Verizon Earnings Preview: Robust Subscriber Adds, High Margins To Drive Growth

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Verizon (NYSE:VZ) is set to report its Q2 earnings on Tuesday, July 22. The company reported a mixed set of results for the first quarter, as revenues rose 4.8% over the same period last year but subscriber numbers came in below expectations on higher competition from rivals such as AT&T (NYSE:T) and T-Mobile. The largest wireless carrier in the U.S. added a net 539,000 postpaid subscribers in the first quarter, about 20% fewer than the same period last year and trailing AT&T by 86,000. With the company having taken on additional debt to fund its acquisition of Vodafone’s stake in Verizon Wireless, it continued to focus strongly on margins by controlling subsidies, and was cautious about entering into a price war with rivals. Wireless service margins increased by 170 basis points over the same period last year. [1]

When the company announces its second quarter earnings, we expect solid growth in revenues owing to robust postpaid subscriber adds and continued focus on margins. Verizon’s CEO said in an interview on CNBC recently that the carrier added over 1.4 million postpaid subscribers in Q2, reflecting a dramatic increase of 160% over the previous quarter and about 50% over the same period last year. In contrast, second largest carrier AT&T is expecting around 800,000 subscriber adds, which is an improvement of less than 30% over its previous quarter performance. Verizon’s CEO also stated that the company witnessed record growth in tablets, lower churn rate and consistently high margins in the three month period ending June 30. [2]

According to our estimates, Verizon’s wireless division accounts for over 90% of its total enterprise value, after the company completed the acquisition of Vodafone’s 45% stake in Verizon Wireless in February this year. We have a price estimate of $50 for Verizon’s stock, which is in line with the current market price.

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“More Everything”, Edge Plan and XLTE Drive Adds, ARPA

Verizon lagged rivals T-Mobile and AT&T in attracting new subscribers in the last few quarters. In the first quarter of this year, while Verizon saw its worst performance in terms of subscriber net adds (postpaid and prepaid) in the last two years with about 549,000 additions, AT&T improved its net adds by 30% sequentially to over 1 million, and T-Mobile added 2.4 million. [3]

In a bid to effectively compete with rivals, Verizon made its first big move in February when it renamed its “Share Everything” data plans as “More Everything” and increased the data allocation for subscribers. It also reduced the monthly charge for adding a smartphone to a 10GB service plan by $5, to $15. For a family of four, this brought down the monthly service cost from $180 to $160 – in line with AT&T’s discounts offered at the time.

Verizon benefited from offering such discounts as subscribers started adding more mobile devices to their shared data plans, which eventually encouraged many of them to shift to higher data tiers. This was reflected in the fact that its retail postpaid average revenue per account (ARPA) increased by over 6% year-over-year to about $160 per month and its retail postpaid connections per account improved from 2.67 in Q1 2013 to 2.77 in the first quarter this year. [4] We expect ARPA to grow in the second quarter as well, owing to the carrier’s superior network quality and focus on increasing data usage per user.

In addition to its “More Everything” plan, Verizon tweaked its Edge upgrade scheme to make it more attractive to users. It reduced the price of the accompanying service plans, making them look more similar to competitors’. The Edge plan basically aids customers in upgrading their handsets without waiting extended periods of time or having to pay a high upfront cost.

Verizon also introduced an upgraded 4G network earlier this year to improve its network quality, retain existing users as well as attract new subscribers. The upgraded LTE network, XLTE, has already been launched in over 300 cities and towns and can potentially be twice as fast as Verizon’s existing 4G network, depending on user location. [5] [6] We believe that the aforementioned pricing actions, discount offerings and better network quality (especially XLTE) are likely to have helped the carrier significantly in retaining existing users and rapidly adding new subscribers in Q2 2014.

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Notes:
  1. Verizon Communications Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 24 2014 []
  2. Verizon to report more than 1.4M postpaid net additions in Q2, Fierce Wireless, July 10 2014 []
  3. T-Mobile adds 1.3M postpaid subs in Q1, blowing past rivals, Fierce Wireless, May 1 2014 []
  4. Verizon Q1 Report []
  5. Press Release-Verizon, PRNewswire, May 19 2014 []
  6. Verizon XLTE Turned on in 50 More Cities Today, Android Headlines, June 27 2014 []