broadband subscribers. It is our view that, in the long run, whichever group (telecos/cable providers) is able to capture the broadband market will hold a significant advantage in the wireline segment. Gross Domestic Product (GDP)

The US GDP is the market value of all goods and services produced by the labor and property located in the United States, making it the broadest measure of economic activity within an economy. In the third and fourth quarters of 2008, the GDP dropped by 0.5% and 6.3%, respectively, marking the first consecutive 5 quarter drop in GDP since the recession of 1990-1991 .

Additionally, Verizon faces wireline competition in local exchange markets from whichever Competitive Local Exchange Carriers (CLECs) that are present in individual markets, which able to purchase Verizon services, or access their network, at wholesale costs and then compete for customers with Verizon. Despite facing significant competitive pressures within an industry that faces significant government regulation, we feel that Verizon is extremely well-positioned moving forward. While competition is especially intense in the wireless segment, Verizons main advantage comes from its position of strategic strength as the firm holding the largest base of wireless customers within the US.

ECONOMIC OUTLOOK
The telecom industry has traditionally been characterized by steady cash flows and strong dividend yields, which makes the sector an attractive play in the current economic situation. Consumers tend to view telecommunications services as a core need for the

Despite being a relatively steady industry, the telecommunications industry is affected by the overall health of the economy. As the economys strength increases, so too will the overall health of the telecommunications industry, as there is a greater need for access lines, minutes of usage and networking and data services that telecommunications companies provide. As mentioned, Verizon has felt the pinch of the overall economic slowdown, which has come in the form of decelerating consolidated revenue growth and declining wireline revenues in 2008.

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Near-term forecasts expect the real GDP growth rate to continue to fall over the course of at least the next couple of quarters before flattening out and perhaps beginning to move in a positive direction towards the latter half of 2009. In the interim, we expect the continued weakening in the economy to slow near-term revenues within the industry, particularly on the enterprise side as telecos experience a decreased demand for business access lines and networking services. Interest Rates The telecommunications industry is highly capitalintensive, making interest rates a very important factor within the industry, as they have a strong influence in determining companys cost of capital. Lower interest rates decrease the cost of capital for firms and tend to stimulate investment in capital expenditures. The yield on 30-year treasury bonds, which we use in our cost of capital estimation, and is currently at about 3.8%, which is up from lows in 2008, but is still low by historical standards.

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operations should the firm be unable to access capital. As of the end of FY 08, the company has nearly $52 billion of debt in the form of notes payable and long term debt (including operating leases and unfunded employee pension obligations, the companys debt total is nearly $85 billion). In June of 2008, as a result of the announced Alltel merger, Moodys, S&P and Fitch all placed Verizons debt ratings under review or lowered 1 their short term outlook . As of December 31, 2008, the vast majority of Verizons debt was long term, with less than $5 billion coming due before the end of 2009. Of this short-term debt, nearly $2.5 billion was in the form of commercial paper or private placement debt. More recently, in March, Fitch assigned an A rating to a proposed $2.5 to $3 billion issuance of 10 to 30 year debt that Verizon intends to use to refinance a portion 6 of its debt . Because of the companys capital intensive nature and heavy debt load, it is imperative that Verizon maintain its investment-grade debt ratings, which allow the company to obtain debt financing at reasonable rates. Verizons operating ability would be materially adversely affected should Verizon be unable to access the capital markets for financing, or should the company see its debt rating downgraded triggering significant increases in its cost of debt. Population and Housing The demand for telephone service is related to population and housing growth. The more densely populated an area, the greater demand there will be for telecommunications services. In addition, new housing starts can be an indicator of demand for new access lines and broadband services.

In its effort to push the economy towards a recovery, it is anticipated that the federal government will attempt to keep treasury yields pushed low in the hope of spurring capital spending in the economy and investment in the markets. These efforts, however, may be undermined by the governments need to issue a significant amount of debt in order to pay for the cost of an economic stimulus package. The expectation of an oversupply of federal government debt may drive down the price of treasuries, thereby increasing yields, which move inversely to price. Taking these facts into consideration, we expect treasury yields to remain at a historically low level, making the cost of capital relatively inexpensive for those firms that are able to access capital. Although Verizon is a highly capital intensive company which makes significant use of debt, the instability in the credit markets in late-2008 did not have too much of an adverse affect on the company. However, future sustained interruptions of the credit markets would have a significantly negative impact on the companys

According to the US Census Bureau, privately-owned housing starts in December 2008 were at a seasonally adjusted annual rate of 550,000, which represents a 15.5% drop from the previous month. The census bureau estimates that there were 904,300 housing units started in 2008, a decline of approximately 33.3% from 2007. Additionally, residential housing starts continued to drop, falling an estimated 13.8% in December of 7 2008 from the previous month . The current housing market and drop off in new home construction is playing a significant role in the drop off of Verizons wireline revenue, as 43.5% of aggregate wireline revenues in 2008 were from the mass market channel, which consists of residential and small business customers.

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into the latter half of 2009 and perhaps into the early part of 2010, with a strong possibility that the 10% level will be tested. This increase in unemployment will continue to pressure the entire economy, including the telecommunications industry. It is our belief, however, that despite the possibility of further deteriorating employment conditions, the telecom industry will hold up relatively well in comparison to the economy as a whole. As the current recession continues and unemployment remains high, Verizons revenues will continue to see pressure resulting from fewer business and residential telecom expenditures. Despite conservative spending, we still expect Verizon to remain relatively strong because of our view that business and residential customers view telecom services as a essential need and because of Verizons strong presence within the industry.

