Verizon Tops Earnings, Revenues; Profits Up Double Digits

Verizon Communications Inc. VZ reported second-quarter 2014 adjusted earnings of 91 cents per share, beating the Zacks Consensus Estimate by a penny. The bottom line also improved 24.7% from 73 cents per share earned a year ago. The earnings growth was buoyed by strong revenue contribution from wireless services, improvement in wireless operating margins and increased demand for FiOS services.

Second quarter adjusted earnings excluded the impact of an after-tax gain of 10 cents per share.

Total revenue increased 5.7% year over year to $31.5 billion, and also steered ahead of the Zacks Consensus Estimate of $31.1 billion. The growth was driven by increasing demand for Verizon Wireless, FiOS and Strategic enterprise services. Operating income increased 17.2% year over year to $7.7 billion given superior cost management. Operating margin expanded 240 basis points (bps) to 24.4%. In addition, consolidated EBITDA margin expanded 170 bps to 37.6%.

Segment Results

Wireless revenues increased 7.5% year over year to $21.5 billion in the second quarter on higher retail postpaid net connections and revenues, and increase in tablet and smartphone sales. Service revenues improved 5.9%, while equipment revenues were up 22.2% year over year. Other revenues rose 7.7% year over year.

During the quarter, Verizon added over 1.43 million retail subscribers, representing 37.5% growth year over year. The growth was aided by expansion of LTE service. Strong sale of Apple Inc.'s AAPL iPhone and increased adoption of Google Inc.'s GOOG Android-based smartphones also increased subscriber numbers.

Total post paid subscriber addition amounted to 1.44 million, a robust 53.1% growth year over year. Pre-paid business recorded loss of customers of 14,000 as against gain of 97,000 customers in the year-ago quarter. At the end of the year, smartphones accounted for 75.0% of the retail post-paid wireless business.

Retail post-paid churn (customer switch) increased 1 bps year over year to 0.94%. Total retail churn also went up by 2 bps to 1.25% in the reported quarter. Retail post-paid ARPA (average revenue per account) grew 4.7% year over year.

Wireline revenues grew 0.3% year over year to $9.8 billion due to rise in consumer and FiOS revenues.

FiOS revenues were $3.1 billion, up 14.4% year over year and represented 75% of total Wireline revenues. During the reported quarter, Verizon added 100,000 and 139,000 new customers to its FiOS Video and FiOS Internet services, respectively.

The company exited the quarter with 5.4 million (up 7.6% year over year) FiOS Video customers and 6.3 million (up 9.3%) FiOS Internet subscribers. The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS Video increased to approximately 40.1% and 35.3%, across all markets from the year-ago levels of 38.6% and 34.5%, respectively.

Strategic services revenues, including Verizon Terremark cloud and data center services, security and IT solutions, advanced communications, and strategic networking, increased 3.0% from the year-ago quarter.

Total broadband connection as of Jun 30, totaled over 9.1 million, up 1.5% year over year.

Liquidity

As of Jun 30, Verizon had cash and cash equivalents of $5,776 million. In the second quarter of 2014, Verizon generated $14.8 billion of cash from operations, while capital expenditure amounted to $8.5 billion. The company had total long-term debt of $107.7 billion. Net debt-to-adjusted EBITDA was 2.4x versus 1.0x at the end of 2013.

Looking Ahead

The company continues to expect 4% revenue growth and EBITDA margin expansion in 2014. In addition, capital investment is estimated to be around $16.5 billion to $17 billion, with reduction in expenditure as a percentage of total revenue for 2014. 

Our Take

We believe Verizon will continue to experience solid momentum in its wireless business based on solid subscriber addition. 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 in new markets. The company's robust cash flow growth and capital efficiency are also 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).

Other Stocks

Another major telecom company set to release earnings this week is AT&T, Inc. T. The Zacks Consensus Estimate for AT&T's second quarter earnings is pegged at 63 cents.

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