Chairman’s Letter to Shareowners
How we’re performing.
Our 2006 results demonstrate that we are executing our strategy and turning opportunity into profitable growth and value creation for shareowners.
Operating revenues for 2006 were $88.1 billion, a 26.8 percent increase over 2005. On a pro forma basis – that is, as if Verizon and MCI had been a single company since 2005 – revenues grew by 3.3 percent on the year, with an increasing share coming from growth businesses, and operating income margins were 16.1 percent, also up year-over-year. We strengthened our balance sheet by reducing debt by $1.9 billion, even while absorbing $6 billion of debt in the MCI transaction. We focused on our core network businesses by disposing of non-network assets, such as Verizon Information Services – now trading on the New York Stock Exchange as Idearc – and our investment in the Dominican Republic. We also paid $4.7 billion in dividends and repurchased approximately $1.7 billion in Verizon shares.
Reported earnings for 2006 were $6.2 billion, or $2.12 per share. Before special items, earnings were $7.4 billion, or $2.54 per share. Our total return for 2006 was 34.6 percent. This performance is especially significant since we sold or spun off assets that, while no longer strategic to our network focus, generated substantial earnings and cash. Idearc has also appreciated in value since the spin-off, so investors who own both stocks have enjoyed an even higher total return. It was also good to see that the overall industry – wireless, telecommunications, cable and online services – was healthier in 2006 than it has been in some time.
We invested $17.1 billion in our networks to differentiate our products and services, deliver quality growth and expand our relationships with customers.
With its emphasis on network quality and a record of innovation, Verizon Wireless continued to post the best results in the industry in 2006: the highest revenue growth, at 17.8 percent; the highest operating margins, at 25.2 percent; the highest number of new customers, at 7.7 million; the most retail customers, at 56.8 million; and the most loyal customers, as indicated by our industry-leading customer turnover of 1.17 percent.
Much of this growth comes from our leadership in wireless data, which in 2006 accounted for $4.5 billion in revenues. We ended the year with 34.3 million retail data customers. With V CAST services and other high-speed applications, Verizon Wireless is transforming the cell phone into a multimedia device capable of delivering music, Internet access, video and locator services. This gives us enormous room for growth as we market these services to our loyal customer base.
We closed our merger with MCI in January 2006 to form Verizon Business. In its first year of operation, Verizon Business staked out a strong competitive position among multinational customers. The superior global IP capabilities that MCI brought to the table give us a particularly strong position in the high-growth end of the large-business market.
Verizon Business was the only U.S.-based large business carrier to show quarter-over-quarter revenue growth, fueled by 27.3 percent growth in strategic services such as advanced IP services, virtual private networks and managed network services. Our industry-leading global network allows us to offer ultra-longhaul, converged packet access and other advanced capabilities demanded by these sophisticated customers. We also achieved $600 million in merger synergies, which exceeded our target, and raised our objective for 2007 to $900 million.
Our principal goal in Verizon Telecom is to transform our telecom franchise into a broadband and entertainment business. To do that, we are investing in a fiber network capable of delivering two-way, high-definition broadband and video services at speeds currently up to 50 megabits per second, all the way to homes and businesses – the fastest broadband service available in the market today.
This historic project – launched in July 2004 – began to bear fruit in 2006. Our advanced fiber-optic network passed a total of 6.2 million homes and businesses by the end of the year. We expanded our FiOS brand of high-speed data services, which when combined with DSL gave us 7 million broadband customers for the year, up 35.7 percent. We also introduced FiOS TV in September 2005 and now offer video to customers in hundreds of communities across the country in competition with cable providers. Essentially, we created a complex new business from scratch in less than two years and ended 2006 with 207,000 video customers. We expect video to gain even more momentum in 2007.
So 2006 was another year of solid operating performance and steady progress in transforming our company. We completed a major merger, streamlined our structure, took market share, and put telecom and global business on a path to growth.