Verizon Communications Inc.

April 22, 2016

Verizon Communications Inc.

VZ * - NYSE

Rating:

Neutral

Price: (4/21/16)

$50.03

Price Targets: 12-18 month:

$53

5-year:

$57

Industry: Telecommunications

James G. Moorman, CFA

212.240.9863 jmoorman@

Q1 Earnings: Strike Pushes Out Cost-Cutting And Could Impact Q2

? Results. Verizon reported revenues of $32,171 million, which increased 0.6% year-overyear (YoY) (down 1.5% excluding AOL), below consensus and our estimate. Wireless revenue declined 1.5% YoY to $22,004 million and wireline revenue declined 1.9% to $9,290 million. Verizon reported postpaid net additions of 463k, including a loss of 8k phone subscribers due to declines in basic and 3G phones. The company added 507k tablets in the quarter. Prepaid subscribers declined by 177k and we expect this subscriber base to continue to decline as it appears not to be a priority compared to postpaid subscribers. Postpaid churn of 0.96% was an improvement from 1.03% a year earlier. Adjusted EBITDA of $11,982 million was roughly in line with consensus and below our estimate. The company reported EPS of $1.06, which compares with the $1.06 consensus and our estimate of $1.07.

? Strike could delay cost-cuts. The company stated that ongoing union negotiations could delay cost-cutting measures. Due to the delay in cost-cutting, the company expects earnings pressure in Q2, but has maintained its full-year forecast. While we continue to believe the strike will have a minimal impact beyond some installation delays, cost-cutting was expected to help offset the loss of profits from the wireline properties sold to Frontier (FTR-BUY-$5.55) and as a result we have reduced our Q2 EPS estimate.

? Full speed ahead with Go90. The company appears to be very focused on building the Go90 platform. During Q1, Verizon announced a joint venture with Hearst to create new content and then recently announced VZ and Hearst will acquire Complex Media. We also believe VZ could purchase assets from Yahoo (YHOO-$37.67). We remain skeptical on the success of Go90 and the amount of investment VZ is putting into the Go90 project.

? Fixed wireless pilot for 5G. VZ remains committed to being the first carrier in the U.S. to deploy 5G. The company is currently testing 5G and plans to conduct a fixed wireless pilot in 2017. VZ continues to densify its wireless network with small cells, which will help position it for a 5G launch. It also plans to add to its fiber network to support 5G by acquiring XO Communications and a fiber expansion in Boston. The fiber expansion in Boston is expected to cost $300 million over 5-6 years and is already in wireline capital.

? Maintaining NEUTRAL rating. We value VZ at 6.6x our 2017 EBITDA estimate to arrive at a per share price target of $53. Our target EV/EBITDA multiple of 6.6x is above the average for our comparable analysis; we believe it deserves a premium, but feel that the current multiple is appropriate due to the coming divestiture. Our target multiple is roughly at the historic midpoint, we believe is an appropriate valuation.

Valuation Data

Long-term growth rate (E)

2%

Total Debt/Cap (12/31/15)

86.1%

Cash per share (12/31/15)

$1.18

Book value per share (12/31/15)

$4.38

Dividend (yield)

$2.26 (4.4%)

Return on Equity (T-T-M)

65.1%

Trading Data

Shares outstanding (M)

4,073.0

Market Capitalization ($M)

$205,523.6

52-week range

$38.06-$51.02

Average daily volume (3 mos.) (K) 15,608.9

Float

100%

Index Membership

S&P 500

FY (Dec) Revenue ($M)

Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec)

Price/Revenue EPS

Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec)

Price/EPS EBITDA ($M)

Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec)

