Verizon Earnings Preview: Wireless Subscriber Adds, Margins In Focus

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Verizon (NYSE:VZ) is set to report its Q3 earnings on Tuesday, October 21. In the previous quarter, the carrier recorded its highest sales growth in the past six quarters, with total operating revenues increasing by 5.7% over the prior year quarter to $31.5 billion. This was driven by double-digit sales growth in the wireless business and positive growth in the wireline business, marking the first quarterly year-over-year increase in overall wireline revenues in more than seven years. The wireless major added about 1.4 million postpaid connections during the quarter, including a record 1.15 million tablet connections. In wireline, Verizon added 139,000 net new FiOS Internet connections and 100,000 net new FiOS Video connections, taking its total subscriber base to 6.3 million and 5.4 million, respectively. [1] ((Verizon Communications Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 22 2014))

For the third quarter, the company’s retail postpaid net additions are likely to increase by about 40% over the prior year quarter’s count of 927,000, based on indications provided by Chairman and CEO Lowell McAdam in an investor conference last month. McAdam also indicated that the percentage of subscribers opting for the company’s Edge plan is likely to decline from about 18% in Q2 to about 12-13% in the third quarter. This, in addition to higher discount offerings, is expected to put some pressure on the wireless segment’s service margins, which in Q3 2013 and Q2 2014 were 51.1% and 50.3%, respectively. Third quarter results are also expected to be impacted due to seasonal fluctuations and certain non-recurring billings and costs. [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. We have a price estimate of $52 for Verizon’s stock, which is slightly ahead of the current market price.

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“More Everything” To Boost ARPA

After lagging behind rivals T-Mobile and AT&T (NYSE:T) in adding new subscribers for several quarters, Verizon added about 1.4 million postpaid connections during the second quarter, which reflected 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 added around 800,000 new subscribers in the same period.

In a bid to effectively compete with rivals, Verizon made its first big move in February when it renamed its “Share Everything” data plans “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. The popularity of “More Everything” plans can be gauged from the fact that 55% of all postpaid accounts on Verizon’s network were using these plans by the end of Q2 2014, up from 36% in Q2 2013 and 50% in Q1 2014.

Verizon benefited from offering the 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 about 5% year-over-year to about $160 per month, and its retail postpaid connections per account improved from 2.7 in Q2 2013 to 2.8 in the second quarter this year. [3] We expect ARPA to grow in the third quarter as well, owing to the carrier’s superior network quality and focus on increasing data usage per user.

Superior Network Quality To Help Improve Churn, Subscriber Base

Verizon introduced an upgraded 4G network earlier this year to improve its network quality, retain existing users and attract new subscribers. The upgraded LTE network, XLTE, has already been launched in over 400 cities and towns and can potentially be twice as fast as Verizon’s existing 4G network, depending on user location. [4] This helped Verizon in being ranked as the best overall network in the U.S. in the latest mobile network performance report by RootMetrics, leading all other carriers in reliability, network speed, data performance as well as call performance.

We believe that the pricing actions due to increased competition, discount offerings and better network quality (especially XLTE) should help the carrier significantly in retaining existing users and adding new subscribers in Q3 2014. The carrier has maintained a low retail postpaid churn of about 0.93-0.94% in the past several quarters and we expect it to report similar churn figures in the third quarter as well.

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Notes:
  1. Press Release, Verizon, July 22 2014 []
  2. Verizon Comments on Strong Customer Growth in Wireless, Verizon, Sept 9 2014 []
  3. Verizon Quarterly Reports []
  4. Press Release, Verizon, PRNewswire, Sept 18 2014 []