Source: National Association of Home Builders

Unemployment Rate The unemployment rate, which measures the number of unemployed as a percentage of the labor force, is also an important indicator for the telecommunications industry. Although telecommunication services are considered to be core consumer services, as the economy weakens and unemployment rises, customers will be more likely to discontinue telecom services, including voice and internet services. Some customers that do not disconnect services will likely have trouble paying for services if they find themselves out of work. Additionally, as unemployment rises and fewer workers are at the workplace, the amount of telecom traffic that is generated by enterprise users is likely to decrease as fewer telephones are used and less networking and data services are needed. According to the Bureau of Labor Statistics, as of March 2009, the unemployment rate in the United States is 8.5%, which is the highest 8 level that the US has seen since December of 1983 . US Unemployment Rate (percent):

CATALYSTS FOR GROWTH

Verizons ability to grow wireless revenues will lie in its ability to maintain its position of strength in the wireless industry and continue to develop data revenues as a high growth compliment to its wireless voice services. The increasing popularity of smartphones and increasingly sophisticated data offerings available to consumers allow data revenue growth to continue at its rapid pace, and Verizons eventual rollout of a 4G, which the company hopes to roll out in small doses in 2010 before its nation-wide by 2015, ensures that the company will stay ahead of the technology curve and allow wireless consumers to satisfy their hunger for increased wireless speed. Currently, Verizon is ahead of AT&T in the race to roll out 4G, giving Verizon a leg up on its closest competitor in capturing future 4G 9 customers . Similar to the wireless segment, speed and increased technology seem to be the name of the game moving forward as Verizon looks to grow revenues in the wireline segment. While wireline revenues are unlikely to ever fully recover from the substitution effect of wirless voice services, there are still significant revenue opportunities to be had, led by potential growth in internet and video services. Verizons continued investment in FiOS technology will allow the firm to compete strongly for the evolving wireline industry customer base and gives Verizon a leg up on competitors such as AT&T who have not invested in the fiber to the home technology.

Source: Bureau of Labor Statistics

Although the governments economic stimulus package is expected to give the economy a boost by, among other things, creating a significant number of jobs, we believe that the unemployment rate will continue to rise

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INVESTMENT POSITIVES

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VALUATION
The attached DCF and EP models, which forecast topline revenue growth of 4%-6.5% (not including FY 2009 expected revenues, which include the integration of Alltel) over the next 5 years. We feel that the companys growth in revenue will be driven by its ability to maintain a relatively low churn rate and continue growing its ARPU, largely on the strength of data service revenue. The Verizons merger with Alltel will allow the combined company access to a greater number of wireless customers. Additionally, we expect the integration of Alltel will allow the wireless segment to realize operating synergies of 1.5%, which is reflected in our model through improved operating margins.

Verizon is well-positioned in the wireless industry, with its acquisition of Alltel making the Verizon the largest wireless service provider in the US. The shared network platform of Verizon and Alltel should make for a smooth integration and allow for significant synergy opportunities in combined wireless operations. Verizon has seen its increase significantly revenues represent a the wireless segment move toward maturity. revenue from data services in the recent past. Data strong growth opportunity in as wireless voice revenues

These operating factors, combined with a continuing value growth of 3% and a weighted average cost of capital of 6.1%, our modeled target price for Verizon Communications, Inc. is $40.33. Currently, the stock is trading at $31.78, and our valuation represents an upside of 26.9% from the stocks current price. Taking Due to current stock prices, Verizons dividend is currently yielding over 6.5%, providing an into account the stocks current discount from its opportunity for investors to secure solid dividend intrinsic value along with Verizons current dividend yield, which we view as safe and stable, of over 5.8%, returns along with long-term capital gains. we feel that Verizon represents a good long term investment, which is reflected in our BUY INVESTMENT NEGATIVES recommendation.

Even in the face of overall wireline revenue declines and an economic recession, Verizon saw net additions in FiOS Internet and TV customers, which is expected to be the companys catalyst for growth moving forward.

Wireless voice revenue slowed to a 4.4% increase in revenues in 2008 as the wireless industry reached an 84% penetration rate in the US. Concerns about wireless revenue growth are likely to continue into the future as wireless voice industry reaches maturity. Wireline revenues fell for the second consecutive year, declining by 4.2% in FY2008 as the economy deteriorated and both business customers and consumers found themselves reducing their number of access lines. Verizon carries a significant amount of debt, and because of the capital intensive nature of its business, the company would be particularly susceptible to sustained problems in the credit markets such as were experienced in the Fall of 2008. As long as the global economy remains in its current state, investors should be mindful of such potential risks. Any dramatic increase in interest costs or an inability to access debt capital markets could have a materially adverse impact on Verizon.

It is our belief that Verizon is among the most wellpositioned companies in an industry characterized by its stability and ability to generate relatively stable cash flows. Despite the telecom industrys maturity, we believe that there are potential growth opportunities for a company such as Verizon that has such a strong position in the US wireless industry and will be able to take advantage of increased data revenue opportunities. Additionally, Verizons investment in fiber technology has positioned the company well to pick up wireline customers that have a desire for increased broadband transmission speeds. Trading Discipline Due to its capital intensive nature and heavy reliance on the capital markets, in the event that the credit markets would have a repeat of the problems from last fall for a sustained basis, or if Verizons credit rating were to be downgraded, restricting the companys access to capital markets, we would have to reevaluate our valuation. Additionally, wireless data revenues fail to continue their expected increase in the near-term, we would also have to reevaluate our recommendation. Finally, based upon our analysis, the potential upside for Verizon is 26.9% from where the stock is currently trading. Should the price of the stock increase to

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reduce the upside to only 10%-15% of our valuation price, we would recommend revisiting our BUY recommendation.

