Growing Wireless Subscribers, FiOS Adoption Drive Verizon’s Q3 Results

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Verizon (NYSE:VZ) announced a strong set of Q3 results on Oct 21, as healthy wireless subscriber growth helped overall operating revenues increase by 4.3% year-over-year (y-o-y) to about $31.6 billion. The wireline business reported a marginal slump in total operating revenues, although consumer revenues grew by 4.5% y-o-y on strong FiOS subscriber adds. Net income grew by over 65% to $3.7 billion in the quarter, reflecting the fact that the company now enjoys complete control over Verizon Wireless, after acquiring Vodafone’s 45% stake earlier this year. The acquisition saddled Verizon’s balance sheet with significant debt, which resulted in the company’s interest expenses more than doubling to about $1.26 billion in Q3 2014. ((Press Release, Verizon, Oct 21 2014)) [1]

The largest wireless carrier in the U.S. added over 1.5 million postpaid connections during the quarter, including 1.1 million tablet connections. The postpaid subscriber growth reflects a 7% increase over an already impressive previous quarter and a 44% increase over the third quarter last year. In wireline, Verizon added 162,000 net new FiOS Internet connections and 114,000 net new FiOS Video connections in Q3, taking its total subscriber base to 6.5 million and 5.5 million, respectively. [2]

Despite increased competition from AT&T (NYSE:T), Sprint (NYSE:S) and T-Mobile, Verizon’s retail postpaid churn was almost flat at 1% from the prior year quarter, validating the carrier’s innovative offerings and high quality network. The carrier also generated strong cash flows totaling $8.4 billion in the quarter, which more than offset the increase in cash taxes and other cash outlays such as interest payments and pension contributions. The more efficient cost structure prepares Verizon well for the coming years, as new subscribers become increasingly tough to find in a saturated market, and rivals further bridge the 4G LTE coverage gap with the industry leader.

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“More Everything” Drives Wireless ARPA, Connections Per Account

After a solid second quarter when Verizon added about 1.4 million postpaid connections, reflecting a dramatic increase of 160% over the previous quarter and about 50% over the same period last year, the carrier added over 1.5 million postpaid connections in the third quarter. This took its total retail postpaid subscriber base to over 100 million and overall retail subscriber base to over 106 million connections at the end of September 2014.

The rapid increase in subscriber adds in the last few quarters can be attributed to the carrier’s innovative plan offerings, especially its “More Everything” data plans. These plans offer higher data offerings and incentivize customers to share their plans with family and friends by making the addition of members cheaper. Although Verizon was a little late in offering such discounts to customers compared to rivals, these offerings are now in line with plans offered by other leading carriers such as AT&T. The popularity of “More Everything” plans can be gauged from the fact that 57% of all postpaid accounts on Verizon’s network were using these plans by the end of Q3 2014, up from 42% in Q3 2013 and 55% in the previous quarter.

Verizon benefited from offering 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 3.5% y-o-y to $161.24 per month, and its retail postpaid connections per account improved from 2.72 in Q3 2013 to 2.82 in the third quarter this year. [1]

FiOS Drives Wireline Consumer Sales

Verizon’s wireline revenues have remained under pressure over the last six years owing to growing competition in a largely saturated market. However, strong performance by the Consumer business segment offset much of the weakness in the legacy TDM-providing Wholesale segment in the third quarter.

The Consumer business, which provides broadband and video services (including FiOS), reported an increase of 4.5% in sales over the prior year quarter to about $3.9 billion. FiOS recorded double-digit revenue growth (12.3%), driven by strong customer additions, innovative pricing actions as well as growing adoption of its recently introduced high-speed Quantum service. By the end of the third quarter, about 57% of the carrier’s Internet subscribers subscribed to the Quantum service, which provides improved Internet speeds of 50-500 Mbps.

On the cost side, the company’s Wireline EBITDA and EBITDA margins were almost flat y-o-y at $2.2 billion and 23.0%, respectively. We expect the wireline business to improve its sales and expand margins going forward, as the company expands its FiOS offerings and works towards streamlining the business.

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Notes:
  1. Q3 2014 Presentation, Verizon, Oct 21 2014 [] []
  2. Verizon Communications Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 21 2014 []