Verizon Earnings: Can Smartphone And LTE Growth Lift Earnings?

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Verizon (NYSE:VZ) is slated to release its Q1 2013 earnings on April 18th. As always, iPhone sales will be a keenly followed metric since the carrier is the first of the top three to announce quarterly results. We will take a close look at the carrier’s net subscriber additions last quarter to see the extent to which its LTE lead over rivals is helping it gain market share amid an industry-wide saturation in wireless growth.

With Verizon promoting high-speed 4G LTE widely, we will also take special interest in its uptake of LTE subscribers and LTE’s penetration within its postpaid subscriber base. Increasing usage of LTE as well as growing smartphone penetration should continue to help the company post a y-o-y increase in postpaid ARPU levels, bolstered by data ARPU. In this regard, it will be interesting to see what the company has to say about the adoption of its recently launched shared data plans – a move that was also replicated by AT&T (NYSE:T) last year.

The company has seen its stock rise by almost 20% since the start of the year as media fueled speculations that it was looking to buy out Vodafone’s stake in their wireless joint venture. Verizon denied the rumors earlier this month but also added that it remains a willing buyer of Vodafone’s stake, keeping alive investors’ hopes that the company will take over full control of the wireless entity sooner rather than later. As a result, the stock continues to trade at about 13% higher than our fair price estimate of $45. (see Vodafone’s Stake In Verizon Wireless Was Probably Too Pricey For Verizon)

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See our complete analysis for Verizon here

LTE lead helps in a saturated wireless market

The U.S. wireless market has become increasingly saturated with wireless connections having exceeded the population in mid-2011. This has made acquiring new subscribers, especially those that pay for the higher-margin data plans, very tough for the wireless carriers. Despite this, Verizon banked on its better 4G LTE coverage to post a record high of 2.1 million postpaid net adds last quarter, almost thrice as many as closest rival AT&T did during the same period. The trend was evident throughout the year as Verizon racked up as many as 5.1 million postpaid net adds in 2012 versus AT&T’s 1.4 million for the full year.

Verizon’s LTE network currently covers over 270 million Americans across the country, while nearest rival AT&T just announced the addition of its 175th LTE market which took its population coverage to 170 million. Sprint is further behind, having started its LTE rollout only in mid-2012. With Verizon continuing to maintain an enviable LTE lead over rivals, we expect the carrier to have seen a ramp-up in its LTE penetration rate. The launch of iPhone 5 as well as a bevy of other LTE-enabled Android devices during the holiday quarter saw the adoption of LTE pick up pace as LTE penetration increased by more than 40% to about 23% of its postpaid subscriber base. While smartphone sales are likely to see a sequential drop, Verizon’s industry-leading LTE coverage  should help it continue to take up a disproportionate number of LTE subscribers. (see Verizon’s LTE Network Leaps To The Fore As iPhone 5 Pre-Orders Start)

An increase in adoption of 4G will reduce dependence on Verizon’s 3G networks, which are under great strain due to heavy data usage by smartphone users. Also, LTE as a network technology not only supports higher speeds but is also more efficient than the current 3G networks at handling data, reducing maintenance and handling costs. Further, higher LTE speeds will see subscribers increasingly use data-intensive applications on their smartphones. This will drive data revenues, thereby increasing ARPA (average revenue per account) levels for Verizon over the coming years.

Smartphone penetration and shared data plans – upside to ARPA

Increasing smartphone penetration should also help ARPA levels increase further. Along with growing LTE usage, the carrier is also seeing many basic phone users upgrade to smartphones, enticed by the huge subsidies on offer. Almost 87% of all retail postpaid phones Verizon sold last quarter were smartphones, with 42% of those upgrading being first-time smartphone buyers. This helped increase its smartphone penetration within the postpaid subscriber base to 58%, up from 44% a year ago. Since smartphone users are usually heavy data users as well, this should continue to help increase postpaid ARPA further. In Q4 2012, the carrier saw its postpaid ARPA  increase by almost 7% over the same period last year to about $147.

With not much upside in terms of subscriber growth left, Verizon is exploring new growth areas in other non-smartphone connected devices such as M2M, telematics, tablets and e-readers. The recent Hughes Telematics’ acquisition shows that the carrier is on the lookout for these additional opportunities. (see Verizon Picks Up Hughes Telematics For Connected Devices Push) Further, the Share Everything data plans that Verizon launched recently is an attempt to get users to add more of these devices to the carrier’s wireless network. This might decrease the average revenue per device considering some of these connected data-only devices consume much less data. But, as users connect more devices to the wireless network, Verizon will be able to draw more revenues from each individual subscriber. Moreover, since their data consumption is low, it will help Verizon shore up its service margins.

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