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Henry B. Tippie School of Management

REFERENCES
1. 2. 3. 4. 5. 6. 7. 8. 9. FY 2008 10-K Annual Report, Verizon Communications, Inc. CTIA The Wireless Association, www.ctia.org 2008 Q4 Earnings Call, Verizon Communications, Inc. Leichtmen Research Group, www.leictmanresearch.com US Bureau of Economic Analysis, www.bea.gov Reuters, www.reuters.com US Census Bureau, www.census.gov United States Department of Labor, Bureau of Labor Statistics, www.bls.gov Cnet Reviews, http://reviews.cnet.com

IMPORTANT DISCLAIMER
This report was created by a student(s) enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowas Tippie School of Management. The intent of these reports is 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.

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Verizon Communications, Inc. Key Assumptions of Valuation Model Ticker Symbol Current Share Price VZ 31.78

Effective Tax Rate Normal Cash (% of Revenue) Risk Free Rate (30-year T Bond) Market Risk Premium Beta (60 month) Current Stock Price Cost of Equity Cost of Preferred WACC CV Growth Rate Pre-tax Cost of Debt Operating Synergies from Alltel Merger (COGS/SG&A)

34.1% 2.5% 3.80% 4.82% 0.67 31.78 7.03% 6.01% 3.00% 7.49% 1.50%

WACC

40.33 5.50% 5.75% 6.01% 6.25% 6.50% 6.75% 7.00% 7.25% 7.50%

$ $ $ $ $ $ $ $ $

1.5% 45.71 41.65 37.85 34.81 31.91 29.28 26.89 24.70 22.70

$ $ $ $ $ $ $ $ $

2.0% 47.54 42.82 38.47 35.04 31.80 28.90 26.29 23.93 21.78

CV Growth Rate 2.5% 3.0% $ 49.98 $ 53.40 $ 44.35 $ 46.43 $ 39.27 $ 40.33 $ 35.33 $ 35.70 $ 31.66 $ 31.49 $ 28.43 $ 27.83 $ 25.55 $ 24.64 $ 22.98 $ 21.82 $ 20.67 $ 19.31 WACC 6.25% $ 32.63 $ 33.15 $ 33.66 $ 34.17 $ 34.68 $ 35.19 $ 35.70 $ 36.21 $ 36.73 $ 37.24 $ 37.75 $ 38.26 $ 38.77

$ $ $ $ $ $ $ $ $

3.5% 58.54 49.44 41.81 36.22 31.26 27.06 23.46 20.34 17.62

$ $ $ $ $ $ $ $ $

4.0% 67.09 54.17 44.02 36.96 30.93 26.00 21.89 18.41 15.43

$ $ $ $ $ $ $ $ $

4.5% 84.19 62.69 47.71 38.12 30.44 24.47 19.69 15.78 12.53

$ Operating Synergies from Alltel Merger

40.33 0.00% 0.25% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00%

$ $ $ $ $ $ $ $ $ $ $ $ $

5.50% 49.54 50.18 50.83 51.47 52.12 52.76 53.40 54.05 54.69 55.34 55.98 56.63 57.27

$ $ $ $ $ $ $ $ $ $ $ $ $

5.75% 42.88 43.47 44.06 44.65 45.25 45.84 46.43 47.02 47.62 48.21 48.80 49.39 49.98

$ $ $ $ $ $ $ $ $ $ $ $ $

6.01% 37.05 37.60 38.14 38.69 39.23 39.78 40.33 40.87 41.42 41.97 42.51 43.06 43.60

$ $ $ $ $ $ $ $ $ $ $ $ $

6.50% 28.61 29.09 29.57 30.05 30.53 31.01 31.49 31.97 32.45 32.93 33.41 33.89 34.36

$ $ $ $ $ $ $ $ $ $ $ $ $

6.75% 25.12 25.58 26.03 26.48 26.93 27.38 27.83 28.29 28.74 29.19 29.64 30.09 30.55

$ $ $ $ $ $ $ $ $ $ $ $ $

7.00% 22.07 22.50 22.93 23.36 23.78 24.21 24.64 25.07 25.49 25.92 26.35 26.78 27.21

11

Verizon Communications, Inc. Financial Information - Reportable Segments - unreconciled Fiscal Years Ending December 31 Dollar amounts in millions Domestic Wireless
Total Domestic Wireless Customers, end of year (millions)

2006

2007

2008

2009E

2010E

2011E

2012E

2013E

CV

63.7

72.1

91.8

95.4

99.1

102.8

106.6

Monthly Data ARPU

Increase

$ $ $

6.79 43.01 49.80

9.90
45.8%

$ $ $

12.89
30.2%

$ $ $

16.11
25.0%

$ 19.34
20.0%

$ 22.82
18.0%

$ $ $

26.24
15.0%

$ 29.65
13.0%

Monthly Voice ARPU

Increase

$ 41.06
-4.5%

38.70
-5.7%

36.38
-6.0%

$ 34.56
-5.0%

$ 33.18
-4.0%

32.51
-2.0%

$ 32.19
-1.0%

Total Monthly Service ARPU

Increase

$ 50.96
2.3%

51.59
1.2%

52.49
1.7%

$ 53.89
2.7%

$ 55.99
3.9%

58.75
4.9%

$ 61.84
5.3%

Average Monthly Churn Rate Total Data Revenue

% of total service revenue

4,475
13.6%

1.21% 7,386
19.4%

1.25% 10,651
25.0%

1.50% 17,490
30.7%

1.30% 21,855
35.9%

1.30% 26,778
40.7%

1.30% 31,951
44.7%

1.30% 37,432
47.9%

Voice Revenue
growth

28,321 32,796 5,247

16.0%

30,630
8.2%

31,984
4.4%

39,489
23.5%

39,064
-1.1%

38,939
-0.3%

39,593
1.7%

40,639
2.6%

Total Service Revenue Equipment and other Revenue

% of service revenue

38,016 5,866
15.4%

42,635 6,697
13.6%

56,979 8,264
12.7%

60,919 8,835
12.7%

65,717 9,531
12.7%

71,543 10,376
12.7%

78,071 11,322
12.7%

Total Wireless Operating Revenue

% Increase

38,043

43,882
15.3%

49,332
12.4%

65,242
32.3%

69,754
6.9%

75,248
7.9%

81,919
8.9%

89,393
9.1%

92,075

Expenses: Cost of services and sales Selling, general and administrative expense Depreciation & amortization expense Total operating expenses Operating income
Operating Margin

