Telecom giant Verizon Communications (NYSE:VZ) will report its fiscal third quarter numbers on Tuesday morning, before the market opens. Though it would be an overstatement to call it a game-changing event for the perceived value of Verizon stock, it wouldn’t be wrong to call it a critical one.
The last few quarters indicated decent growth for Verizon, but the bar was set low. After all, 2016 was a tough year, with other wireless players like AT&T (NYSE:T) and Sprint (NYSE:S) caught in the throes of a price war. From this point forward, any growth will be (will have to be) organic growth in a relatively normal environment.
The market’s perception of that growth will largely hinge on three data points.
Verizon Stock Earnings Preview
For the quarter ending in September, analysts expect Verizon to report income of $1.19 per share on revenue of $32.5 billion. The company generated $31.7 billion in sales for the comparable quarter a year earlier, when it posted a profit of 98 cents per share.
JPMorgan anticipates EBITDA of $11 billion, on service-based profit margins of 68.7%.
Verizon has topped earnings estimates in the prior two quarters, though fell short of estimates for the final quarter of last year.
Three Things to Watch
Verizon has been as proactive and reactive to changes in the media and communications market as other organizations have, though has opted to focus its attention to the web, whereas other players have invested more in entertainment.
For instance, rival AT&T has worked to cultivate more of a presence in the video entertainment market, recently targeting Time Warner as an acquisition. Verizon now owns Yahoo, and has combined it with its AOL property to build a major online-advertising platform.
Those delineating lines continue to blur, though, making it tough to handicap VZ stock.
Nevertheless, three details will stand out more than the rest on Tuesday now that investors have a better feel for what the future of telecom and video entertainment will look like, and where Verizon fits into that picture.
1. Cost Cutting
The recent decision from Verizon to offer a generous, optional severance package to 44,000 employees is only one of several cost-cutting initiatives designed to shave $10 billion worth of spending over the course of the next four years. Moving toward virtualized networks (as opposed to hardware-based networks) is another key way the company has chosen to reduce its spending.
Through the first half of 2018 Verizon had only managed to cut $500 million in expenses, though the early part of such initiatives tend to start slow and then build momentum. Nevertheless, cost-cutting should show at least some evidence of acceleration for the third quarter and ideally on more than one front.
Though Verizon is technically leading the charge on the wireless/mobile front, launching the nation’s first commercial 5G service, the company is anything but a pure wireless play.
Verizon has invested heavily, building out an enormous fiber-optic network that not only bolsters the capacity of its wireless voice service, but also is a tremendous platform from which to sell cable television and broadband services.
During the second quarter of the year, Verizon added 43,000 new (net) FIOS internet customers, driving a 2.0% increase in FIOS revenue. But, know that FIOS video subscribers continue to shrink thanks to the cord-cutting movement, sometimes falling faster than FIOS-based voice customers are added.
Verizon has tinkered with its own video service options in the past, though none have been decided successes. Indeed, the company has recently retreated from that market. Investors may want to keep their eyes and ears open, however, for more competitive plans to re-address that market.
3. Telecom Additions, Churn
Still, Verizon predominantly is a telecom company, and wireless service is still its bread and butter.
The company added 531,000 new (net) postpaid wireless customers during the second quarter, bolstering wireless revenue by 5.5% year-over-year. Postpaid churn was 0.97%. For the recently-ended Q3, JPMorgan believes postpaid churn will roll in again right around 1.0%, backed by 500,000 net customer additions.
Looking Ahead for Verizon Stock
As of the latest look, analysts were looking for earnings of $1.10 per share for the quarter currently underway, on sales of $34.3 billion. That’s a 1% top-line improvement, and a big bullish improvement on the 86 cents per share of Verizon stock. That translates into a full-year profit estimate of $4.64 per share.
Revenue is expected to roll in at $130.75 billion, up 3.7% year-over-year. The numbers suggest analysts believe the company is back in sustainable growth mode.
Those figures may be adjusted to better reflect developments that have taken shape in the meantime.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.