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Verizon Communications Inc. Needs Yahoo! Inc. to Stay Alive (VZ)

While Verizon Communications Inc. (NYSE:VZ) has been busy trying to decide how it was going to handle its now uncertain acquisition of Yahoo! Inc. (NASDAQ:YHOO), it has still been running a telco business. Last quarter’s results remind us why Verizon is seeking out such a growth opportunity. Although the reported per-share earnings figure topped estimates, that was the only real “win” for the report. VZ stock fell in response, and understandably so.

Verizon Communications Inc. Needs Yahoo! Inc. to Stay Alive (VZ)

In its recently completed third fiscal quarter of 2016, VZ earned an operating profit of $1.01 per share, and reported revenue of $30.94 billion.

Analysts were expecting income of only 99 cents per share on $31.09 billion worth of revenue. For the third quarter of 2015, the company earned $1.04 per share of Verizon stock on sales of $33.16 billion.

Verizon stock had topped earnings estimates in five of the prior six quarters, making this the sixth beat of the last seven. The bar had been set relatively low for most of those quarters though.

Operating income for Q3 came in at $6.5 billion, while operating margins were 21.1%. Non-GAAP EBITDA reached $10.5 billion, while non-GAAP EBITDA margin came in at 33.9% for the quarter.

CEO Lowell C. McAdam commented:

“Verizon continues to deliver strong financial and operational results in highly competitive markets while positioning itself for future growth. While we transform our company in a challenging environment, we have maintained the financial flexibility to invest in our industry-leading networks to better serve customers, add scale to bring innovation to the mobile media and Internet of Things (IoT) markets, and increase dividends for a 10th consecutive year.”

Verzion Earnings Show It Still Needs Yahoo

Verizon was the winning bidder for struggling web company Yahoo, offering $4.8 billion for the company’s web properties in July of this year. That offer excludes the company’s stake in Alibaba Group Holding Ltd (NYSE:BABA) and Yahoo Japan, which make up the bulk of Yahoo’s value at this time.

Although most everyone agrees Yahoo needs plenty of work to become the powerhouse it used to be, in the right hands it could return to its previous greatness. VZ acquired Yahoo rival AOL last year and has already shown forward progress with the newly bought property. With Yahoo in the mix, even more synergies could be achieved. A deal with Yahoo would also give Verizon access to web users who may also be interested in Verizon’s digital video ambitions like Go90 or even a so-called “skinny” cable television bundle that it has expressed interest in before.

AOL’s video presence was a key reason Verizon nabbed it in 2015.

Now though, VZ may back of out the Yahoo deal.

In September, it was revealed that Yahoo didn’t disclose a major data breach that occurred in 2014. The company has also quietly been working with law enforcement officials, taking measures that some would say is a violation of privacy. Both gaffes damage the Yahoo brand, adding to the burden Verizon stock will bear if it goes through with the deal.

Revenue Headwind for Verizon Stock

VZ stock can certainly use the added revenue. While it’s still a cash cow, it has not been a growth machine in a while. Revenue for the prior three quarters has effectively been flat on a year-over-year basis, and earnings growth hasn’t been much more impressive.

A saturated wireless and television market in conjunction with a decreasing need for landlines are the culprit for that stagnation, leaving wireless subscriber market share as the only sizeable growth engine. Wireline revenue fell 2.3% to $7.8 billion.

Although Verizon has been mostly seeing positive growth in the number of postpaid wireless customers of late, it has been seeing less absolute growth than smaller rivals T-Mobile US Inc (NASDAQ:TMUS) and Sprint Corp (NYSE:S), and its average billings per user remain the lowest in the wireless business.

Last quarter, the company kept the weak streak alive by adding only 442,000 postpaid wireless subscribers, versus expectations of 766,300. Total wireless revenue fell 3.9% to $22.1 billion last quarter.

One bright spot was the company’s Internet of Things business. Organic IoT revenues were up 24% on a year-over-year basis. However, this arm remains too small to make a significant impact and last quarter’s Internet of Things revenue only grew to $217 million. In September, Verizon announced that it would be acquiring smart-city outfit Sensity Systems.

Looking Ahead for VZ Stock

Looking ahead, the telecom giant expects 2016’s bottom-line numbers to look very similar to 2015’s final tallies. Its adjusted earnings per share of VZ stock should be in line with 2015’s $3.99, factoring in an adverse impact of 7 cents per share due to a work stopped earlier in the year.

Analysts currently expect the company to report a profit of $3.89 per share this year on sales of $126.28 billion. Verizon generated $131.62 billion worth of revenue last year.

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

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