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Verizon Posts In-line Earnings

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Premier U.S. mobile service provider Verizon Communications Inc. (VZ - Analyst Report) reported second quarter 2013 earnings of 73 cents per share, in line with the Zacks Consensus Estimate. The results improved 14.1% from 64 cents a year ago.

The improvement was buoyed by Verizon’s investments for enhancing wireless operations, expanding global networks, improving FiOS services and tapping growth opportunities in broadband, video and cloud activities. The company also displayed top-class operating efficiency.  

Total revenue increased 4.3% year over year to $29.79 billion but failed to meet the Zacks Consensus Estimate of $29.83 billion.

Segment Results

Wireless revenues increased 7.5% year over year to $19.98 billion in the second quarter supported by robust smartphone penetration and customer additions. While Service and Equipment revenues improved 8.3% and 10.5%, respectively, Other revenues decreased 8.5%.

During the quarter, Verizon added over 1.0 million retail subscribers, including 941,000 post-paid. At the end of first half 2013, the company had 100.1 million retail subscribers (including 94.3 million post-paid and 5.9 million prepaid customers), reflecting a 6.3% year-over-year increase.

The company continues to bring in more markets under its wings with the rapid expansion of 4G Long-Term Evolution (LTE) services, strong sales of Apple Inc.’s (AAPL - Analyst Report) iPhone, and increased adoption of Google Inc.’s Android smartphones. These resulted in stronger growth in retail wireless subscribers. The Share Everything Plan and offering of new smartphones also attracted more customers.

At the end of the quarter, smartphones accounted for 64.0% of retail post-paid wireless. As of Jun 30, Verizon’s LTE covered 500 markets with more than 301 million people.

Retail post-paid churn (customer switch) increased 9 basis points (bps) year over year to 0.93%. Total retail churn also went up by 12 bps to 1.23. Retail post-paid ARPA (average revenue per account) grew 6.4% year over year.

Wireline revenues dipped 2.0% year over year to $9.73 billion due to continued decline in global business. The negative effect was partially offset by strong consumer revenue and better sale of strategic services in the U.S.

FiOS revenues were $2.7 billion, up 14.7% year over year. During the reported quarter, Verizon added 140,000 and 161,000 new customers to its FiOS Video and FiOS Internet services, respectively.

The company exited the quarter with 5.0 million (up 12.6% year over year) FiOS Video customers and 5.8 million (up 12.2%) FiOS Internet subscribers. The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS Video increased to approximately 34.5% and 38.6%, respectively, across all markets from the year-ago levels of 32.6% and 36.6%.

Strategic services revenues, including Verizon Terremark cloud and data center services, security and IT solutions, advanced communications, and strategic networking, increased 4.8% from the year-ago quarter, representing 57.0% of global enterprise revenue.

Total broadband connection as of Jun 30, was 8.9 million, up 1.9% year over year.

Liquidity

As of Jun 30, Verizon had cash and cash equivalents of $1.8 billion. The company had long-term debt (including current portion) of $49.8 billion, representing debt-to-capitalization ratio of 36.3%. Net debt-to-adjusted EBITDA was 1.2 times versus 1.3 times at the end of 2012.

For the first six months of 2013, Verizon generated $17.1 billion of cash from operations, while capital expenditure amounted to $7.6 billion.

Upcoming Earnings Release

Another telecom giant AT&T Inc. (T - Analyst Report) will release its second-quarter 2013 financial results on Jul 23, after the close of trading. The Zacks Consensus Estimate for second quarter earnings currently stands at 68 cents per share. The estimate reflects year-over-year growth of 3.6%.

Our Take

We believe that Verizon will continue to experience solid momentum in its wireless business, as subscriber additions were strong. Going forward, Verizon will achieve growth and profitability with its focus on gaining share in the retail post-paid market, launch of new devices and expanding network to new markets. The company’s robust cash flow growth and capital efficiency are expected to support its performance level.

Despite the positives, we prefer to stay on the sidelines owing to risk factors such as persistent erosion in access lines, uncertain returns from investments, iPhone subsidies, hindrances in spectrum deals and intense competition. Verizon currently holds a Zacks Rank #3, implying a Hold rating.
 

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