Verizon Communications Inc. (VZ) Stock Drops After Earnings (As It Should)

VZ stock - Verizon Communications Inc. (VZ) Stock Drops After Earnings (As It Should)

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Despite a valiant effort to stop the shrinking of its top and bottom line, Verizon Communications Inc. (NYSE:VZ) just can’t seem find a groove. Concerned shareholders sent VZ stock 2.1% lower following what can only be categorized as a disappointing first-quarter report from the company.

All told, Verizon earned an operating profit of 95 cents per share, versus analyst expectations of a profit of 97 cents per share. Analysts were also calling for sales of $30.57 billion for the quarter ending in March, but the telecom giant only produced $29.8. billion worth of revenue. Verizon reported $32.17 billion in revenue and $1.06 per share of profits in the year-ago quarter.

CEO Lowell McAdam said of the Verizon earnings numbers:

“Our first-quarter results again demonstrated that customers value a high-quality network experience. To build on our loyal customer base and the third-party recognition we have received for network leadership, we extended our wireless and fiber network capabilities, began offering an unlimited pricing option and expanded our opportunities in new markets”

The wireless (and wireline) service provider launched the unlimited data plan in February, which arguably helped the company attract and keep customers. Before the new package was made available, Verizon had lost  398,000 postpaid customers. After the plan was introduced, it added 109,000 connections. All told, the company lost 307,000 postpaid customers in its first quarter. Postpaid churn was 1.15%.

Whatever the case, the adverse fiscal impact of Verizon Unlimited is clear.

The new pricing plan isn’t solely to blame for the quarter’s fiscal weakness. Verizon missed its prior quarter’s earnings estimate as well — the first miss since the last quarter of 2014. This second shortcoming implies analysts didn’t fully appreciate the competitive headwind that VZ ran into near the end of last year.

Verizon Is Shifting Strategies

The telecom icon is still a powerhouse, not only boasting the most U.S. wireless market share, but remaining a cash cow. Growth has been a struggle though, ever since Sprint Corp (NYSE:S) introduced its “cut your bill in half” promotion over a year ago, and T-Mobile US Inc (NASDAQ:TMUS) began offering nearly free smartphones. Rival AT&T Inc. (NYSE:T) put just as much pressure on Verizon around that time as well, however, axing its two-year contract requirement.

The end result was a price war that took a toll on all the industry’s players; last quarter’s lull was nothing VZ stock holders haven’t seen before.

The proposed solution thus far for some of the industry’s leaders has been melding wireless service providers with media names, blurring the lines between the two in an effort to sell (and cross-sell) new packages.

AT&T is credited as the first to think outside the box, acquiring satellite television giant DirecTV back in 2015. It’s currently working toward a union with studio Time Warner Inc (NYSE:TWX), which would allow it to be the message and the messenger.

Verizon is no stranger to lateral acquisitions, though. It bought internet venue AOL and all of its web properties back in 2015. VZ reportedly has done well with it, although AOL’s revenue was off 4% last quarter on a year-over-year basis.

Now Verizon is looking to replicate that success with AOL via the purchase of Yahoo! Inc. (NASDAQ:YHOO).

In fact, Yahoo’s last quarterly report as its own publicly traded entity was posted earlier this week … an ironic improvement in revenue, and a respectable increase in income. The company had been losing ground for years, leading some to believe Verizon was still overpaying for the web business despite the discount offered at the 11th hour. With a much-needed rebound on the books, though, perhaps Verizon doesn’t have as much work cut out for it as some suspected.

That being said, McAdam noted earlier in the week he was open to more M&A in the future, and was particularly interested in deals that beef up Verizon’s media delivery and 5G networking capabilities. McAdam even made a point of referencing Comcast Corporation (NASDAQ:CMCSA) and Walt Disney Co (NYSE:DIS) as possible partners, though he certainly didn’t limit his options to those players. Both of those companies, however, would give Verizon a weapon to wield against a Time-Warner/AT&T (and DirecTV) combo.

Nevertheless, Verizon still operates a telecom business, and must remain competitive on that front particularly with the advent of 5G connectivity representing a new battleground.

The company didn’t win any new spectrum in the most recent FCC auction, but it did ink a deal with Corning Incorporated (NYSE:GLW) this week, agreeing to purchase at least $1.0 billion worth of fiberoptic cable from the company over the course of the coming three years. This suggests Verizon is aiming to keep a big portion of its customer connectivity running through physical lines rather than radio waves, but also ramp-up its Fios business — which can support television, phone, and internet services. Its Fios revenue was up 4.7% last quarter.

Looking Ahead for VZ Stock

Verizon didn’t offer specific profit or revenue guidance for the quarter currently underway, or for the full year. It only noted it expected this year’s top and bottom line to essentially look like 2016’s tallies. The company added it was looking for a rebound in wireless and equipment revenue later this year to offset the slow start.

Analysts have been more specific, calling for earnings of 99 cents per share on revenue of $30.35 billion.

For the whole year, analysts were modeling a bottom line of $3.81 per share of VZ stock on sales of $124.53 billion. Both would be down from last year’s levels, although those forecasts don’t factor in the addition of Yahoo’s numbers. That deal should be finalized within the next few weeks, and reflected in the second quarter results due in mid-July.

As of this writing, James Brumley held a long position in T.

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