The largest U.S. mobile service provider
Verizon Communications Inc.
) is slated to release its second quarter 2012 earnings on July 19,
before the opening bell. The current Zacks Consensus Estimate is
pegged at 63 cents for the second quarter, representing a
year-over-year increase of 11.34%.
With respect to surprises, Verizon had a 1.75% average positive
earnings surprise in the trailing four quarters. In the
year-earlier quarter, the company had surprised us by reporting
earnings 3.64% above our expectation.
The company did not release any financial forecast for the second
quarter during its first quarter conference call.
First Quarter Flashback
Verizon made a good start to the year, producing double-digit
earnings and cash flow growth. Lower sales of
) iPhone boosted margins during the quarter as subsidies fell.
Adjusted earnings were a penny ahead of the Zacks Consensus
Estimate and 8 cents above the year-ago earnings. Revenue improved
on continued strength in wireless, FiOS fiber-optic and strategic
Wireless revenue advanced on the back of strong data revenues and
subscriber growth. Despite the sluggish growth in the U.S. mobile
market, rapid expansion of 4G LTE services and strong adoption of
Google Inc. (GOOG) Android smartphones led to the growth in retail
Despite the solid momentum for FiOS fiber-optic network and
strategic services, Wireline revenue dipped on continued declines
across global wholesale and other businesses. The penetration rate
of both FiOS Internet and FiOS Video accelerated to approximately
36.4% and 32.3%, respectively.
Agreement of Analysts
Estimates reflect a negative bias for both the second quarter
and fiscal 2012 over the last 30 days. For the second quarter, 3
analysts out of 26 made downward revisions while none moved in the
opposite direction. For fiscal 2012, out of the 31 covering
analysts, 3 revised their estimates downward while 1 revised it
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The analysts are cautious on both the company's wireless and
wireline divisions. Verizon is spending hugely to subsidize the
iPhone, which will likely limit its wireless margins and profits
throughout the year.
Verizon is facing major setbacks regarding its spectrum deals with
a group of cable companies, including
Time Warner Cable Inc
) and Bright House Networks and Cox Communications Inc. It will
have an adverse impact on Verizon's financials should the deal
fail. But, if it succeeds, it might put pressure on the balance
sheet in the short term by reducing cash balances and increasing
capital expenditures before becoming accretive over the longer
On the wireline front, Verizon is struggling with persistent losses
in access lines that are weighing on its revenues and margins.
However, the company is currently making efforts to reduce its
Moreover, the analysts believe competitive pressures from its
Sprint Nextel Corp.
), and high promotional and restructuring expenses would further
limit the earnings upside potential.
The analysts believe these negatives would offset Verizon's strong
subscriber count and average revenue per user, which depend on
penetration of smartphones and iPhones, in the U.S. market in
Magnitude - Consensus Estimate Trend
The magnitude of earnings revisions for the second quarter
increased by a penny in the last 7 and 30 days.
The Zacks Consensus Estimate for 2012 remains unchanged at $2.50
over the last 7 and 30 days.
We believe Verizon is poised to grow its revenue and earnings based
on the introduction of smartphones, tablets and data devices in the
wireless segment and continued expansion of robust FiOS fiber-optic
network and strategic services, including cloud-computing business,
in the wireline business. These will continue to drive the
company's growth prospects going forward.
However, persistent erosion in access lines, uncertain returns from
the 4G wireless and wireline FiOS networks, iPhone subsidies,
hindrances in spectrum deals and intense competition from cable
companies and other alternative service providers are threats to
We are currently maintaining our long-term Neutral rating on
Verizon. For the short term (1-3 months), the stock retains a Zacks
#3 (Hold) Rank.