Building Business Acumen Verizon

Post Course Action Items:

1. 7 days:

Teach one of the principles learned in class today;

to someone in your department.

2. 7 days: Discuss your action items with your manager in

the next 7 days.

3. 30 days: Read “Seeing the Big Picture“

4. 30 days: Give an account of your progress on your action

item to your manager(s).

Start now:

How well do you know Verizon’s

Key Success Measures?

Verizon’s key metrics

Quick Quiz | FY 2013

METRIC

How much Cash was on hand?

01.

How much Cash was generated by Operating Activities?

02.

What was our Gross Profit Margin?

03.

What was our EBITDA Profit Margin?

04.

What was our Net Profit Margin?

05.

What was our Return on Assets? 06.

How much was invested in Capital Expenditures (last 3 years)?

07.

How much did Total Operating Revenue grow, year over year?

08.

How much did EBITDA grow, year over year?

Clear Learning Objectives

 List the 5 key Drivers that all successful companies focus on.

 Analyze and compare company and business units (Wireless, Wire Line

& VES) performance relative to key business drivers.

 Compare company performance to competitors, partners, and

benchmark entities in the industry.

 Explain Verizon’s key financial statements and success measures.

 Articulate connections between business drivers and corporate strategy.

 Create and share action plans…

›

Deliver a great Customer Experience

– Simplify our products, policies and processes and compete for our customers, every day

›

Grow

– Grow customers and revenue faster than the competition by creating, improving and selling products that customers find valuable

›

Drive Profitability Higher

– Concentrate our energy on things that drive customer involvement and eliminate things that don’t

›

Build our V-Team Culture into a Competitive Advantage

Business can be tough!

So why do businesses fail?

 Business failure rates:

 25% of businesses fail in the first year.

 44% of businesses survive 4 years; a failure rate of 54%.  71% of businesses fail within ten years.

 16% of CEOs lose their job every year.

Booz Allen Hamilton

 70% of merger and acquisition activity do not live up to expectation.

…. is _____ !

“Cash is a company’s oxygen supply.”

~Ram Charan

“Cash is more important than your mother.”

~Al Shugart: Former Seagate CEO

Cash

› The Big Picture:

– What is required to Start, Grow and Maintain the business

› Measures:

– At any point in time, the sum of : (1) Cash on hand, (2) Cash balances in checking or savings accounts, and (3) Cash equivalents (convertible to cash within 90 days)

– Cash Flow – during any period of time (month, quarter, year), all cash collected from core

operations less all cash used for operating expenses or activities. Does not include cash from investing and financing activities, which

Can a company have too much Cash?

• Earn it

•Cash from Operation

• Sell Assets

•Cash from Investing

• Borrow it

•Cash from Financing

Pro: No Cost

-Con: Time

Pro: Immediate -Con: Reduces Assets

Pro: Immediate -Con: Cost (Interest)

What kind of companies carry a lot of Cash?

Why is Cash Flow so important?

How Much Cash

Should a Company Have?

A company should have enough cash to cover…

• their interest,

• current expenses,

• capital expenditures,

Top 5 Uses of Cash Dividend Pay-Outs 2012: $5,230 2013: $5,936 Repayments of Borrowing 2012: $6,403 2013: $8,163 Special Distribution 2012: $8,32 2013: $3,150 Capital Expenditures 2012:$16,175 2013: $16,604

Mergers and Acquisitions

Cash – Verizon

(S&P 500 Average Cash: 6%)

$53,528 Divided by $120,550 = 44.40%

(In Millions)

Why carry more cash?

• Acquisition • Uncertainty Business Drivers Operating Revenues Net Income Cash Cash Cash as a % of Revenues Cash from Operating Act.

Verizon Comm Verizon Comm 2011 2012 $110,875 $115,846 $10,198 $10,557 $13,362 $3,093 12.05% 2.67% $29,780 $31,486 Verizon Comm 2013 $120,550 $23,547 $53,528 44.40% $38,818 AT&T 2013 $128,752 $18,553 $3,339 2.59% $34,796 T-Mobile USA 2012 $5,101 $394 $2,631 51.58% $1,181 Comcast 2013 $64,657 $6,818 $5,291 8.18% $14,160 Google Inc 2013 $59,825 $12,920 $58,717 98.15% $18,659

Cash Review

notes on page 9

1. Define Cash Driver

• What is required to start, grow and maintain

the business. (Notes: page 11)

2. Measures of Cash

1. Cash – Easily converted into cash in 90 days or less.

2. Cash Flow – Difference of cash in and cash out over a given period of time.

3. Free Cash Flow: Cash Flow minus Cap. Ex.

3. Importance of Cash Driver

• Have sufficient cash to run business. • What is the cost of that cash (capital)? • Enhance shareholder value.

