Verizon leads the industry, with the most expensive average contract, best coverage

Verizon Inc. (VZ) reported its results [PDF] this morning.  Verizon owns one of the nation's fastest growing cable services, Verizon FiOS (fiber optic service), as well as vestigial landline services.  It also is currently co-owner of Verizon Wireless, which it has a 55 percent stake in.  Verizon Wireless is currently the largest mobile carrier in the U.S. and enjoys the broadest coverage of Americans in less populated regions.
I. Vodafone Deal Set to Wrap up, Give VZ Sole Control of VZW
A key backdrop of the earnings report is the upcoming Jan. 28 shareholder vote on whether to complete the acquisition of Vodafone Plc's (LON:VOD) 45 percent minority stake in Verizon Wireless for a whopping $130B USD.
The deal will comprise $58.9B USD in cash, $60.2B USD in Verizon stock, and $11B USD from smaller transactions.  The move would dilute Verizon shareholders substantially as it will involve issuing 1.28 billion shares of common stock, adding to the current pool of 2.87 billion shares.  On the other hand, it would allow Verizon to fully reap the profits of being the biggest carrier in the world's most lucrative market -- the U.S.
Verizon Wireless formed in 1999 from the merger of Vodafone's U.S. network "AirTouch" and Bell Atlantic Corp.  Bell Atlantic was one of the seven "Baby Bells" formed in the aftermath of the 1982 antitrust settlement with American Telephone and Telegraph.

Verizon Wireless
[Image Source:]

Bell Atlantic had already merged with another Baby Bell in 1996 (NYNEX).  At the time of the merger Bell Atlantic was also closing a deal to acquire the wireless services of General Telephone & Electronics Corp. (GTE), a veteran carrier who had been the biggest competitors to the "old" AT&T.  Hence Verizon Wireless can be viewed as an amalgamation of two Baby Bells (Bell Atlantic and NYNEX), a foreign entrant (Vodafone Touch), and an independent market veteran (GTE).  At its inception Verizon Wireless had about 21 million customers, including the pending GTE adds.  Verizon Wireless would later go on to acquire MCI Inc., another Baby Bell derivative.
Today, Verizon has 102.799 million customers and controls roughly a third of the total wireless market.  The acquisition of Vodafone's stake was officially announced in Sept. 2013 and has already received the blessing of the U.S. Federal Communications Commission (FCC).  Typically the U.S. Department of Justice (DOJ) has six months to respond if it wishes to challenge a merger or share acquisition.  Experts believe it is unlikely to do so, but if it were to do so, it would need to file by the start of April.  Typically the DOJ approval is silent -- by not filing a challenge -- as in the case of the merger of Deutsche Telekom AG (ETR:DTE) subsidiary T-Mobile USA with MetroPCS.
As top shareholders already pushed the deal in its final form to fruition, the Jan. 28 vote is largely a perfunctory final gesture, which along with silent DOJ consent will allow the pair to full merge by Q3.
II. Q4 2013 Earnings -- Better Than Expected
So what outlook faces the soon-to-be-wholly owned wireless unit?
Well for now Verizon's earnings show a thriving business.  In Q4 2014 Verizon added 1.653 million total subscribers (1.573 million postpaid, 80k prepaid), a total that was good enough for a virtual tie with T-Mobile USA, which added 1.645 million new subscribers.  T-Mobile USA is currently in fourth place in subscribers, while Verizon remains in first.
In a way a tie is a win for Verizon, who for the last two quarters had trailed the reinvigorated T-Mobile USA in subscriber growth.  Indeed analysts were pessimistic headed in to the earnings report.  Credit Suisse Group AG (CS) analysts predicted 1.5 million adds, the same average of five analysts contacted by Thomson Reuters I/B/E/S.  A survey of 9 analysts by Bloomberg predicted an even drearier 1.3 million adds.

Verizon dude
Verizon remains the nation's biggest network in coverage and subscribers.

Postpaid churn ticked barely upwards from 0.95% in Q4 2012 (on a year-on-year (YoY) basis) to 0.96% in Q4 2013.  The percentage of handsets activated improved somewhat, jumping from 85.4 to 88.9 percent.  Both figures together show Verizon is one of the most successful players currently in getting and keeping customers.

In terms of landline services, another 1.5 million customers (roughly) dropped the landline, cutting the total subscriber base to roughly 21.1 million lines, of which roughly 11.2 million are residential.  However, Verizon added 1 million digital voice subscribers, to its FiOS voice network, which now has 4.2 million subscriptions.

Verizon's young FiOS cable video and internet offerings also grew by 500 and 600 million on a yearly basis, respectively, and 92,000 and 126,000 from the previous quarter.  Verizon 5.3 million video and 6.1 million cable internet subscribers, respectively.  For comparison, Verizon's FiOS footprint is now roughly half that of Time Warner Inc. (TWC) who has 11.4 million video and 11.1 million internet customers (roughly) in Q4 [sources: 1, 2].  Comcast is more than three times the size of Verizon FiOS with 21.6 million video subscribers and 20.3 million internet subscribers at the end of Q3.

The FiOS growth was the sole area Verizon missed; analysts surveyed by Thomson Reuters I/B/E/S expected 130,000-150,000 video subscriber adds and 150,000-175,000 internet subscriber adds.

Verizon FiOS
Growth of Verizon's cable internet, phone, and video service, FiOS, fell short of analyst expectations.

The combined wireless and wired service provider pulled in revenue of $31.1B USD for the quarter, better than the YoY prior result of $30.05B USD.  That total beat analyst expectations of $31B USD (Bloomberg) or $31.02B USD (Thomson Reuters I/B/E/S).

