Verizon Q2 Earnings Preview: Impact Of “Edge” and “More Everything” Plans In Focus

+1.96%
Upside
41.72
Market
42.54
Trefis
VZ: Verizon logo
VZ
Verizon

Verizon (NYSE:VZ), the largest U.S. wireless carrier, is expected to publish Q2 2015 earnings on July 21. While Verizon’s consistent brand message and its focus on coverage and network quality have helped it build a reputation with customers, the company has not exactly been immune to the saturation in the U.S. wireless market, amid mounting competition from smaller rivals T-Mobile and Sprint (NYSE:S). During Q1 2015, Verizon posted a mixed set of numbers, with operating revenues growing by 3.8% year-over-year to about $32 billion, driven by wireless subscriber growth in the prior year, although adds through the quarter remained weak. Consolidated EBITDA rose by 5.8% y-o-y to $11.9 billion. ((Q1 2015 Earnings Transcript, Seeking Alpha, April 21 2015)) For Q2, we will be interested in hearing about two broad trends: 1) How subscriber acquisitions and churn numbers are trending amid rising competition; 2) The impact of the “Edge” and “More Everything” plans on operating metrics.

We have a price estimate of $56 for Verizon’s stock, which is over 20% ahead of the current market price.

See our complete analysis for Verizon

Relevant Articles
  1. Up 8% Year To Date As 5G Gains Traction, What’s Next For Verizon Stock?
  2. Up 25% Over The Last Three Months, Will Verizon See Further Gains Following Q4 Results?
  3. Down 50% From Covid Highs, Will Verizon Stock Recover Post Q3 Results?
  4. Will Verizon Stock Recover To Its Pre-Inflation Shock Highs?
  5. Verizon Stock Has Over 60% Upside If It Recovers To Its Pre-Inflation Shock Highs
  6. Will Verizon’s Postpaid Woes Continue In Q1?

Tablets Could Drive Postpaid Subscriber Numbers, Churn Numbers In Focus

Wireless subscriber additions, particularly postpaid subscriber adds, represent the most important operating metric for wireless carriers. Verizon’s subscriber adds during Q1 2015 were not so impressive, with net retail postpaid additions growing by about 4.8% year-over-year to 565,000 connections. Moreover, much of the growth has been coming from tablet adds rather than phones. Verizon added 820,000 LTE tablets Q1 2015, while net postpaid phone additions were negative 138,000, as the carrier witnessed a decline of 385,000 basic phones. Wireless carriers have been heavily promoting and discounting tablets as they look to bolster crucial subscriber growth numbers. It should be noted that tablets typically add less long-term value compared to phone connections, since they are relatively inexpensive to add on to a family data plan and monthly data consumption is also likely to be lower. However, they have some indirect benefits, by prompting customers to move on to higher-data tiers and by potentially improving churn numbers, since customers who add more devices on to their plans are less likely to switch carriers.

During Q1 2015, Verizon’s retail postpaid churn stood at 1.03%, improving both sequentially and year-over-year. The company’s contract free Edge plans (discussed below) are helping to lower its churn rate, as out-of-contract subscribers often choose to move over to the Edge plan, effectively staying with the Verizon network. However, competition from T-Mobile – with its clever branding and “uncarrier” approach – and Sprint – with its aggressive pricing plans and gradually improving network – could pose a threat to Verizon. Sprint’s churn declined sequentially from 2.3% to 1.84% during Q1, while its postpaid net adds stood at 211,000. T-Mobile added an impressive 1.1 million net postpaid customers in Q1, while its churn rates dipped to 1.3%. While Verizon has effectively managed to fend off competition thus far by focusing on higher quality customers, the recent momentum that the bottom two carriers have been seeing does pose a threat to the company.

Impact Of EDGE and More Everything Plans On Margins and ARPA

Verizon’s Edge equipment installment plan allows customers to upgrade their handsets without waiting for extended periods of time or having to pay a high upfront cost. The plan appears to create a win-win situation for both users and carriers: while subscribers benefit from faster smartphone upgrades as well as discounts on their monthly service plans, the carrier benefits from lower handset subsidies, since the customer ends up paying the full retail price of the smartphone in installments. Edge phones currently represent about 11.7% of Verizon’s postpaid phone base. During Q1, Verizon noted that the percentage of phone activations on the Edge program was about 39% compared with about 25% in the fourth quarter. The number is expected to rise to as much as 50% during Q2. While the lower subsidy burdens should bode well for Verizon’s wireless margins, there is a possibility that this could be mitigated by higher discounts and promotional activity that the company has been taking to counter aggressive marketing by rivals. Verizon’s wireless EBITDA margins are already the best in the industry, at mid-40% levels, ahead of AT&T (roughly 40%) and Sprint and T-Mobile (under 30%).

Verizon has been seeing strong adoption of its “More Everything” data plans that offer higher bundled data and incentivize customers to share their plans with family and friends by making the addition of members cheaper. 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. Data usage per account within “More Everything” accounts increased by 54% y-o-y in Q1 2015, while average data usage per user also increased dramatically. The higher data usage didn’t help average revenues (ARPA declined over 2.2% y-o-y to slightly above $156 at the end of March 2015) since Verizon offered to increase subscribers’ data usage by providing them at least 50% more data at the same cost in November last year. However, net-net, this is a positive development for the carrier, since data usage is perhaps 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 revenue growth.

Network Updates 

While Verizon still leads the industry in terms of LTE coverage, the gap with rivals has decreased significantly over the past year, making it tougher for the carrier to gain significant market share going forward. Now, Verizon has been focusing on strengthening its network capacity in order to maintain its pricing power, amid a surge in data usage. The company has been focusing on adding capacity through a combination of small cell technology and by deploying its AWS airwaves in high-traffic areas. Verizon recently spent $10.4 billion in acquiring a total of 181 licenses in the AWS-3 auction covering 192 million POPs, or around 60 percent of the U.S. population. ((Verizon: With AWS-3, we have at least 40 MHz of AWS spectrum in 92 of top 100 markets, Fiercewireless, February 2015)) This could eventually help the carrier increase revenues as well as profitability, since LTE networks are much more efficient than older 3G and 2G networks, and help realize higher data usage at lower cost.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research