11,491 12,039 4,913 28,443 9,600

25.2%

13,456 13,477 5,154 32,087 11,795

26.9%

15,660 14,273 5,405 35,338 13,994

28.4%

20,053 19,165 7,405 46,623 18,619

28.5%

21,439 20,490 7,918 49,847 19,907

28.5%

23,128 22,104 8,541 53,773 21,474

28.5%

25,179 24,064 9,298 58,541 23,378

28.5%

27,476 26,259 10,147 63,882 25,511

28.5%

28,300 27,047 10,451 65,798 26,277

28.5%

Wireline Verizon Telecom Mass Markets

% Increase

21,542 8,017 2,200 31,759

21,289
-1.2%

20,974
-1.5%

20,433
-2.6%

20,331
-0.5%

20,587
1.3%

20,949
1.8%

21,317
1.8%

21,530
1.0%

Wholesale Other Verizon Telecom Revenues

% Increase

7,774 1,717 30,780

-3.1%

7,571 1,367 29,912

-2.8%

7,344 1,094 28,871

-3.5%

7,270 875 28,476

-1.4%

7,362 700 28,649

0.6%

7,491 560 29,000

1.2%

7,623 448 29,388

1.3%

7,699 358 29,588

0.7%

Verizon Business Enterprise Business

% Increase

14,164 3,281 3,101 20,546 (2,801) 49,504

14,550
2.7%

14,411
-1.0%

13,835
-4.0%

14,250
3.0%

14,606
2.5%

14,898
2.0%

15,196
2.0%

15,500
2.0%

Wholesale International and Other Verizon Business Revenues

% Increase

3,345 3,214 21,109

2.7%

3,341 3,374 21,126

0.1%

3,291 3,323 20,449

-3.2%

3,390 3,423 21,062

3.0%

3,474 3,509 21,589

2.5%

3,544 3,579 22,021

2.0%

3,615 3,650 22,461

2.0%

3,687 3,723 22,910

2.0%

Intersegment eliminations Total Wireline Operating Revenues

% Increase

(2,760) 49,129
-0.8%

(2,824) 48,214
-1.9%

(2,732) 46,588
-3.4%

(2,794) 46,744
0.3%

(2,878) 47,360
1.3%

(2,933) 48,088
1.5%

(2,989) 48,860
1.6%

(3,051) 49,447
1.2%

Expenses: Cost of services and sales Selling, general and administrative expense Depreciation & amortization expense Total operating expenses (Wireline) Operating income (Wireline)
Operating Margin

24,522 12,116 9,590 46,228 3,276

6.6%

25,220 11,236 9,184 45,640 3,489

7.1%

24,274 11,047 9,031 44,352 3,862

8.0%

23,685 10,665 8,718 43,068 3,520

7.6%

23,765 10,700 8,747 43,212 3,532

7.6%

24,078 10,841 8,862 43,781 3,578

7.6%

24,448 11,008 8,998 44,454 3,633

7.6%

24,841 11,185 9,143 45,169 3,692

7.6%

25,139 11,319 9,253 45,711 3,736

7.6%

Consolidated Operating Revenues Consolidated Operating Income

88,958

93,469

97,354

112,389

117,057

123,166

130,566

138,813

142,081

Total access lines (000's) % increase Net Broadband Connections (000's) % increase FiOS TV Customers (000's) % increase

45,100 7,000 207

41,000 -9.1% 8,200 17.1% 943 355.6%

36,161 -11.8% 8,673 5.8% 1,918 103.4%

28,929 -20.0% 9,193 6.0% 3,452 80.0%

27,482 -5.0% 9,745 6.0% 5,524 60.0%

28,032 2.0% 10,330 6.0% 7,181 30.0%

28,593 2.0% 10,949 6.0% 8,258 15.0%

29,165 2.0% 11,606 6.0% 8,671 5.0%

12

Forecasted Verizon Wireless Customers Based on est. US Population and Wireless Penetration Rates

US Penetration Rate 2009 2010 2011 2012 2013

US Population

0.88 0.88 0.88 0.88 0.88

306.94 309.86 312.80 315.77 318.77

VZ Mkt Share 34% 35% 36% 37% 38%

Verizon WirelessCustomers 91.8 95.4 99.1 102.8 106.6

13

Verizon Communications, Inc. Income Statement Fiscal Years Ending December 31 Dollar amounts in millions Operating Revenues Operating Expenses Cost of services and sales (exclusive of items shown below) Selling, general and administrative expense Depreciation and amortization expense Total Operating Expenses Operating Income 2006 88,182 2007 93,469 2008 97,354 2009E 112,389 2010E 117,057 2011E 123,166 2012E 130,566 2013E 138,813 CV 142,081

