Key Takeaways From Verizon’s Q2 Results

Verizon (NYSE:VZ) posted Q2 earnings on Tuesday that beat expectations, although revenues fell short of estimates amid weaker wireless subscriber growth and the impact of the seven week-long labor strike in the carrier’s northeastern wireline operations. Below we provide some of the key takeaways from Verizon’s results.

We have a price estimate of $55 for Verizon’s stock, which is roughly in line with the current market price. We will be updating our estimates shortly to account for the earnings release.

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• Revenues declined amid weaker wireless service and equipment revenues, as well as a decline in the wireline operations.

• Net income was impacted by a non-cash pretax charge of about $3.6 billion, relating to pension and other post-employment retirement benefits.

• EPS would have been $0.07 higher if not for the labor strike.

Wireless: Revenues Impacted By EIP Shift, Postpaid Phone Adds Turn Positive

• Wireless service revenues trended lower, amid a shift to equipment installment plans, which have lower monthly billings. About 37% of the carriers postpaid base is presently on these plans.

• Margins improved, driven partly by lower handset subsidy costs and the uptake of equipment installment plans (67% take-rate for the quarter).

• Equipment revenue declines have been an industry-wide trend, amid lower upgrade rates and a lack of high-profile smartphone launches.

• Postpaid phone adds turned positive, compared to the last quarter when the company posted net losses amid higher feature phone attrition. However, net adds have slowed meaningfully on a year-over-year basis. ((Verizon Communications (VZ) Lowell C. McAdam on Q2 2016 Results, Seeking Alpha, July 2016))

• Postpaid churn trended upwards, as some tablet customers who signed up using promotions two years ago left the network. This trend could continue through the rest of the year. However, management noted that phone churn remained low.

Wireline Declines Amid Labor Strike, Continued Attrition From Legacy Services 

• Wireline revenues and margins trended lower, amid continued attrition of voice and high speed internet (HSI) customers and the labor strike in the northeast. The striking workers were involved in network maintenance, troubleshooting and customer service, and the standoff resulted in meaningful service disruption and delays.

• Revenues for the FiOS service, which Verizon is banking on to stabilize its wireline operations, saw continued revenue expansion on account of a higher customer base and demand for higher Internet speeds.

• However, FiOS net adds were negative as the carrier lost video, voice and internet customers and was unable to add meaningful number of new subscribers amid the work stoppage. Verizon noted that it was working through the backlog of new installations, and expects to return to a normal run rate in the third quarter.

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