Verizon Reports Robust Q4 Subscriber Adds, Income Falls On Pension Costs

Verizon (NYSE:VZ) announced a mixed set of Q4 results Thursday, as healthy wireless subscriber growth helped overall operating revenues increase by 4.3% year-over-year (y-o-y) to about $33.2 billion. The wireline business reported a marginal slump in total operating revenues, although consumer revenues grew by 4.1% y-o-y on strong FiOS Internet and Video subscriber adds. Notwithstanding postpaid subscriber gains, the company reported a net loss of $2.23 billion in the quarter compared to a profit of over $5 billion a year ago, on account of higher pension costs and liabilities related to other post-employment benefits. This gains more significance when we consider that the company now enjoys complete control over Verizon Wireless, after acquiring Vodafone’s 45% stake last year. The acquisition saddled Verizon’s balance sheet with significant debt, which resulted in the company’s interest expenses increasing about 21% y-o-y in Q4 to $1.74 billion and growing over 84% in full year 2014 to about $5 billion. ((Press Release, Verizon, Jan 22 2015))

The largest wireless carrier in the U.S. added over 2 million postpaid connections during the quarter, including 1.4 million tablet connections. The postpaid subscriber growth reflects a 33% increase over an already impressive previous quarter and a 25% increase over the fourth quarter last year. In wireline, Verizon added 145,000 net new FiOS Internet connections and 116,000 net new FiOS Video connections in Q4, taking its total subscriber base to 6.6 million and 5.65 million, respectively. ^[1]

As expected, Verizon’s retail postpaid churn increased in the quarter to 1.14% from 0.96% in the same period last year, due to increased competition from AT&T (NYSE:T), Sprint (NYSE:S) and T-Mobile. Increased competition in the latter half of the year also marginally pushed up the full year postpaid churn to 1.04% in 2014. The carrier also generated strong cash flows, which enabled it to invest over $17 billion in capital expenditures (CapEx) in 2014 and return over $7.8 billion to shareholders in the form of dividends. The company’s CapEx to revenue ratio improved by 30 basis points to 13.5% in 2014 on improving CapEx efficiency. Verizon estimates its CapEx to be in the range of $17.5-18 billion in 2015.

We have a price estimate of $52 for Verizon’s stock, which is over 10% ahead of the current market price.

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“More Everything” Adoption, Innovative Plans Help Increase Data Usage

After robust gains in the first nine months when Verizon added about 3.5 million postpaid connections, reflecting an increase of 24% over the same period last year, the carrier added over 2 million postpaid connections in the fourth quarter. This took its total retail postpaid subscriber base to over 102 million and overall retail subscriber base to over 108 million connections at the December 2014.

The rapid increase in subscriber adds in the last year 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 61% of all postpaid accounts on Verizon’s network were using these plans by the end of 2014, up from 46% in 2013 and 57% 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. However, this was offset by the fact that Verizon offered to increase subscribers’ data usage by providing them at least 50% more data at the same cost in November last year. For instance, Verizon increased the data usage limit of its $80 plan from 6 GB to 10 GB, and of its $100 plan from 10 GB to 15 GB. This was reflected in the fact that its retail postpaid average revenue per account (ARPA) was almost flat in Q4 at about $158 per month, and grew just about 4% for full year 2014 to $160. However, an important implication of giving more data to users was that average data usage per user increased by 50% in 2014. This is arguably the most important metric for carriers in the U.S. currently considering there is very little scope for subscriber additions, and data use will likely provide the basis of all future top line growth. ((ref: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. This trend was witnessed in 2014 as well with overall wireline revenues remaining flat at around $38.4 billion.

The Consumer business, which provides broadband and video services (including FiOS), reported an increase of 5% in sales in 2014 over the prior year to about $15.6 billion. FiOS now represents about 77% of total consumer revenue and it recorded double-digit revenue growth in the year, driven by strong customer additions, innovative pricing actions as well as growing adoption of its recently introduced high-speed Quantum service (Internet speeds of 50-500 Mbps). By the end of 2014, about 59% of the carrier’s Internet subscribers had subscribed to the Quantum service, up from 46% at the end of 2013.

On the cost side, the company’s Wireline EBITDA and EBITDA margins slightly increased in 2014 over the prior year to $8.9 billion and 23.2%, 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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1. Verizon Communications Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, Jan 22 2015 [↩]