35,309 24,955 14,545 74,809 13,373

37,547 25,967 14,377 77,891 15,578

39,007 26,898 14,565 80,470 16,884

43,738 29,830 16,123 89,691 22,698

45,205 31,191 16,665 93,060 23,997

47,206 32,945 17,403 97,554 25,612

49,627 35,072 18,297 102,995 27,571

52,317 37,444 19,290 109,050 29,762

53,439 38,366 19,704 111,509 30,572

Equity in earnings of unconsolidated business Other income and (expense), net Interest expense Minority interest Income Before Provision for Income Taxes, Discontinued Operations, Extraordinary Item and Cumulative Efrfect of Accounting Charge Provision for income taxes Income Before Discontinued Operations, Extraordinary Item and Cumulative Effect of Accounting Change Income from discontinued operations, net of tax Extraordinary item, net of tax Cumulative effect of accounting change, net of tax Net Income

773 395 2,349 4,038

585 211 1,829 5,053

567 282 1,819 6,155

679 290 2,150 7,913

694 320 2,213 8,460

737 311 2,226 9,127

778 308 2,164 9,936

829 286 2,028 10,842

848 314 2,215 11,168

8,154 2,674

9,492 3,982

9,759 3,331

13,604 4,643

14,339 4,894

15,308 5,225

16,557 5,651

18,007 6,146

18,224 6,220

5,480 759 (42) 6,197

5,510 142 (131) 5,521

6,428 6,428

7,023 7,023

7,522 7,522

7,805 7,805

8,332 8,332

8,828 8,828

9,051 9,051

Weighted Average Shares Outstanding, basic Earnings per share, basic Dividends per share of common stock

$ $

2,912 2.13 1.62

$ $

2,898 1.91 1.65

$ $

2,849 2.26 1.75

$ $

2,855 2.46 1.75

$ $

2,867 2.62 1.81

$ $

2,904 2.69 1.86

$ $

2,942 2.83 1.91

$ $

2,981 2.96 1.96

$ $

3,014 3.00 2.02

14

Verizon Communications, Inc. Balance Sheet Fiscal Years Ending December 31 Dollar amounts in millions 2006 Assets Current assets Cash and cash equivalents Short-term investments Accounts receivable Assets held for sale Inventories Prepaid expenses and other Total Current Assets Plant, property and equipment Less accumulated depreciation Investments in unconsolidated business Wireless licenses Goodwill Other intangible assets, net Other investments Other assets Total assets Liabilities and Shareowners' Investment Current liabilities Debt maturing within one year Accounts payable and accrued liabilities Liabilities related to assets held for sale Other Total Current Liabilities Long-term debt Employee benefit obligations Deferred income taxes Other liabilities Minority interest Shareowners' investment Common Stock/Contributed Capital Reinvested earnings Accumulated other comprehensive loss Common stock in treasury, at cost Deferred compensation-employee stock ownership plans and other Total shareholders' investment Total liabilities and shareholders investment 2007 2008 2009E 2010E 2011E 2012E 2013E CV

3,219 2,434 10,891 2,592 1,514 1,888 22,538 204,109 121,753 82,356 4,868 50,959 5,655 5,140 17,288 188,804

1,153 2,244 11,736 1,729 1,836 18,698 213,994 128,700 85,294 3,372 50,796 5,245 4,988 18,566 186,959

9,782 509 11,703 2,092 1,989 26,075 215,605 129,059 86,546 3,393 61,974 6,035 5,199 4,781 8,349 202,352

7,204 1,621 13,811 2,247 2,252 27,135 241,637 151,871 101,236 3,986 66,312 6,035 6,000 15,981 226,685

5,289 1,689 14,385 2,317 2,345 26,024 248,746 158,179 105,440 4,151 69,066 6,035 6,249 16,645 233,611

6,835 1,777 14,472 2,426 2,468 27,977 258,649 166,434 110,943 4,368 72,670 6,035 6,575 17,514 246,082

7,594 1,884 15,341 2,558 2,616 29,993 270,924 176,433 117,609 4,630 77,036 6,035 6,970 18,566 260,839

9,134 2,003 15,616 2,720 2,781 32,254 284,566 187,577 125,037 4,923 81,902 6,035 7,410 19,739 277,300

9,687 2,050 15,984 2,784 2,847 33,352 287,714 191,993 127,981 5,039 83,830 6,035 7,585 20,203 284,025

