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Verizon Communications (VZ - Analyst Report) reported third quarter 2013 adjusted earnings of 77 cents per share, surpassing the Zacks Consensus Estimate of 75 cents. The results improved 20.3% from the adjusted earnings of 64 cents a year ago.

The improvement was buoyed by growing demand for wireless services along with FiOS and enterprise services. In addition, the company’s growing investments in building advanced network services and infrastructure is also supporting its business growth.

Total revenue increased 4.4% year over year to $30.3 billion and surpassed the Zacks Consensus Estimate of $30.2 billion.

Segment Results

Wireless revenues increased 7.2% year over year to $20.4 billion in the third quarter supported by substantial growth in retail post-paid customers and rising smartphone penetration. Service and Equipment revenues improved 8.4% and 3.6%, respectively. Other revenues decreased 5.2% year over year.

During the quarter, Verizon added over 1.1 million retail subscribers, including 927,000 post-paid customers. At the end of the quarter, the company had 101.2 million retail subscribers (including 95.2 million post-paid and 6 million prepaid customers), reflecting a 5.5% 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, which now covers 99% of its 3G market with availability across 500 markets and serving over 303 million customers. Further, strong sale of Apple Inc.’s (AAPL - Analyst Report) iPhone and increased adoption of Google Inc.’s Android smartphones also aided growth at Verizon Wireless. In addition, the company also gained from the launch of its device upgrade plan -- Verizon EDGE -- in Aug 2013.

At the end of the quarter, smartphones accounted for 67.0% of retail post-paid wireless.

Retail post-paid churn (customer switch) increased 6 basis points (bps) year over year to 0.97%. Total retail churn also went up by 10 bps to 1.28. Retail post-paid ARPA (average revenue per account) grew 7.1% year over year.

Wireline revenues dipped 1.0% year over year to $9.8 billion due to continued decline in global business. The negative effect was partially offset by strong consumer revenues backed by FiOS sales and better sale of strategic services in the U.S.

FiOS revenues were $2.8 billion, up 13.4% year over year. During the reported quarter, Verizon added 135,000 and 173,000 new customers to its FiOS Video and FiOS Internet services, respectively.

The company exited the quarter with 5.2 million (up 12.6% year over year) FiOS Video customers and 5.9 million (up 12.6%) FiOS Internet subscribers. The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS Video increased to approximately 39.2% and 34.9%, respectively, across all markets from the year-ago levels of 37% and 32.9%.

Strategic services revenues, including Verizon Terremark cloud and data center services, security and IT solutions, advanced communications, and strategic networking, increased 5.2% from the year-ago quarter, representing 58.0% of total enterprise revenue.

Total broadband connection as of Sep 30, was 9 million, up 2.6% year over year.

Liquidity

As of Sep 30, Verizon had cash and cash equivalents of $56.7 billion. The company had long-term debt (including current portion) of $99.14 billion, representing debt-to-capitalization ratio of 35.8%. Net debt-to-adjusted EBITDA was 1.1 times versus 1.3 times at the end of 2012.

For the first nine months of 2013, Verizon generated $28.4 billion of cash from operations, while capital expenditure amounted to $11.8 billion. The company had free cash flow of $16.6 billion at the end of the third quarter, which compares to $13.4 billion in the year-ago corresponding period.

Guidance

The company expects capital expenditure of $16.6 billion in 2013.

Upcoming Earnings Release

Another telecom giant  AT&T Inc. (T - Analyst Report) will release its third quarter 2013 financial results on Oct 23. The Zacks Consensus Estimate for earnings currently stands at 65 cents. The estimate reflects year-over-year growth of 4.99%.

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, launching 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 these 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 (Hold).

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