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Investment Overview for Verizon (NYSE:VZ)
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Verizon's value that present opportunities for upside or downside to the current Trefis price estimate for Verizon.
Mobile Plans & Phones
U.S. Cellular Subscribers: We estimate that this figure will increase from about 300 million by the end of 2011 to about 336 million by the end of our forecast period. However, there could be a downside of about 4% to our price estimate if this figure only reaches 315 million by the end of our forecast period. On the other hand, there could be an upside of a similar order if the figure hits the 355 million mark by the end of our forecast period.
Verizon's Share of Monthly Mobile Subscribers: We estimate that this figure will increase from around 29% by the end of 2011 to about 32% by end of our forecast period. However there could be an upside of about 7% if this figure hits 33% instead.
Wireless SG&A as % of Wireless Gross Profits: We estimate that this figure will increase from about 37% in 2011 to about 44% by end of our forecast period. We believe that Verizon will need to increase marketing expenses to tackle AT&T which has been improving in terms of network quality and LTE deployment. However there could be an upside of about 20% to our price estimate if this figure stabilizes around current levels. On the other hand, there could be downside of 11% if the figure increases more than we forecast and reaches about 50% by end of our forecast period.
Wireless CapEx as % of Wireless Gross Profits: We expect this figure to increase from 21.5% in 2012 to about 25.5% by end of our forecast period as Verizon rolls out LTE and spends on network improvements to compete better. However there could be an upside of 11% to our price estimate if this figure eventually falls down to around current levels.
For additional details, select a driver above or select a division from the interactive Trefis split for Verizon at the top of the page.
Verizon is one of the largest telecommunication service providers in the U.S. It makes money primarily through its mobile phone subscription plans for retail consumers and businesses. The company also provides land-line phone service to residences, small businesses and large enterprises. Broadband Internet services and fiber optic TV services (FiOS) are significant growth areas for Verizon.
Mobile Plans & Phones constitute the majority of Verizon's value for these two reasons:
High Revenue Per Subscriber
We estimate that Verizon's postpaid revenue per subscriber stood at around $32 per month for year 2011. In addition to this we estimate that its average data ARPU (average data revenue per user) stood at around $18 in 2011. If we combine this we get an estimated ARPU of $50 for postpaid users. In reality, the postpaid ARPU is a tad higher since our data ARPU is averaged across prepaid subscribers as well. Nonetheless, it does indicate that revenue per subscriber for the mobile business is higher than that for the land line phone business which stood at around $26 for 2011. This ARPU figure is however less than what Verizon gets from its FiOS customers. However, the number of mobile subscribers for Verizon is much higher than its FiOS subscribers, making mobile phones & plans Verizon's most important division.
High Market Share in a Big Mobile Market
Verizon has the largest subscriber base in the U.S. We estimate that Verizon will command more than 36% share in the U.S. mobile market, which will grow to more than 360 million connections in 2012.
Push for 4G
Mobile operators have now started pushing for 4G networks that offer higher data speeds than 3G. AT&T and Verizon have rapidly expanded their LTE networks and Sprint has also jumped on the bandwagon. First to deploy LTE, Verizon has however maintained lead, with its LTE network covering almost thrice as many U.S. citizens as second-placed AT&T's does. As a growing number of smartphone users demand high-speed wireless services, Verizon is better placed than rivals to tap this demand with its widespread LTE coverage.
Scarcity of wireless spectrum
The wireless market is intensely competitive, with the number of wireless subscriber connections (327.6 million) exceeding the total population (315.5 million) in the U.S. As an ever increasing number of smartphone users demand higher speeds and congestion-free networks, wireless carriers are hard-pressed for additional spectrum in order to meet these demands. With AT&T abandoning its T-Mobile acquisition in the face of stern regulatory opposition, Verizon seems to have scored a big win by acquiring AWS licenses from multiple cable companies for its rapidly growing LTE network. If the deal is approved, it will not only secure its spectrum needs for the future but also move a huge swathe of unused spectrum off the table for rivals in desperate need of spectrum.
Mobile Phone Voice Plan Pricing Declines Offset by Data
Mobile voice plan pricing has seen a gradual decline, as competition has intensified and technology (primarily speed and reliability) and reach have improved. Increasingly, data access is a significant part of usage. So, while average voice revenues have been on a downward trend, the increased data revenue contribution has helped mitigate the impact on total ARPU.
SMS usage on a decline
SMS texting rates have started declining in several advanced SMS markets such as Finland, Netherlands and Hong Kong. Since the U.S. saw a boom in text-messaging a couple of years after these countries, we expect the trend to come to U.S. shores soon. The decline in SMS usage can be attributed to the growing use of smartphones that has caused customers to migrate from traditional modes of communication such as text-messaging or SMS to the more convenient and new age messaging services of social media (Facebook & Twitter), email and other IP-based messaging systems. The erosion in SMS usage may have a negative impact on most wireless carriers' data ARPUs as carriers generally charge much more per byte of SMS data sent than any other data sent over the Internet.
Verizon to enter online streaming business
The online streaming market has seen tremendous growth, enabling market leader Netflix to grow its revenues by almost three times in the last four years. Launching a streaming service of its own will therefore enable Verizon to enter this high growth market and make a profitable venture out of it. It could also bundle this service with its existing wireless service and gain a competitive edge in the wireless market by differentiating itself from its rivals. However, a sticking point for the launch could be a lack of relationship with content providers who might think twice before striking deals with Verizon that might jeopardize their long-standing relationship with cable operators. This is where Verizon was looking for partners with an already existing relationship with content providers to fill in. It looked to buy Hulu in this regard but the talks didn't materialize. Rumors of possible Netflix acquisition also made the rounds. Finally, Verizon announced that it will be partnering Redbox in a joint-venture to provide its streaming services.
Declining Phone Lines per Household
The number of phone lines per household is expected to continue to decline in line with trends in recent years, as many consumers eliminate secondary lines and mobile phones become the primary phones for many consumers. Improvements in the reliability and connection quality of cell phones will have a significant impact on residential phone lines.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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