Verizon’s Q4 Review: Wireless Business Performs Well Despite Competition

Verizon (NYSE:VZ), the largest U.S. wireless carrier, published a relatively well-rounded set of Q4 2015 results that generally met analyst estimates. ^[1] The wireless business performed well, posting reasonable subscriber adds and strong customer retention, despite mounting competition from smaller rivals T-Mobile and Sprint (NYSE:S) and saturation in the U.S. wireless market. Things were more challenging for the wireline business, which witnessed a slight contraction in revenue, besides significantly slower subscriber additions. Below, we take a look at the performance of Verizon’s wireless business, which we estimate accounts for over 90% of its value.

We have a price estimate of $55 for Verizon’s stock, which is about 20% ahead of the current market price. We will be updating our model shortly to account for the 2015 results.

See our complete analysis for Verizon

Postpaid Phone Adds And Low Churn 

Verizon’s wireless business posted a relatively healthy set of numbers as its consistent brand message, its focus on coverage and network quality as well as its higher-quality customer base have helped it largely fend off the competition in a saturated wireless market. Verizon’s retail postpaid net additions came in at 1.5 million during the quarter. Postpaid phone net adds stood at about 449,000 as net smartphone adds of 713,000 were partially offset by a net decline of basic phone subscribers. Verizon’s postpaid phone net additions for 2015 stood at 1.1 million, putting it behind T-Mobile (3.5 million adds), but likely well ahead of AT&T and Sprint, who report Q4 earnings next week. ^[2] The carrier’s retail postpaid churn also remained low, at 0.96% during Q4, marking a year-over-year improvement of 18 basis points. While Verizon expects to continue to post positive net phone additions going forward, the growth rate is likely to slow given that wireless penetration in the U.S. is already above 100% levels. The smaller carriers have also made progress with their network coverage and capacity, potentially limiting the supply of migrating customers. ^[3]

Wireless Revenues Remain Flat As Margins Trend Higher 

There were some moving parts in the carrier’s revenue and margin metrics, owing to the increasing shift to equipment installment plans. Unlike the contract model, where carriers subsidize handsets upfront in return for higher-service revenues, equipment installment plans typically recognize a bulk of handset revenue at the point of sale, while discounting monthly service fees. About 40% of Verizon’s postpaid phone customers are on unsubsidized service pricing. ^[4] While wireless service revenues declined by about 6% year-over-year to about $17.2 billion, overall wireless revenues rose by just about 1% on the back of higher equipment revenues. Verizon’s wireless EBITDA margins expanded to 38.4% from 32.6% during the same quarter last year, possibly driven by lower handset subsidies, improving churn and the growing base of 4G users (79% of its postpaid base is on 4G smartphones).

Internet Of Things Growth 

Verizon’s fastest-growing division was its Internet of Things unit. Revenues for the quarter rose by 18% year over year to $200 million. While IoT accounted for just $690 million in sales in 2015 (roughly 0.5% of total revenue), it should prove promising over the long-run. The installed base for IoT devices worldwide is projected to grow from roughly 10 billion connected devices currently to as many as 30 billion devices by 2020. ^[5] The addressable market for carriers such as Verizon could be sizable, since the potential for embedding networked intelligence spans from automobiles to logistics to civic infrastructure. While AT&T is presently the leader in this so-called “machine-to-machine” market (potentially 50% market share), Verizon has been investing significantly in the space at both the network and platform levels, as it looks to drive incremental growth.

Key Earnings Metrics:

• Total quarterly operating revenues grew 3.2% y-o-y to $34.3 billion.
• Adjusted consolidated EBITDA margin for 2015 was 35.4%, an expansion of 130 bps over 2014.
• Operating cash flows totaled $38.9 billion in 2015, compared with $30.6 billion in 2014.

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1. Verizon Press Release [↩]
2. T-Mobile Press Release [↩]
3. Verizon Q4 2015 Financial Tables [↩]
4. Verizon Communications (VZ) on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, January 2016 [↩]
5. The Internet of Things: Sizing Up The Opportunity, McKinsey [↩]