The largest U.S. mobile service provider
Verizon Communications Inc.
) is slated to release its third quarter 2012 earnings before the
opening bell on October 18. The current Zacks Consensus Estimate is
pegged at 65 cents for the third quarter, representing a
year-over-year increase of 16.58%.
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With respect to surprises, Verizon has a 0.81% average positive
earnings surprise in the past four quarters. However, the company
had reported in-line results in the year-ago quarter.
The company did not release any financial forecast for the third
quarter during its second quarter conference call. However, for
fiscal 2012, the company expects to generate double-digit earnings
growth of 10% banking on continued healthy wireless and improving
wireline margins. Verizon also estimates capital expenditures to be
flat or down from $16.2 billion reported last year.
Second Quarter Flashback
Verizon once again generated double-digit earnings growth and
significant cash flow growth in the second quarter. Though adjusted
earnings was at par with the Zacks Consensus Estimate, it was above
the year-ago earnings by 7 cents. Revenue improved on continued
strong wireless services, FiOS fiber-optic services and strategic
Wireless revenue advanced on the back of strong data revenues and
high retail post-paid average revenue per user (ARPU). Despite the
sluggish growth in the U.S. mobile market, rapid expansion of 4G
LTE services, strong sales of
) iPhone and strong adoption of
) Android smartphones led to the growth in retail wireless
subscribers. Retail post-paid churn (customer switch) was lowest in
four years at 0.84% in the second quarter.
Despite the solid momentum for FiOS fiber-optic network and
strategic services, Wireline revenue dipped on continued declines
across global business. The penetration rate of both FiOS Internet
and FiOS Video accelerated to approximately 36.6% and 32.6%,
(Read our full coverage on this earnings report:
Verizon Meets Ests, Grows Y/Y
Agreement of Analysts
Estimates reflect a negative bias for both the third quarter and
fiscal 2012 over the last 30 days. For the third quarter, 7 out of
28 analysts made downward revisions while one moved in the opposite
direction. For fiscal 2012, out of the 32 analysts covering the
stock, 4 revised their estimates downward while 1 revised it
The analysts are cautious about both the Wireless and Wireline
profitability on the back of the numerous actions taken by the
Just before the third quarter started, the company unveiled new
shared data plan - Share Everything - for its wireless services.
Though Verizon's unlimited facility and shared data component would
aid in making the plans popular leading to higher demand, the new
offer contains higher fee that could limit the monthly ARPU growth
in the short term.
Verizon has finally won the approval for its spectrum deals with a
group of cable companies, including
ime Warner Cable Inc.
) and Bright House Networks, and Cox Communications. The company
has also completed its swap deal to acquire spectrum from the
low-cost wireless service provider
These transactions further strengthen Verizon's position against
its major rivals
Sprint Nextel Corp.
), which is a turnaround story, and
), which is still in need of additional airwaves. Though the
spectrum deals would be accretive to Verizon in the long term and
reshape the overall telecommunication industry when demand for
smartphones is at its peak, the analysts believe that the deals
might put pressure on the balance sheet in the short term due to
reduced cash balances and increased capital expenditures.
Finally, Verizon started offering the hot iconic iPhone 5 starting
late last month of the third quarter. Though iPhone 5 is likely to
be the most popular product, it would dilute margins in the short
term owing to lofty subsidies. In fact, subsides might outweigh
other benefits from the product like customer additions and higher
average revenue per user.
On the wireline front, the new FiOS pricing would lead to lower
subscription, as it has imposed a burden on customers to pay an
extra $10-$15 per month for bundled television and broadband
service. As a result, the FiOS subscriber growth is expected to
remain stable in the third quarter.
Additionally, Verizon is seeking new ways such as FiOS Quantum,
copper-to-fiber migration and cost-cutting measures to drive FiOS
revenue growth and maximize profitability. These initiatives
nevertheless would restrict near-term FiOS subscriber additions. As
a result, wireline revenue trends would remain challenging over the
next couple of quarters. Further, Verizon is struggling with
persistent losses in access lines that are weighing on its revenues
In brief, the number of initiatives taken by Verizon to bolster
long-term profitability would result in some dilution in the short
term. The growing free cash flows and falling capital efficiency
(capital expenditure-to-revenue ratio) has compelled the company to
boost annual dividend by 3% to $2.06 per share for the second half
of fiscal 2012.
Magnitude - Consensus Estimate Trend
The magnitude of earnings revisions for the third quarter slid by a
penny over the last 7 and 30 days.
The Zacks Consensus Estimate for 2012 remains unchanged at $2.48
over the last 7 and 30 days.
We believe Verizon is poised to grow its revenue and earnings this
year based on the introduction of new 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.
Nevertheless, we remain skeptical about returns from the 4G
wireless and wireline FiOS networks, persistent access line losses,
heavy iPhone subsidies and intense competition from cable companies
and other alternative services providers
We are currently maintaining our long-term Neutral recommendation
on Verizon. For the short term (1-3 months), the stock retains a
Zacks #3 (Hold) Rank.