Verizon Earnings Preview: Impact Of Vodafone Deal, Rising Competition In Focus

by Trefis Team
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Verizon (NYSE:VZ) is scheduled to announce its Q1 2014 results on April 24th. The company recently completed the acquisition of Vodafone’s 45% stake in Verizon Wireless, and will report consolidated EPS figures for the quarter. Verizon’s full control of its wireless division will mitigate the impact of the declining wireline business on both revenues as well as the bottom line. However, the acquisition has saddled Verizon’s balance sheet with heavy debt, the interest on which could dent its cash flows in the coming quarters. At the same time, the carrier is facing rising competition from rivals such as AT&T (NYSE:T), T-Mobile and Sprint (NYSE:S), all of whom have either introduced new plans or cut prices to poach subscribers in an increasingly saturated postpaid market. Verizon still leads the industry in LTE coverage, but the gap with rivals has decreased significantly over the past year, making it tougher for the carrier to gain significant market share going forward. Moreover, the intensifying competition could lead to a prolonged price war and eat into Verizon’s healthy margins in the coming years.

It will therefore be interesting to see the company’s performance on the postpaid net-adds front, especially given how T-Mobile’s ‘Uncarrier’ initiatives have shaken up the wireless industry in recent quarters. With Verizon unlikely to see significant market share gains in postpaid going forward, its ARPU growth becomes the most important driver of its wireless revenues in the coming years. So far, Verizon has refrained from cutting its own prices by much, illustrating the pricing power that it commands in the industry due to its strong and reliable network coverage.

Our $53 price estimate for Verizon is about 10% ahead of the current market price.

See our complete analysis for Verizon


Verizon’s Pricing Power

With the wireless market getting largely saturated, rivals have become aggressive with their pricing strategies in order to gain market share. The biggest threat is coming from T-Mobile at the moment, with the carrier having launched several ‘Uncarrier’ initiatives over the past year. In recent weeks, T-Mobile has come up with a revised data allocation for its postpaid plans, adding 500MB of data to its lowest two data tiers for the same price. In response, AT&T slashed the price of its 2GB Mobile Share Value plan by $15 to $65, and the price of its plan for two lines sharing the data by $15 to $90. These changes came on the back of price cuts announced on its more expensive family data plans in February. Sprint has also made a big move this year, launching its cheaper ‘Framily’ plans, which reduce monthly fees as subscribers add more people to their groups. [1]

In comparison, Verizon has been more conservative in launching new pricing schemes, banking on its network advantage to pull it though the price war. In February, the carrier made its first big move, but it didn’t change much when compared to competitors’ plans. It renamed its “Share Everything” data plans to “More Everything” and increased the data that subscribers get. It also made its Edge device financing and early upgrade plans more attractive by reducing the price of the accompanying service plans, making them look more similar to competitors’. However, the carrier did not offer deep discounts like AT&T or T-Mobile have, choosing to maintain its premium pricing, especially for subscribers on lower data tiers. [2]

Encouraging Data Usage

Verizon has been a little more liberal with its price cuts on the higher data tiers. In a recent move, the carrier reduced the monthly charge for adding a smartphone to a 10GB service plan by $5, to $15. For a family of four, this brings down the monthly service cost from $180 to $160 – in line with AT&T’s discounts offered in February. Although we expect rivals’ pricing moves to have an impact on Verizon’s service pricing in the long run, its response so far shows that the carrier will focus most of its efforts on defending its higher-ARPU generating subscriber base on the upper data tiers.

By discounting higher data usage, Verizon is counting on subscribers adding more mobile devices to their shared data plans and shifting to the higher data tiers. Growing LTE adoption should also help drive the trend, now that Verizon is done with its initial LTE buildout and is now adding data capacity in high-traffic areas by deploying its AWS airwaves. This will help Verizon offset the impact of the pricing discounts on offer and defend its long-term data potential.

Verizon’s recently completed Vodafone deal saw the carrier take on over $60 billion in debt and issue shares worth almost as much to Vodafone’s shareholders. Given that the value of Vodafone’s stake was high, and Verizon had little to gain operationally from the deal since it already had full control over the JV, the big motive behind the transaction seems to have been changing the capital structure (see Higher Cost Debt Limits Verizon’s Ability To Generate Value Out Of Vodafone Deal). Verizon could also look to integrate its wireline and wireless businesses in some way, so as to drive better value out of its under-performing wireline division. With the Vodafone deal closed, we will be looking for an update on Verizon’s strategy for 2014 and beyond.

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Notes:
  1. AT&T cuts Mobile Share Value prices, T-Mobile adds data to Simple Choice plans, FierceWireless, March 10th, 2014 []
  2. How does Verizon’s ‘More Everything’ stack up to competitors’ offers?, CNET, February 17th, 2014 []
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