7,715 14,320 2,154 8,091 32,280 28,646 30,779 16,270 3,957 28,337

2,954 14,462 7,325 24,741 28,203 29,960 14,784 6,402 32,288

4,993 13,814 7,099 25,906 46,959 32,512 11,769 6,301 37,199

4,990 16,668 8,502 30,160 41,211 36,779 15,682 7,486 40,884

4,379 16,985 8,855 30,219 41,627 38,306 16,333 7,797 42,582

4,424 18,267 9,317 32,007 43,869 40,306 17,185 8,204 44,804

4,662 19,364 9,877 33,903 46,504 42,727 18,218 8,697 47,496

4,942 20,587 10,500 36,030 49,442 45,426 19,368 9,246 50,496

5,254 21,072 10,748 37,074 50,606 46,495 19,824 9,464 51,685

40,421 17,324 (7,530) (1,871) 191 48,535 188,804

40,613 17,884 (4,506) (3,489) 79 50,581 186,959

40,588 19,250 (13,372) (4,839) 79 41,706 202,352

47,845 21,864 (10,428) (4,891) 93 54,483 226,685

49,832 22,772 (10,861) (5,094) 97 56,746 233,611

52,433 23,960 (11,428) (5,360) 102 59,708 246,082

55,583 25,400 (12,114) (5,682) 108 63,295 260,839

59,094 27,004 (12,879) (6,041) 115 67,293 277,300

60,485 27,640 (13,182) (6,183) 118 68,877 284,025

15

Verizon Communications, Inc. Cash Flow Statement Fiscal Years Ending December 31 Dollar amounts in millions 2009E Cash Flows from Operating Activities Net Income Adjustments to reconcile net income to cash Depreciation and amortization expense Employee retirement benefits Deferred income taxes Equity in earnings of unconsolidated business, net of dividends Accounts receivable Inventories Prepaid expenses and other Other assets Accounts payable and accrued liabilities Other, net Net cash porvided by operating activities - continuing operations Net cash provided by operating activities Cash Flows from Investing Activities Capital expenditures Net change in short-term investments Other intangible assets Other, net Net cash used in investing activities Cash Flows from Financing Activities Proceeds from notes and long-term debt, net Dividends paid Proceeds from sale of common stock Purchase of common stock for treasury Other, net Net cash provided by financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 7,023 16,123 4,267 3,913 679 (2,108) (155) (263) (7,632) 2,854 1,403 26,103 26,103 2010E 7,522 16,665 1,527 651 694 (574) (70) (94) (664) 317 353 26,329 26,329 2011E 7,805 17,403 1,999 852 737 (87) (109) (122) (869) 1,282 462 29,354 29,354 2012E 8,332 18,297 2,422 1,032 778 (869) (133) (148) (1,052) 1,097 560 30,316 30,316 2013E 8,828 19,290 2,699 1,151 829 (275) (162) (165) (1,173) 1,223 624 32,869 32,869 CV 9,051 19,704 1,069 456 848 (368) (64) (65) (465) 485 247 30,898 30,898

(21,075) (1,112) (801) (5,045) (28,033)

(22,064) (67) (249) (311) (22,691)

(23,653) (88) (326) (407) (24,474)

(25,519) (107) (395) (492) (26,513)

(27,276) (119) (440) (549) (28,384)

(25,205) (47) (174) (217) (25,644)

4,249 (4,994) 191 (52) (43) (649) (2,578) 9,782 7,204

(194) (5,194) 19 (203) 20 (5,552) (1,915) 7,204 5,289

2,286 (5,402) 19 (266) 29 (3,334) 1,547 5,289 6,835

2,874 (5,618) 21 (322) 2 (3,043) 759 6,835 7,594

3,217 (5,842) 22 (359) 17 (2,945) 1,540 7,594 9,134

1,476 (6,076) 23 (142) 19 (4,701) 554 9,134 9,687

16

Verizon Communications, Inc. Common Size Income Statement Fiscal Years Ending December 31 2006 100.00% 2007 100.00% 2008 100.00% 2009E 100.00% 2010E 100.00% 2011E 100.00% 2012E 100.00% 2013E 100.00% CV 100.00%

Operating Revenues Operating Expenses Cost of services and sales (exclusive of items shown below) Selling, general and administrative expense Depreciation and amortization expense Total Operating Expenses Operating Income Equity in earnings of unconsolidated business Other income and (expense), net Interest expense Minority interest Income Before Provision for Income Taxes, Discontinued Operations, Extraordinary Item and Cumulative Effect of Accounting Charge Provision for income taxes

40.04% 28.30% 16.49% 84.83% 15.17% 0.88% 0.45% 2.66% 4.58%

40.17% 27.78% 15.38% 83.33% 16.67% 0.63% 0.23% 1.96% 5.41%

40.07% 27.63% 14.96% 82.66% 17.34% 0.58% 0.29% 1.87% 6.32%

38.92% 26.54% 14.35% 79.80% 20.20% 0.60% 0.26% 1.91% 7.04%

38.62% 26.65% 14.24% 79.50% 20.50% 0.59% 0.27% 1.89% 7.23%

38.33% 26.75% 14.13% 79.21% 20.79% 0.60% 0.25% 1.81% 7.41%

38.01% 26.86% 14.01% 78.88% 21.12% 0.60% 0.24% 1.66% 7.61%

37.69% 26.97% 13.90% 78.56% 21.44% 0.60% 0.21% 1.46% 7.81%

37.61% 27.00% 13.87% 78.48% 21.52% 0.60% 0.22% 1.56% 7.86%

9.25% 3.03%

10.16% 4.26%

10.02% 3.42%

12.10% 4.13%

12.25% 4.18%

12.43% 4.24%

12.68% 4.33%

12.97% 4.43%

12.83% 4.38%

Income Before Discontinued Operations, Extraordinary Item and Cumulative Effect of Accounting Change Income from discontinued operations, net of tax Extraordinary item, net of tax Cumulative effect of accounting change, net of tax Net Income

6.21% 0.86% -0.05% 7.03%

5.90% 0.15% -0.14% 0.00% 5.91%

6.60% 6.60%

6.25% 6.25%

6.43% 6.43%

6.34% 6.34%

6.38% 6.38%

6.36% 6.36%

6.37%

6.37%

17

Verizon Communications, Inc. Common Size Balance Sheet Fiscal Years Ending December 31 2006A Assets Current assets Cash and cash equivalents Short-term investments Accounts receivable Assets held for sale Inventories Prepaid expenses and other Total Current Assets Plant, property and equipment Less accumulated depreciation Investments in unconsolidated business Wireless licenses Goodwill Other intangible assets, net Other investments Other assets Total assets Liabilities and Shareowners' Investment Current liabilities Debt maturing within one year Accounts payable and accrued liabilities Liabilities related to assets held for sale Other Total Current Liabilities Long-term debt Employee benefit obligations Deferred income taxes Other liabilities Minority interest Shareowners' investment Common Stock/Contributed capital Reinvested earnings Accumulated other comprehensive loss Common stock in treasury, at cost Deferred compensation-employee stock ownership plans and other Total shareholders' investment Total liabilities and shareholders investment 2007A 2008A 2009E 2010E 2011E 2012E 2013E CV