• Improves attractiveness to suppliers and

customers.

4. Action Plan

• Collect Faster • Manage payables

• Do it right the first time

How to Impact Cash

Decrease how much cash is owed by our customers but not paid.

Decrease how much cash is tied up in inventory.

Increase (without hurting vendor relationship) the days it takes to pay our vendors.

Increase revenue by charging more and/or selling more.

…. is _____ !

“No Margin…. No Mission

“Profit is an opinion. Cash is a fact!

› Definition:

– Calculated on both (1) individual products, and on (2) total company sales. It is what remains after all expenses are subtracted from all revenues. Can be expressed in dollars or as a percentage.

› Measures

– Gross Profit: the money made after the direct cost of your product or services are subtracted from sales, such as raw material and direct labor. – Operating Profit: The money made after

Overhead and Operating Expenses of running the company are subtracted from Gross Profit.

– Net Profit: The money made after non-operating costs, such as interest and taxes are subtracted from Operating.

– EPS: Profit divided by number of diluted shares.

Case Study Profit



How much will you charge your customers?



What can you do to increase your profits and profit margin?

Operating Revenue (Sales)

- Cost of Service & sales (COGS)

= Gross Profit

- Selling, general and administrative (SGA)

= Operating Income (EBITDA)

- Interest expense

- Tax expense

- Depreciation & amortization

= Net Income, Profit, or Earnings

Profit Metrics

Cost of Goods Sold:

Cost directly attributable to products & services we sell; raw materials, manufacturing costs, direct labor. Costs associated with getting products ready for market SGA:

Often referred to as Overhead

High Margin vs. Low Margin

28.30%

21.67%

20.41%

WHY?

They sell commodities. 2011 S&P 500 Average Net Profit Margin = 13%

3.78%

8.57%

0.63%

High Margins Low Margins

WHY?

“In 1912, the Model T, for the first time cost less than the prevailing average annual wage in the United States.”

“Ignoring conventional wisdom, Henry Ford continually sacrificed margins to increase sales. In fact, profits per car fell as he slashed prices

from $220 in 1909 to $99 in 1914.”

“But Sales Exploded!”

“Ford demonstrated that a strategic, systematic lowering

of prices could boost profits, as net income rose from… $3 million in 1909 to $25 million in 1914.”

Profit – Verizon

(In Millions)

Rationalization of programs, projects and assets ~ John Stratton, VES President

Copper to FiOS

 Chronic customers $900 for 2 visits

 FiOS connection $700 ~ John Stratton

LTE is 5x to 8x cheaper to run a megabit across ~ John Doherty SVP IR

S&P 500 Averages for 2012:

Gross Profit Margin (%) = 33%

Business Drivers Operating Revenues Net Income Verizon Comm Verizon Comm 2011 2012 $110,875 $115,846 $10,198 $10,557 Verizon Comm 2013 $120,550 $23,547 Profit GrossProfit Margin 58.62% 60.05% 62.67% EBITDA Margin Net Profit Margin

26.49% 25.57% 9.20% 9.11% 40.29% 19.53% AT&T 2013 $128,752 $18,553 T-Mobile USA 2012 $5,101 $394 Comcast 2013 $64,657 $6,818 Google Inc 2013 $59,825 $12,920 60.03% 42.56% 69.58% 56.78% 37.96% 14.41% 28.90% 7.73% 33.15% 10.54% 27.99% 21.60%

UPS: Fuel Conservation by avoiding left-hand turns:

• 92,000 trucks

• Saved over 28,541,472 miles • Saved 3 million gallons of fuel • Reduce insurance premiums • Airplanes taxi with one engine

General Mills: Hot’n Spicy Chex Mix:

“We had 14 different pretzel shapes. By getting rid of some of them, we save $1 million a year.”

Yoplait: Ditched multicolored lids, saving $2 million a year:

Process

Profit Review

1. Define Profit Driver

 What is left over after you have subtracted

expenses.

 Can be expressed in dollars ($) or as a percent

(%).

2. Measures of Profit

1. Gross Profit (Margin) – subtract COGS 2. EBITDA – Earnings Before Interest, Tax,

Depreciation, and Amortization.

3. Net Profit (Margin) – Subtract all expenses.

3. Importance of Profit Driver

 Net Profit is one of the most important

#’s for the business.

 Indicates price strength & cost controls  Identifies ability to manage costs

4. Action Item

 Increase Revenue

 Sell more  Charge more  Lower Expenses…

My Impact, You Bring Your Job into the class!

 Increase Sales (sell more or charge more)  Reduce Costs

 Reduce overtime on your teams  Reduce travel expenses

 Virtual meetings

 Manage office supplies

 Shut down computers and office equipment  Reduce printing/color copies/copying expenses  Copper to FiOS conversion

 Reduce Coffee Cups

 Use bags with accessories only

 White boards for customers notes and activity tracking  Grow revenue

›

Definition:

– Anything that you own or control which has value.

