Key Takeaways From Verizon’s Q3 Earnings

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Verizon (NYSE:VZ), the largest U.S. wireless carrier, posted a mixed set of Q3 2016 results, beating expectations on earnings, although revenues missed expectations, amid weaker wireless subscriber growth and declines in the wireline business. Below, we provide some of the key takeaways from the carrier’s earnings and what to expect going forward.

We have a $56 price estimate for Verizon, which is 17% ahead of the current market price.

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Postpaid Wireless Metrics Face Pressure, But Things Could Improve

Verizon lost a net of 36k postpaid phone subscribers during Q3, as it continued to let go of less lucrative feature phone subscribers (393k feature phone losses in Q3). However, smartphone net adds also slowed considerably, falling by about 60% year over year, amid supply issues for high-end smartphones (the iPhone 7 remained back ordered, while the Samsung Note 7 recall impacted growth) and also due to price competition from smaller rivals Sprint and T-Mobile, who launched low-priced unlimited data plans during the quarter. That said, we expect phone net adds to improve during Q4, as postpaid feature phone subscriber losses potentially decline, while Verizon also benefits incrementally from the launch of Google’s well-reviewed Pixel smartphone, for which it is the exclusive carrier in the U.S.

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Verizon’s postpaid churn rose by 11 bps over last year to 1.04% driven by tablet attrition, as customers who signed up for tablets promos two years ago rolled off their contracts. Verizon’s average revenue per account also saw a 5% year-over-year decline to about $145, amid a shift towards equipment installment plans, which have lower service billings. However, Verizon expects ARPAs to improve going into next year, as a larger mix of users shift to non-subsidized pricing. About 60% of the postpaid base is currently on subsidy-free plans. ARPA plus monthly installment billings, on the other hand, were up by about 2.3% year-over-year to $169.

Wireline: FiOS Growth Slows Despite Strike Backlog

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Verizon’s wireline operations saw some sequential improvement, as the firm executed on a backlog of installations pending from the seven week long labor strike it witnessed in its Northeastern operations during Q2. However, things remained a mixed bag on a year-over-year basis. The FiOS fibre optic broadband offering, that the firm is banking on to drive long-term growth, posted net adds that were 6% lower on a year-over-year basis and the firm’s overall broadband subscriber base also declined by about 0.5% year-over-year. However, wireline EBITDA margins improved by 230 basis points year-over-year, driven by a higher mix of FiOS customers as well as improved cost management. [1]

Yahoo Deal Updates

Verizon is in the process of buying Yahoo’s web assets and this quarter marks the carrier’s first quarterly earnings report since the disclosure of Yahoo’s massive data breach, which is reported to have impacted over 500 million user accounts. Verizon noted that it was currently evaluating what the breach means for the deal, while indicating that it expects the impact on Yahoo to be material. While we think that it is unlikely that Verizon will walk away from the transaction, it could use it as an opportunity to renegotiate the purchase price, which stood at $4.8 billion.

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Notes:
  1. Verizon Communications’ (VZ) Management on Q3 2016 Results – Earnings Call Transcript, Seeking Alpha, October 2016 []