3.65% 2.76% 12.35% 2.94% 1.72% 2.14% 25.56% 231.46% 138.07% 93.39% 5.52% 57.79% 6.41% 5.83% 0.00% 19.60% 214.11%

1.23% 2.40% 12.56% 0.00% 1.85% 1.96% 20.00% 228.95% 137.69% 91.25% 3.61% 54.35% 5.61% 5.34% 0.00% 19.86% 200.02%

10.05% 0.52% 12.02% 0.00% 2.15% 2.04% 26.78% 221.46% 132.57% 88.90% 3.49% 63.66% 6.20% 5.34% 4.91% 8.58% 207.85%

6.41% 1.44% 12.29% 0.00% 2.00% 2.00% 24.14% 215.00% 135.13% 90.08% 3.55% 59.00% 5.37% 5.34% 0.00% 14.22% 201.70%

4.52% 1.44% 12.29% 0.00% 1.98% 2.00% 22.23% 212.50% 135.13% 90.08% 3.55% 59.00% 5.16% 5.34% 0.00% 14.22% 199.57%

5.55% 1.44% 11.75% 0.00% 1.97% 2.00% 22.72% 210.00% 135.13% 90.08% 3.55% 59.00% 4.90% 5.34% 0.00% 14.22% 199.80%

5.82% 1.44% 11.75% 0.00% 1.96% 2.00% 22.97% 207.50% 135.13% 90.08% 3.55% 59.00% 4.62% 5.34% 0.00% 14.22% 199.78%

6.58% 1.44% 11.25% 0.00% 1.96% 2.00% 23.24% 205.00% 135.13% 90.08% 3.55% 59.00% 4.35% 5.34% 0.00% 14.22% 199.77%

6.82% 1.44% 11.25% 0.00% 1.96% 2.00% 23.47% 202.50% 135.13% 90.08% 3.55% 59.00% 4.25% 5.34% 0.00% 14.22% 199.90%

8.75% 16.24% 2.44% 9.18% 36.61% 32.49% 34.90% 18.45% 4.49% 32.13%

3.16% 15.47% 0.00% 7.84% 26.47% 30.17% 32.05% 15.82% 6.85% 34.54%

5.13% 14.19% 0.00% 7.29% 26.61% 48.24% 33.40% 12.09% 6.47% 38.21%

4.44% 14.83% 0.00% 7.56% 26.84% 36.67% 32.72% 13.95% 6.66% 36.38%

3.74% 14.83% 0.00% 7.56% 25.82% 35.56% 32.72% 13.95% 6.66% 36.38%

3.59% 14.83% 0.00% 7.56% 25.99% 35.62% 32.72% 13.95% 6.66% 36.38%

3.57% 14.83% 0.00% 7.56% 25.97% 35.62% 32.72% 13.95% 6.66% 36.38%

3.56% 14.83% 0.00% 7.56% 25.96% 35.62% 32.72% 13.95% 6.66% 36.38%

3.70% 14.83% 0.00% 7.56% 26.09% 35.62% 32.72% 13.95% 6.66% 36.38%

45.84% 19.65% -8.54% -2.12% 0.22% 55.04% 214.11%

43.45% 19.13% -4.82% -3.73% 0.08% 54.12% 200.02%

41.69% 19.77% -13.74% -4.97% 0.08% 42.84% 207.85%

42.57% 19.45% -9.28% -4.35% 0.08% 48.48% 201.70%

42.57% 19.45% -9.28% -4.35% 0.08% 48.48% 199.57%

42.57% 19.45% -9.28% -4.35% 0.08% 48.48% 199.80%

42.57% 19.45% -9.28% -4.35% 0.08% 48.48% 199.78%

42.57% 19.45% -9.28% -4.35% 0.08% 48.48% 199.77%

42.57% 19.45% -9.28% -4.35% 0.08% 48.48% 199.90%

18

Verizon Communications, Inc. Value Driver Estimation Fiscal Years Ending December 31 Dollar amounts in millions 2006 NOPLAT EBITA (less Vodafone minority interest in wireless) Less: Taxes on EBITA Marginal Tax Rate Total Income Tax Provision Plus: Tax Shield on Interest Expense Less: Tax on Interest Income Less: Tax on earnings of unconsolidated business Less: Tax on other income Taxes on EBITA Plus: Change in Deferred Taxes NOPLAT INVESTED CAPITAL Operating Working Capital: Plus: Normal Cash (< 2.5% of Sales) Plus: Receivables Plus: Inventory Plus: Prepaid Expenses Less: Accounts Payable Less: Other accured expenses Net Operating Working Capital Net Property, Plant and Equipment PV Operating Leases Wireless Licenses NET INVESTED CAPITAL ROIC (NOPLAT/Invested Capital) NOPLAT Invested Capital (Beginning) ROIC (NOPLAT/Invested Capital) FREE CASH FLOW NOPLAT Net Investment (change in invested capital) Free Cash Flow (NOPLAT - Net Investment) 9,335 36.80% 2,674 864 145 284 145 2,963 (6,141) 231 2007 10,525 38.40% 3,982 702 81 225 81 4,298 (1,486) 4,741 2008 10,729 39.10% 3,331 711 110 222 110 3,600 (3,015) 4,114 2009E 14,785 34.13% 4,643 734 99 232 99 4,948 3,913 13,750 2010E 15,537 34.13% 4,894 755 109 237 109 5,194 651 10,995 2011E 16,485 34.13% 5,225 760 106 252 106 5,521 852 11,817 2012E 17,635 34.13% 5,651 739 105 266 105 5,914 1,032 12,753 2013E 18,920 34.13% 6,146 692 98 283 98 6,360 1,151 13,710 CV 19,404 34.13% 6,220 756 107 289 107 6,473 456 13,387