EV/EBITDA

2015A

$31,984.0 $32,224.0 $33,158.0 $34,254.0 $131,620.0

1.6x

2016E

$32,171.0A $31,221.4E $32,006.9E $34,067.3E $129,466.5E

1.6x

$1.02 $1.04 $1.04 $0.89 $3.99

12.6x

$1.06 $0.95 $0.97 $1.00 $3.98

12.6x

$11,949.0 $11,801.0 $11,886.0 $10,931.0 $46,567.0

6.7x

$11,982.0 $11,279.7 $11,279.8 $11,521.6 $46,063.0

6.7x

Previous $32,673.7 $32,021.4 $32,169.0 $34,097.4 $130,961.6

$1.07 $0.97

NC $0.99 $4.00

$12,029.0 $11,439.0 $11,420.6 $11,576.0 $46,464.7

2017E

$32,266.4 $32,527.8 $32,678.2 $34,207.7 $131,680.1

1.6x

$1.02 $1.00 $1.02 $1.04 $4.09

12.5x

$11,713.9 $11,564.6 $11,749.0 $11,874.9 $46,902.3

6.6x

Previous $32,513.3 $32,727.3 $32,719.8 $34,252.0 $132,212.3

NC $1.03 $0.99 $1.01 $4.05

$11,781.8 $11,868.7 $11,629.4 $11,763.3 $47,043.3

Please refer to pages 11-12 of this report for detailed disclosure and certification information.

* D. A. Davidson & Co. makes a market in this security.

D.A. Davidson & Co. Member SIPC

Price Chart

D.A. Davidson & Co.

Source: Capital IQ

Company Description: New York, NY ? Verizon is a provider of wireline and wireless products and services to consumers, businesses, and government in the U.S. and around the world. Its wireless segment offers communications products and services including voice, data, and equipment sales to a mixture of postpaid, prepaid, and wholesale subscribers. The company currently ranks second among the top four wireless providers in terms of total subscribers and its 4G LTE network covers 308 million POPs. Its wireline segment provides voice, data, and video communications products and services, which include broadband video and data, corporate networking solutions, data center and cloud services, security and managed network services, and voice services.

Potential Risks: ? Wireless industry is highly competitive. Verizon faces significant competition in the wireless industry where the top four largest

carriers make up 99% of total subscribers. There are major wireless providers as well as regional providers and MVNOs (mobile virtual network operators) competing for a limited number of subscribers. ? Wireless is a capital intensive industry. Due to rapid growth in wireless data consumption and technological evolution, wireless is very capital intensive. The industry is in constant upgrade to meet increased network demands as well as purchasing additional spectrum. ? Competition in wireline. The company faces an increasingly competitive environment that includes cable companies, wireless service providers, other telecommunications providers, satellite television companies, Internet service providers, and other companies that offer network services. ? High debt levels. Verizon took on significant debt to acquire Vodafone's 45% stake in Verizon Wireless for $130 billion. As of March 31, 2015, the company had total debt of $109.9 billion and a net debt to adjusted EBITDA of 2.2x.

2

Changes To Estimates Strike Delays Cost-Cuts Full-Speed Ahead With Go90 Fios Drives Wireline Growth Fixed Wireless Pilot For 5G

Net/Net

D.A. Davidson & Co.

We are reducing our Q2 estimates for the delay in cost-cutting, but are only taking our full-year estimate down by $0.01 due to Q1 actual being $0.01 below our estimate. We are reducing our 2017 revenue and EBITDA estimates on our expectations for lower wireline growth, but are increasing 2017 EPS due to lower debt levels from the FTR proceeds.

The company stated that ongoing union negotiations could delay cost-cutting measures. Due to the delay in cost-cutting, the company expects earnings pressure in Q2, but has maintained its full-year forecast. The company has already started to cut costs by reducing overall headcount by 3% and in calling rates and store fronts, but we believe the third portion would include the northeast wireline properties and that is being held up by contract negotiations. While we continue to believe the strike will have a minimal impact beyond some installation delays, cost-cutting was expected to help offset the loss of profits from the wireline properties sold to Frontier and as a result we have reduced our Q2 EPS estimate.

The company appears to be very focused on building the Go90 platform. During Q1, Verizon announced a joint venture with Hearst to create new content and then recently announced VZ and Hearst will acquire Complex Media. We also believe VZ could purchase assets from Yahoo. It was questioned on the call whether a NPRM on privacy at the FCC could reduce the ability to monetize AOL or Yahoo assets. We do not expect a major impact from the NPRM, but we remain skeptical on the success of Go90 and the amount of investment VZ is putting into the Go90 project.

The company added 98,000 Fios broadband net adds, although total broadband subscribers declined by 10k while Fios video saw net adds of 36k. Total Fios revenue increased 5.0% YoY and consumer Fios increased 4.7% as demand for Quantum and higher data speeds drove the revenue increase. At the end of Q1, roughly 78% of Fios Internet subscribers had a plan with speeds of 50 Mbps or higher. On the video side, custom TV packages are seeing high demand and accounted for approximately 38% of Fios video sales in Q1. Custom video sales tend to generate less revenue than standard video packages, but result in higher EBITDA margins.

