Verizon Communications Inc Still Good Despite Mixed Results And Strike

  • Verizon has delivered mixed but decent Q1 2016 results.
  • The company's margins remain strong while churn is low.
  • The huge wireline strike could depress second quarter earnings and keep the stock down, though the long-term outlook remains good.

Giant wireless carrier Verizon (NYSE:VZ) has delivered mixed Q1 2016 results that exceeded earnings estimates but fell short of revenue expectations. Verizon posted revenue of $32.17B, up 0.6% Y/Y but $320M short of Wall Street consensus. The company posted EPS of $1.06, which represented a 3.9% year-over-year increase and was in-line with analysts' consensus.

Segment Performance

Verizon Wireless

This is the company's largest revenue segment. Verizon Wireless posted first quarter revenue of $22.0B, a decline of 1.5% Y/Y which the company attributed to more customers choosing unsubsidized device payment plans. Service revenues/installment billings climbed 1.6%Y/Y. Segment non-GAAP EBITDA was $10.2B, up 1.7% Y/Y with operating income of $7.9B. EBITDA margin improved 140bp to 46.2%. Verizon did warn that 48% of postpaid customers are currently on an unsubsidized plan and service revenues are likely to flatline once that number gets to 50%.

Verizon Wireless finished the quarter with 640,000 retail postpaid net additions which is quite remarkable considering that the quarter is historically a seasonally low one in terms of new subscribers. 452,000 of these were 4G subscribers. Verizon finished the quarter with a total of 73.8M smartphones, or 85% of the company's phone base. More than 81% of the company's retail postpaid connections were 4G subscribers.

Total retail connections by the end of the quarter clocked in at 112.6M, up 3.7% Y/Y while retail postpaid connections clocked in at 107.2M, a 4.4% Y/Y increase. The segment's churn remained low at 0.96%, a 7bp improvement compared to a year ago.

Wireline/FiOS

FiOS, a service that bundles phone, Internet and TV, remains the biggest growth driver for Verizon's wireline segment. Verizon added 98,000 net new FiOS Internet connections during the quarter and another 36,000 net new FiOS video connections. Total FiOS revenue climbed 5% Y/Y to $3.5B.

78% of consumer FiOS customers subscribed to data speeds of 50Mbps or higher by the end of the quarter.

Wireline consumer revenues increased 0.8% during the quarter to $4.0B with segment operating income of $0.6B.

Verizon had earlier promised to shed some light on the performance of its new Go90 mobile video service during the upcoming earnings call. Investors should keep an ear out for this.

Verizon did not report average revenue per customer account but said that it expects 2016 full-year earnings to be comparable to 2015 earnings. Verizon though did warn that:

"given the status of labor contract negotiations, there will be pressure" on Q2 earnings due to timing cost reductions.''

Close to 40k Verizon wireline workers downed their tools of trade a week ago in one of the biggest work stoppages in the U.S. in recent years. The full effects of the strike probably will not be known until the company reports second quarter numbers.

The strike aside that was a pretty decent performance by Verizon considering that the company's margins remain strong and churn rates quite low. Not everybody shares this sentiment, however. Wall Street analysts Craig Moffet of MofffetNathanson says that quarterly data suggests that Verizon could be losing market share to T-Mobile US (NASDAQ:TMUS), though he added that it was still holding its own against Sprint (NYSE:S) and AT&T (NYSE:T).

Verizon has refused to engage in price cuts in a bid to retain its customers and lure in new ones as has been the case with its rivals. Verizon insists that it's all about quality, and independent testing by RootMetrics appears to support these claims. Verizon was ranked #1 in network performance in the U.S. during the second half of 2015. The survey rated the carriers on network reliability, data, calls, speed, and text performance and Verizon emerged first in all the categories.

Verizon Stock Performance

Prior to the huge wireline strike, Verizon stock had performed admirably year-to-date.
VZ stock chart

Source: Verizon stock performance YTD by amigobulls.com

Verizon stock is viewed by investors as a good defensive play due to it relatively stable business and high dividend yield. If interest rates remain low and the markets choppy, then Verizon's defensive qualities will help the stock to continue making good gains. The ongoing strike is likely to keep the stock down maybe for a couple more weeks though it could take longer depending on its duration. The outlook on Verizon stock over the next 6-12 months remains quite good.

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  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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