• Asset or financial strength; Refers to a company’s ability to meet its future obligations and

commitments.

• Asset Utilization: The measure of how

productively your assets are working to make money (generate a return) – to drive sales and profits.

›

Measures

– Strength: Current Ratio, Debt to Equity Ratio. Equity Ration, Liquidity, Risk Measurement, Risk Profile.

Assets in Action

Ford operated a sawmill in the forests around Iron Mountain, Michigan, in the years prior to 1920 to make wooden parts for his Model T.

As the piles of wood scraps began to grow, so did Ford's eagerness to find an efficient way of using them. He learned of a process developed and

patented by Orin F. Stafford.

The process involved chipping wood into small pieces, converting it into charcoal, grinding the charcoal into powder, adding a binder and

compressing the mix into the now-familiar, pillow-shaped briquette. By 1921, a charcoal-making plant was in full operation.

Strength vs. Utilization

Organizationsmust balance Asset Strength & Utilization

Asset Strength:

Refers to a company’s ability to stay viable during the ups and downs in the market place.

Asset Utilization:

Refers to a company’s ability to efficiently and effectively use its assets to generate profits.

Asset Strength Metrics:

• Cash:

Asset Utilization Metrics:

Assets – Verizon

(In Millions)

 We have spent $49,023 on infrastructure (last 3 yrs.)

 NPV for each phone ~ Fran

 Copper vs FiOS $900 vs $700 ~ John

 Asset rationalization ~ John

 Return on Asset guidance between 5% - 8% ~ Fran

 Six Sigma ~ Lowell

ROA is Net income Divided by Total Assets= $23,547 Divided by $274,098 = 8.59%

S&P 500 Ave. 2012: ROA = 5.8%

Business Drivers Operating Revenues Net Income Verizon Comm Verizon Comm 2011 2012 $110,875 $115,846 $10,198 $10,557 Verizon Comm 2013 $120,550 $23,547 Assets Return on Assets 4.43% 4.69% 8.59% AT&T 2013 $128,752 $18,553 T-Mobile USA 2012 $5,101 $394 Comcast 2013 $64,657 $6,818 Google Inc 2013 $59,825 $12,920 6.57% 3.87% 6.15% 11.65%

Asset Review

notes on page 13

1. DefineAsset Driver

Anything you own or control that has value

• What have …

• How well you use what you have...

2. Measures of Asset

• ROA – Percent value of total revenue to total assets.

• ARPA –Average Revenue Per Account.

• CHURN –Percent of connections that leave

3. Importance of Asset Driver

• Demonstrates ability to work smarter rather

than harder.

• Indicates company invests in “right” assets

4. Action Item

• Manage Cash and Cash Flow • Manage Inventory

Why is Growth so

› Definition:

– An increase or improvement over time, in measures such as: sales, profit, assets, shareholder value,

customers and offices. The most common Growth measures are Revenues and Profits (and EPS for public companies).

› Measures

– Top-Line Growth, Revenues or Sales Growth Net Income Growth

– Growth Rate, Expansion, Increase

– Bottom-Line Growth, Net Income or Profit Growth. – Organic Growth vs. Inorganic Growth

Case Study Growth

 You sold 75% of your inventory at the prices you set.

Did you make a profit?

 What will you do with about the competitor next door?

 Will you buy the business down by the train station?

Why Grow?

In today’s business world, no growth means lagging

behind in a world that grows every day…

• Investors expect it.

• Employees are more energized by it.

• Customers are generally attracted to it.

• Executives are measured by it.

Growth – Verizon

(In Millions)

S&P 500 Average Revenue Growth: 10.5% 2009: Alltel acquisition

2010: Building out/investing in 4G &FiOS

2012: Acquisitions; Terre mark, Hughs, CloudSwitch 2012: Spectrum, FiOS, 4G, acquisitions

2014: Verizon Wireless, the other 45% $130B Business Drivers Operating Revenues Net Income Verizon Comm Verizon Comm 2011 2012 $110,875 $115,846 $10,198 $10,557 Verizon Comm 2013 $120,550 $23,547 Growth

Operating Rev. Growth EBITDA Growth Net Income Growth Diluted EPS Growth

4.04% 4.50% -5.39% 10.96% -0.19% 3.52% -5.56% -63.53% 4.10% 63.99% 123.05% 1190.32% AT&T 2013 $128,752 $18,553 T-Mobile USA 2012 $5,101 $394 Comcast 2013 $64,657 $6,818 Google Inc 2013 $59,825 $12,920 1.03% 56.95% 146.09% 171.20% 5.24% 14.26% 30.90% 30.12% 3.34% 7.29% 9.44% 12.28% 19.23% 13.55% $20.33 $21.11

3. Importance of Growth Driver

“Investors expect it, employees are energized by it, customers are generally attracted to it and executives are measured by it.”

