Can Verizon (VZ) Win the Subscriber Wars?


Verizon Communications Inc. (NYSE: VZ) reported earnings last week amid a market focused on one telecom theme: the battle for subscribers. The market has driven Verizon stock’s share price down to near its 52-week low and kept it there on concerns that the ongoing industry price war will do significant financial damage.

Can Verizon (VZ) Win the Subscriber Wars?Investors want to know how VZ’s business is holding up in the battle and what its prospects are this year.

VZ Stands its Ground

Verizon’s approach to the price war has largely been to stand its ground. Although VZ has offered some promotional discounts, it has refused to offer the heavy, all-in discounts its rivals have. Sprint Corp (NYSE:S) now offers dramatic discounts with half-price deals.T-Mobile US Inc (NYSE:TMUS) is easing credit restrictions. AT&T Inc. (NYSE:T) has joined the mobile fight club by offering a limited data rollover plan similar to T-Mobile’s.

Verizon’s CEO Fran Shammo said emphatically VZ refuses to follow the other carriers with their deep discounts and won’t chase customers at just any price.

Quick VZ Earnings Review

A quick take on VZ shows it earned an adjusted 71 cents per share in the fourth quarter, compared to 66 cents in last year’s quarter. VZ took a massive accounting charge related to pensions, more than equal to the accounting gain it took in last year’s same quarter. These are non-operational charges, which caused VZ to post a GAAP loss of 54 cents a share in the quarter.

Total revenue rose by 6.8% in the quarter to $33.2 billion. For the full year, the adjusted EPS without the accounting gains and losses was $3.35 for 2014, an increase from $2.84 in 2013.

VZ Stock Price War Numbers

Many of the adjusted VZ numbers, as the earnings re-cap shows, were actually good. The market didn’t care, as it fastened on the Verizon stock’s “war numbers.” The important churn rate — the percentage of subscribers who left the carrier — climbed to more than 1.1%. That caused concern.

Even though retail revenue services for the fourth quarter grew by 2.6% year-over-year, industry analysts wanted to see a higher growth number. Margins were down as well. Segment earnings before interest, taxes, depreciation, and amortization (EBITDA) on service revenues fell to 42% for the quarter, compared to 47% last year.

Another key metric, average revenue per account (ARPA), rose by 1% in the quarter, but this rate slowed compared to the 3.5% increase for the full year.

Some of these numbers might seem esoteric, but to industry observers they indicate the inner financial health of the wireless operations. There are a couple of potentially important trends. The numbers signal a few more subscribers are leaving, that each customer’s still spending a bit more but that this trend is slowing, and that there’s some pressure on operating income.

VZ Stock’s Co-Combatants

AT&T, with its massive size, business, and its annual revenue base of nearly $130 billion, should be able to weather the mobile wars fairly well. Although it has put its toe in the water with modest discounts on data rollover, it’s behaved more like VZ than like rivals T-Mobile and Sprint.

Whether AT&T will join the battle more vigorously in 2015 with more price-cutting moves is unclear, but so far it looks like it won’t.

Though the two larger carriers, VZ and AT&T, have warned that competitive pressures will eventually impact profits and margins, the effects might be felt first on smaller carriers Sprint and T-Mobile.

As Sprint has specifically targeted T-Mobile customers, these two smaller carriers, which each do about one quarter of the revenue of VZ and AT & T, may actually end up taking chunks out of each other’s business when the smartphone smoke clears.

Can Verizon (VZ) Win the Subscriber Wars?


VZ Stock for 2015

The market fastened onto the warnings VZ and T uttered about the mobile price wars, and it looked for any impact — wireless war wounds. So far there are few on VZ. Verizon is still increasing its subscriber base, revenue and income, and it looks as though that will continue.

Though no carrier is likely to win this war, and Verizon stock may take some hits — bruises or other wounds — it won’t be a casualty.

VZ still has a strong grip on the wireless business, and will after this mobile war burns itself out. VZ stock pays a strong dividend, currently yielding 4.7%, and sells at just under 20 times earnings, at a price off more than 12% from its 52-week high. It’s a good deal right now.

As of this writing, Greg Sushinsky did not hold a position in any of the aforementioned securities.

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