Postpaid Subscriber Growth, Margin Improvements Drive Verizon’s Q4

Verizon (NYSE:VZ) published its Q4 2017 results on Tuesday, January 23, missing market expectations on earnings although revenues beat estimates, driven partly by higher wireless equipment sales. The company’s outlook for 2018 remains fairly positive, with full-year revenues projected to grow in the low single digits, with its service revenues expected to return to growth around the end of the year or early next year. Below we provide some of the key takeaways from Verizon’s earnings.

We have a price estimate of $51 for Verizon’s stock, which is roughly in line with the current market price.

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Verizon’s Wireless Subscriber Metrics Looking Up

Verizon posted postpaid net additions of 1.2 million, with smartphone net additions coming in at 647k, marking an increase from 456k net adds in the year-ago period, driven by strong uptake of the company’s unlimited plans. Overall postpaid phone net additions stood at 431k, up from 167k in the year-ago period, while postpaid churn rates remained low at 0.77%. The improvements in Verizon’s net adds and churn is  impressive, considering that the company has not been offering a video bundle unlike its nationwide rivals. For instance, T-Mobile offers free Netflix subscriptions on some plans, while AT&T offers HBO subscriptions on some of its unlimited plans. Verizon’s wireless EBITDA margins trended higher to 39.8% in the quarter, up from the 36.9% in the year-ago period, driven by better trends in service revenue and lower device promotional activity compared to last year.

Verizon’s emerging business also performed reasonably well. The company’s Internet business, Oath, posted revenues of $2.2 billion over the quarter, marking a sequential increase of about 10%, driven by higher advertising spends during the holiday season. Verizon’s Telematics business – which includes Fleetmatics and Telogis – also witnessed growth, with sales rising to $230 million.

Verizon Is A Big Beneficiary Of The New U.S. Tax Law

Verizon is a big beneficiary of the U.S. tax overhaul, which slashes the corporate rate to 21%, as the company derives a bulk of its revenues from the domestic market, with most of its capital investments also centered around the U.S. The company indicated that the reforms would add between $3.5 billion to $4 billion to its operating cash flow this year, while boosting earnings by $0.55 to $0.65 per share for the full year. Verizon also recorded a one-time gain of $16.8 billion during Q4 relating to the tax reforms, as the reduced corporate income tax rate slashes Verizon’s $48.3 billion in deferred tax liabilities.

Verizon’s 5G Ambitions Will Take Shape In 2018

Verizon intends to launch 5G services in three to five cities this year, making it the first U.S. carrier to launch commercial operations of the next generation wireless standard. The carrier is investing in its fiber optic network (it has an agreement to buy 12.5 million miles of fiber per year for the next three years from Corning) while also bolstering its spectrum position. With its acquisition of Straight Path, which is expected to close at the end of this quarter, Verizon is likely to hold about 236 and 180 billion Mhz-POP in the 28 GHz and 39 GHz bands, respectively. In comparison, AT&T is estimated to hold just about 40 and 8 billion Mhz-POP, respectively, in the two bands. The company indicated that it would spend between $17 billion to $17.8 billion this year on capital expenditures, including its 5G deployments.

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