2,205 10,891 1,514 1,888 14,320 10,245 (8,067) 82,356 5,470 50,959 130,718

1,153 11,736 1,729 1,836 14,462 7,325 (5,333) 85,294 5,665 50,796 136,422

2,434 11,703 2,092 1,989 13,814 7,099 (2,695) 86,546 5,748 61,974 151,573

2,810 13,811 2,247 2,252 16,668 8,502 (4,050) 101,236 6,724 66,312 170,221

2,926 14,385 2,317 2,345 16,985 8,855 (3,866) 105,440 7,003 69,066 177,643

3,079 14,472 2,426 2,468 18,267 9,317 (5,139) 110,943 7,369 72,670 185,843

3,264 15,341 2,558 2,616 19,364 9,877 (5,461) 117,609 7,812 77,036 196,996

3,470 15,616 2,720 2,781 20,587 10,500 (6,500) 125,037 8,305 81,902 208,744

3,552 15,984 2,784 2,847 21,072 10,748 (6,653) 127,981 8,501 83,830 213,659

231 #DIV/0!

4,741 130,718 3.63%

4,114 136,422 3.02%

13,750 151,573 9.07%

10,995 170,221 6.46%

11,817 177,643 6.65%

12,753 185,843 6.86%

13,710 196,996 6.96%

13,387 208,744 6.41%

231

4,741 5,705 (963)

4,114 15,151 (11,037)

13,750 18,648 (4,898)

10,995 7,422 3,573

11,817 8,200 3,617

12,753 11,152 1,601

13,710 11,749 1,962

13,387 4,915 8,473

ECONOMIC PROFIT Invested Capital (Beginning) ROIC WACC EP (Invested Capital*(ROIC-WACC))

130,718 3.63% 6.01% (3,120)

136,422 3.02% 6.01% (4,090)

151,573 9.07% 6.01% 4,635

170,221 6.46% 6.01% 758

177,643 6.65% 6.01% 1,134

185,843 6.86% 6.01% 1,577

196,996 6.96% 6.01% 1,863

208,744 6.41% 6.01% 834

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Verizon Communications, Inc. Weighted Average Cost of Capital (WACC) Estimation WACC: Common Shares Outstanding (millions) Current Price Market Value of Equity (millions) Market Value of Debt Value of Capital (D + E) Risk Free Rate (30 year US Treasury Bond) Market Premium (LT Ave, geo.) Beta (60-month) Cost of Equity Pre-tax Cost of Debt WACC

2,840 31.78 90,255 84,844 175,100 3.80% 4.82% 0.67 7.03% 7.49% 6.01%

Market Value of Debt: Notes Payable LT Debt Operating Leases Pension/Post Retirement Medical Benefits

4,993 46,959 5,748 27,144 84,844

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Verizon Communications, Inc. Discounted Cash Flow (DCF) and Economic Profit (EP) Model Valuation Fiscal Years Ending December 31 Assumptions: CV growth CV ROIC WACC Cost of Equity 3.00% 6.41% 6.01% 7.03% 2009E DCF Model FCF PV(FCF) PV(FCF) + PV(Non-Oper) - PV(Debt) - PV(ESOP) PV(Equity) Shares Outst. Target Price Target Price EP Model ROIC EP PV(EP) PV(EP) Invested Capital PV(Operations) + PV(Non-Oper) - PV(Debt) - PV(ESOP) PV(Equity) Shares Outst. Target Price Target Price 2010E 2011E 2012E 2013E CV

(4,898) (4,620) $ $ $ $ $ $ $

3,573 3,179

3,617 3,035

1,601 1,267

1,962 1,465

236,412 176,546

180,873 16,206 84,844 (includes operating leases, pension liabilities) 348 111,886 2840 39.40 As of Last FY End 40.33 As of 4/17/2009 (growth at cost of equity)

9.07% 4,635 4,372 $ $ $ $ $ $ $ $ $

6.46% 758 674

6.65% 1,134 952

6.86% 1,577 1,249

6.96% 1,863 1,391

6.41% 27,668 20,662

29,299 151,573 180,873 16,206 84,844 (includes operating leases, pension liabilities) 348 111,886 2840 39.40 As of Last FY End 40.33 As of 4/17/2009 (growth at cost of equity)

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Relative P/E Analysis Ticker T Q WIN CTL PCS Company AT&T $ Qwest Comm$ Windstream $ CenturyTel $ MetroPCS $ Price 25.95 3.54 8.44 26.67 16.58 EPS 2009E $2.00 $0.32 $0.90 $3.20 $0.55 EPS 2010E $2.23 $0.30 $0.91 $2.97 $1.12 Average 2.62 P/E 09 13.0 11.1 9.4 8.3 30.1 14.4 12.9 P/E 10 11.6 11.8 9.3 9.0 14.8 11.3 12.1 Est. 5yr Gr. 4.2 0.38 0.43 3.93 31.9 PEG 09 3.09 29.11 21.81 2.12 0.94 11.4 14.9 PEG 10 2.77 31.05 21.57 2.28 0.46 11.6 13.9

VZ

Verizon

31.78

2.46 $

0.87

Implied Value: Relative P/E (EPS09) Relative P/E (EPS10) Fair Value (Average) $ 32.51

$ $

35.38 29.65

PEG Ratio (EPS09) PEG Ratio (EPS10)

$ $

24.39 26.50

(average PEG ratio * growth * EPS)

22