Growth Review

notes on page 15

1. Define Growth Driver

An increase or improvement …

2. Measures of Growth

• Operating Revenue Growth :

Top-line Sales/Revenues increase.

• Net Income Growth:

Bottom-line / Profit increase.

• Customer Growth :

The increase/decrease in the customer base.

4. Action Item

• Grow revenue

• Bundle products/services • Understand client objectives

›

Definition:

›

Internal Customers: Employees or

departments to whom or to which we

provide work, products, information, or

output. Most employees are both

internal suppliers and internal

customers to each other.

›

External Customers: Individuals who, or

organizations that, purchase,

recommend, or use a company’s

products and/or services.

1. A’s hire A+’s and B’s hire C’s ~John Bishop

2. “People don’t leave companies, they leave their managers”

~First Break All the Rules by Marcus Buckingham

“People will forget what you said, people will forget what you did, but people will never forget how you made them feel.” ~Maya Angelou(American Poet, b.1928)

Internal People:

External People:

3. “Management is doing things right. Leadership is doing the right things.”

~Peter Drucker

4. Meet monthly/quarterly with your boss and ask:

#1) Are there any gaps in my performance, and #2) Have my priorities changed?”

People

What is more important than meeting customer expectations?

Exceeding! ...?

“If I would have asked my customer what they wanted, they would have said

a faster horse!” ~Henry Ford

Anticipating Customer Needs & Expectations!

“Verizon Credo:

“We make it easy for our customers to do

People:

Verizon: Best In Class!

2010 4th 2011 3rd 2012 1st 1. Verizon

2. Jiffy Lube International 3. Coldwell Banker Real Estate 4. Farmers Insurance

5. CHG Healthcare Services

6. McCarthy Building Companies, Inc. 7. The PNC Financial Services Group 8. Mohawk Industries, Inc.

9. American Infrastructure 10. Capital BlueCross

11. Blue Cross Blue Shield of Michigan

2013 1st

People Review

1. Define People Driver

• Internal • External customers. 2. Measures of People # of Connections ARPA Churn NPS

3. Importance of People Driver

• Anticipate and then exceed expectations. • Customer service is for everyone;

 External  Internal  Vendors

4. Action Item

 Give others the benefit of the doubt  Seek Feedback…

How can you personally impact

PEOPLE:

1.

Who is one of your critical internal customer?

2.

What are their top one or two expectations?

3.

How would you grade yourself on how well you are

fulfilling those expectations?

›

The Annually Reported Financial Statements

– Statement of Income (P&L) – Balance Sheet

– Statement of Cash Flows

1. What is the basic equation for each statement?

2. What is the purpose of the statement? 3. What are the key numbers and how

are they trending?

Equation: Operating Revenues – Expenses = Income

Indicates:

Profitability

Sales or Top Line

= Earnings = Profit = Bottom Line

Interest Taxes

Net Profit Margin:

(23,547 / 120,550) x 100 = 19.53%

Earning Per Share (EPS):

$11,497 / 2,874 = 4.00

Gross Profit Margin:

(120,550 – 44,887) /120,550 X 100 = 62.76%

EBITDA Profit Margin:

Variance Analysis

2012 vs. 2013

Which has the greater impact on profit?

0% 0% 0% 0%

1. Increasing revenues by $100

2. Cutting costs by $100

3. Raising price by $100

4. All options would have about the same

impact

Sell More Cut Cost Raise Price? Lower Cost $100 Increase Rev. $100 $100.00 $50.48 ($12.28) $62.76 -($37.24) Raise Price $100 $0.00 $80.43 ($19.57) $100 -($100) $100.00 $80.43 ($19.57) $100 -($0.00)

Equation: Assets = Liabilities + Equity

Snapshot in time

Indicates: Financial Strength

Least Liquid

Due Last

Due in < 1 year Most Liquid

Due First

Can become Cash in < 1 year

$139,689 $178,682

Cash Flowing IN: $$

Cash Flowing OUT: ($$$)

“Cash Flow”

(Most important Number!)

Net Income

38,818

1 2 3 4 5 6 7 8 9

When a Person… Chances of the idea being incorporated into their life is…

Says, “That’s a good idea”… 10% Says, “I’ll do it!” and commits… 25%

Says when they’ll do it… 40%

Plans how to do it… 50%

Commits to another… 60%

Sets a future specific appointment with

One final thought…

“People will work…

hard for a paycheck,

harder for a person, and

hardest for a reason

.”

Thomas S. Monson

AcumenLearning.com

(800) 224-5444