Earnings, with a pension charge included were $5.07B USD ($1.77 USD per share) in Q4, a great turnaround from the YoY result of a loss of $4.23B USD ($1.48 USD per share).  With "unusual items", the net earnings came in at $1.89B USD ($0.66 USD per share) -- a penny per share better than the analyst expectation of Bloomberg and Thomson Reuters I/B/E/S.  The small profit surprise was driven by terrific margins at 47 percent -- slightly better than the Reuters surveyed analyst expectation of around 46 percent.

III. T-Mobile Fears Sink Shares

The FiOS miss was a part of why Verizon stock was down in today's trading.  But an integral part of why analysts were less than impressed with what appeared to generally be a better than expected performance was ongoing fears about T-Mobile's disruptive tactics.

While T-Mobile USA has perhaps been the most vocal in targeting AT&T, Inc. (T), America's second largest carriers, Verizon Wireless is the nation's most expensive carrier so may be at risk from pressure from the budget end.

A Verizon Wireless customer now pays $157.21 USD on their monthly bill, on average, up 7.1 percent from a year ago.  That's higher than the analyst expectation of $156.38 USD per month.  That's both good and bad news -- good news for Verizon's profits, bad news for Verizon trying to attract new customers.

Verizon expensive
Verizon leads the industry in having the highest wireless bills. [Image Source: Flickr/Exif]

Facing questions about pricing in a earnings call, Fran Shammo, Verizon chief financial officer, promised:

We are prepared to respond where we see a need to respond. 

Craig Moffett, head analyst at MoffettNathanson Research, says that may no easy task, commenting in a research note:

There is a price differential where -- well, where even satisfied customers will declare enough is enough. The only question that remains is whether we have already crossed it.  They are vulnerable precisely because they have been so successful.

Jonathan Chaplin, an analyst with New Street Research, echoes in a separate note:

We expect rising competitive intensity to create a headwind for growth in 2014.  We don’t think Verizon is out of the woods. We believe competitive pressure is still coming.

The consolidation of ownership of the wireless business is generally popular, but analysts are taking note of AT&T and third-place Sprint Corp. (S) move towards contract-free prepaid offerings and perks such as early device upgrades, moves that were arguably first instigated by T-Mobile.

John Legere [SOURCE: The New York Times]

By contrast Verizon has been more resistant of such profit-cutting moves, gambling that its nation-leading network will convince customers to pay more and put up with having a few less perks.

So far that gamble has paid off.  But analysts aren't convinced that it's going to stay that way, as they fear customers may be reaching a breaking point, price-wise.

IV. Intel OnCue Deal, Hyunda-Kia Service Win

Verizon is hoping to boost its TV business with a $200M USD a soon-to-be announced acquisition bid for Intel Corp.'s (INTC) small 350 employee OnCue TV business, which has been shopped around looking for a buyer. 

In a way the deal would position Verizon in the cable space as a T-Mobile-like market disruptor.

The unit specializes in a cable internet-based model, which delivers cable video-style content over internet to subscribers.  The technology could provide crucical momentum for Verizon FiOS's slowing video growth.  Traditionally cable video providers like Comcast and TWC have leaned on shutting out competitors cable line deployments locally, leaving them with a monopoly or duopoly in many regions.  With the Intel unit, Verizon has another option -- to simply pipe cable-quality video over its faster-growing internet FiOS network, even if rivals stall its FiOS cable video deployment.

Intel TV
[Image Source: WorldTV PC]

Additionally, Verizon's CFO Shammo announced plans to push for an upgrade in Verizon's debt rating following the Vodafone deal's closure.  Planned to span four to five years, the effort looks to bump the service provider's rating one notch with major agencies, from the current level of BBB+ to A-.  Verizon had formerly held an A- rating, but lost it when it took on more debt to expand its network and make acquisitions.

The CFO states:

We need to de-lever as quickly as possible.  We are going to continue to invest in our network and our platforms. We’re going to continue to acquire spectrum, which we need to deliver our wireless performance.

The company also received a bit of good news when it was announced that it would be the service provider for Hyundai Motor Comp.'s (KRX:005380)(KRX:005385)(KRX:005387)(KRX:005389) and its sister company Kia Motor Corp. (KRX:000270).  The deal will initially involve 3G data links in various car and truck models, but will eventually include 4G connections.

[Image Source: Bloomberg]

Hyundai spokesperson Miles Johnson plugged the new partner, stating:

We chose Verizon because of their coverage and quality, while other outlets have issues with dropped calls.  Verizon’s coverage is more robust.

Verizon will provide the backbone of the new second generation Blue Link system.  Last year Hyundai and Kia sold roughly 1.5 million vehicles in the U.S., about half of market leader General Motors Comp.'s (GM) 2.8 million vehicles sold in the U.S.  Verizon Wireless also has contracts with Daimler AG's (ETR:DAI) luxury brand Mercedes-Benz and Toyota Motor Corp. (TYO:7203).  AT&T is thought to dominate the services for major U.S. traditional auto brands, including GM and Ford Motor Comp. (F).

Sources: Verizon, Reuters, Bloomberg [1], [2]

"So if you want to save the planet, feel free to drive your Hummer. Just avoid the drive thru line at McDonalds." -- Michael Asher

Most Popular Articles

Copyright 2018 DailyTech LLC. - RSS Feed | Advertise | About Us | Ethics | FAQ | Terms, Conditions & Privacy Information | Kristopher Kubicki