Fixed wireless pilot for 5G. VZ remains committed to being the first carrier in the U.S. to deploy 5G. The company is currently testing 5G and plans to conduct a fixed wireless pilot in 2017. We believe fixed wireless will be a major component of 5G rollouts, although it remains to be seen what the cost will be and how it can be scaled. VZ continues to densify its wireless network with small cells, which will help position it for a 5G launch. It also plans to add to its fiber network to support 5G by acquiring XO Communications and a fiber expansion in Boston. The fiber expansion in Boston is expected to cost $300 million over five-six years and is already in wireline capital. For video in Boston, the local franchising authority (LFA) has to be negotiated with the City Council and will take roughly six months. We believe this upgrade makes a lot of sense given the infrastructure it had in the area and the need to densify for LTE and 5G.

We do not believe the strike will have a material impact if it is concluded in the near-term and expect the full cost-cutting measures to be put into place. We do have concerns about the amount of capital that Verizon may put into its Go90 platform and how successful it will be over time.

3

Company

Ticker Rating

4/21/2016 ($M, except per share values) # shares Mkt. Cap Total Debt Enterprise Value

T-Mobile TMUS*

BUY

$40.26

824.7 $33,203 $22,445 $55,648

Sprint S*

NEUTRAL

$3.64

3,971.2 $14,455 $33,753 $45,992

13A EBITDA Growth 14A EBITDA Growth 15A EBITDA Growth 16E EBITDA Growth 17E EBITDA Growth

-16.9% 6.0% 31.2% 20.4% 10.7%

13.4% 10.2% 33.4% 19.2% 13.0%

EV/'14A EBITDA EV/'15A EBITDA EV/'16E EBITDA EV/'17E EBITDA

9.9

7.7

7.5

5.7

6.3

4.8

5.7

4.3

14A Revenue Growth 15A Revenue Growth 16E Revenue Growth 17E Revenue Growth

13.1% 8.4% 8.3% 7.9%

-2.7% -7.0% 0.4% 3.6%

EV/'14A Revenue EV/'15A Revenue EV/'16E Revenue EV/'17E Revenue

1.9

1.3

1.7

1.4

1.6

1.4

1.5

1.4

P/E - '14A P/E - '15A P/E - '16E P/E - '17E

n.m. 32.8 35.0 27.4

n.m. n.m. n.m. n.m.

CapEx as % of Rev - '14A CapEx as % of Rev - '15A CapEx as % of Rev - '16E CapEx as % of Rev - '17E

15% 15% 13% 11%

17% 25% 29% 28%

EBITDA Margin - '14A EBITDA Margin - '15A EBITDA Margin - '16E EBITDA Margin - '17E

19% 23% 26% 26%

17% 25% 30% 32%

Dividend Yield

0.0%

Source: D.A. Davidson Estimates and Capital IQ Estimates

*D.A. Davidson & Co. makes a market in this security

0.0%

T-Mobile EBITDA multiples exclude the non-cash benefit from leasing

Verizon VZ*

NEUTRAL

$49.63

4,080.0 $202,490 $110,194 $307,864

10.9% 2.9% 7.7% -1.1% 1.8%

7.1 6.6 6.7 6.6

5.4% 3.6% -1.6% 1.7%

2.4 2.3 2.4 2.3

13.7 12.4 12.5 12.1

14% 14% 13% 13%

34% 35% 36% 36%

4.6%

D.A. Davidson & Co.

AT&T T*

BUY

$37.98

6,200.0 $235,476 $126,151 $356,506

-0.6% -0.7% 14.2% 15.7% 5.8%

8.6 7.6 6.5 6.2

2.9% 10.8% 13.4% 2.3%

2.7 2.4 2.1 2.1

14.8 14.0 13.2 12.4

16% 14% 13% 13%

31% 32% 33% 34%

5.1%

US Cellular USM NA

$41.97

84.4 $3,541 $1,640 $4,561

-24.9% -43.1% 81.1% 21.0% 12.5%

13.1 7.2 6.0 5.3

-0.9% 3.3% -0.9% 0.1%

1.2 1.1 1.1 1.1

n.m. n.m. 65.1 45.8

16% 15% 13% 13%

9% 16% 19% 22%

0.0%

4

Verizon Balance Sheet (millions, except per share data) Cash A/R Other C/A Gross PPE Less accumulated dep. Net PPE Net Intangible Assets Other Assets Total Assets S/T Debt A/P Other C/L LT Debt Equity unit notes (SDE) Deferred Taxes Other Prfd Stock Equity Liabilities + Equity

