Verizon’s Smartphone Growth Lifts Results Despite Weak Wireline

by Trefis Team
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Verizon reported unimpressive 4Q12 earnings on January 22nd, which was led by the wireless segment and the increased smartphone penetration. The wireline results were disappointing, and wireless subsidies continue to impact margins.

We are in the process of updating our price estimate for Verizon’s stock, based on the recent earnings.

See our complete analysis for Verizon here

Verizon reported an EPS loss of $1.48 of which 7 cents a share is attributed to superstorm Sandy and $1.55 is related to severance, pension and benefit charges. The company reported top line growth of 5.7% to end the quarter at $30.1 billion and an annual growth of 4.5% for fiscal year 2012 to $115.9 billion. The net loss for 4Q12 was $1.93 billion versus 4Q11 loss of $212 million along with net income of $10.6 billion for 2012 versus $10.20 billion for 2011.

A Look At The Different Segments


Verizon added 2.2 million net retail connections in the fourth quarter including a record high 2.1 million retail postpaid net connections. The company reported 5 million net retail postpaid connections for 2012. Verizon added 2.1 million retail postpaid net subscribers in 4Q to close the year at 92.5 million postpaid subscribers. The total subscriber base is 98.2 million including 5.7 million prepaid subscribers.

Verizon activated 9.8 million smartphones of which 65% of these were 4G LTE. It also activated 6.2 million iPhones in 4Q and reported almost half to be 4G LTE. Android phones made up a majority of the remaining smartphones and over 95% were 4G LTE. We believe this to be a silver lining as higher 4G LTE users will result in higher data consumption and revenue. However, the subsidies that Verizon has to provide to drive higher smartphone penetration negatively impact margins (see  Should Carriers End Smartphone Subsidies?).

The wireless business generated operating revenues of nearly $20 billion in 4Q12, up 9.5% from 4Q11. Verizon reported 2012 wireless operating revenues growth of 8% to end the year at $75.9 billion. The biggest revenue driver was retail service which grew by 8.4% to $15.8 billion in 4Q12, while equipment grew by 15.5% to 2.6 billion.

Operating expenses grew by 9% to $15.2 billion in 4Q12 of which selling, general & administrative expenses grew by 13.7% while the cost of services & sales experienced a 9% increase. We believe the increased expenses can be attributed to higher sales mix of smartphones for the quarter, which are often heavily subsidized. Verizon reported 86.5% of all postpaid handsets sold in 4Q12 were smartphones versus 70.3% in 4Q11. We expect smartphone segment to continue to grow and will contribute to increase in operating expenses.

While CapEx for 2012 declined by 1% to $8.86 billion, 4Q12 experienced a 56% jump to $2.8 billion. This increase can be attributed to Hurricane Sandy along with the company’s increased spending on improving 4G LTE.

Verizon reported a 6% increase in wireless average revenue per account (ARPA) to $146.80 in 4Q12 to end 2012 at an ARPA of $144.04.


The wireline business had a very rough quarter with net additions for FiOS Internet declining by 28% to 144,000 in 4Q12 versus 201,000 in 4Q11. FiOS Video also experienced a 31% decline to 134,000 in 4Q12 versus 194,000 in 4Q11. We are disappointed with these numbers but aren’t surprised either since the company hasn’t been aggressive with FiOS business for a while and would be very concerned if these numbers continued to decline.

The wireline business generated operating revenues of nearly $10 billion in 4Q12, down 1.5% from 4Q11. Verizon reported 2012 wireline operating revenue decline of 2% to $39.8 billion. Although consumer retail business grew by 4% to $3.6 billion in 4Q12, the global enterprise and global wholesales experienced declines of 2% and 8.7% respectively.

Operating expenses grew by nearly 5% to $10.3 billion in 4Q12 of which selling, general & administrative expenses grew by 4.5% while cost of services & sales experienced a 6.7% increase. The wireline segment 4Q12 EBITDA margin is 18% compared to 23.8% in 4Q11, and the EBITDA margin for 2012 is 21.3% compared to 23.1% in 2011 while CapEx for 2012 declined by 1% to $6.3 billion.

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