2014 11,153 13,993 4,477 230,508 (140,561) 89,947 105,708 7,430 232,708 2,735 16,680 8,649 110,536

0 41,578 38,854

0 13,676 232,708

2015 4,820 13,457 4,003 220,163 (136,622) 83,541 120,244 18,575 244,640 6,489 19,362 9,201 103,705

0 45,484 42,557

0 17,842 244,640

Est 2016 3,266 13,736 5,284 235,974 (151,806) 84,168 116,410 17,551 240,414 6,265 18,284 8,929 92,915

0 46,918 41,989

0 25,115 240,414

Est 2017 9,534 13,496 5,284 253,096 (168,123) 84,972 116,410 17,551 247,247 6,265 17,621 8,929 92,915

0 46,918 41,989

0 32,610 247,247

D.A. Davidson & Co.

1Q14 3,544 12,131 7,597 223,841 (134,785) 89,056 103,199 6,035 221,562 2,152 14,984 8,217 107,617

2Q14 6,424 12,966 3,497 227,475 (137,763) 89,712 105,714 6,114 224,427 2,283 16,521 7,689 107,696

3Q14 7,853 13,283 3,637 230,452 (140,520) 89,932 105,658 5,930 226,293 1,603 17,055 8,231 107,627

4Q14 11,153 13,993 4,477 230,508 (140,561) 89,947 105,708 7,430 232,708 2,735 16,680 8,649 110,536

1Q15 4,933 12,698 5,205 210,389 (128,747) 81,642 104,775 26,537 235,790 4,439 15,189 9,085 108,949

2Q15 3,317 13,444 4,741 213,661 (131,129) 82,532 119,733 16,986 240,753 4,206 16,953 9,486 109,465

3Q15 4,181 13,105 4,482 216,674 (134,112) 82,562 119,777 17,966 242,073 7,264 17,721 9,507 105,060

4Q15 4,820 13,457 4,003 220,163 (136,622) 83,541 120,244 18,575 244,640 6,489 19,362 9,201 103,705

1Q16 5,846 12,485 5,284 222,669 (139,658) 83,011 120,410 17,551 244,587 6,265 18,118 8,929 103,615

Est 2Q16 3,834 12,588 5,284 227,006 (143,702) 83,305 111,410 17,551 233,972 6,265 16,172 8,929 92,915

Est 3Q16 1,013 12,905 5,284 231,290 (147,753) 83,537 116,410 17,551 236,700 6,265 16,809 8,929 92,915

Est 4Q16 3,266 13,736 5,284 235,974 (151,806) 84,168 116,410 17,551 240,414 6,265 18,284 8,929 92,915

Est 1Q17 4,335 12,730 5,284 239,777 (155,863) 83,914 116,410 17,551 240,224 6,265 16,217 8,929 92,915

Est 2Q17 5,960 12,833 5,284 244,218 (159,937) 84,280 116,410 17,551 242,319 6,265 16,541 8,929 92,915

Est 3Q17 7,423 12,892 5,284 248,642 (164,025) 84,617 116,410 17,551 244,177 6,265 16,514 8,929 92,915

Est 4Q17 9,534 13,496 5,284 253,096 (168,123) 84,972 116,410 17,551 247,247 6,265 17,621 8,929 92,915

41,597 33,144

0 13,851 221,562

42,027 32,199

0 16,012 224,427

42,289 31,520

0 17,968 226,293

41,578 38,854

0 13,676 232,708

42,330 45,039

0 10,759 235,790

42,945 44,824

0 12,874 240,753

42,896 45,083

0 14,542 242,073

45,484 42,557

0 17,842 244,640

45,568 41,989

0 20,103 244,587

46,018 41,989

0 21,684 233,972

46,468 41,989

0 23,325 236,700

46,918 41,989

0 25,115 240,414

46,918 41,989

0 26,991 240,224

46,918 41,989

0 28,762 242,319

46,918 41,989

0 30,647 244,177

46,918 41,989

0 32,610 247,247

5

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