The largest U.S. mobile service provider
Verizon Communications Inc.
) has made a good start to the year, generating double-digit
earnings and cash flow growth in the first quarter of 2012.
First Quarter Review
Verizon's first quarter adjusted earnings outpaced the Zacks
Consensus Estimate by a penny and were 8 cents above the year-ago
earnings. Revenue improved on continued strong wireless, FiOS
fiber-optic and strategic services.
Wireless revenue advanced on the back of strong data revenues
and subscriber growth. Rapid expansion of 4G Long-Term Evolution
(LTE) services and strong adoption of
) Android smartphones led to the growth in retail wireless
subscribers. Though the slowing growth in the U.S. mobile market
led to the lower sales of
) iPhone, it boosted margins in the segment as subsidies fell.
Despite the solid momentum for FiOS fiber-optic network and
strategic services, Wireline revenue dipped on lower global
wholesale and other businesses. The penetration rate of both FiOS
Internet and FiOS TV accelerated to approximately 36.4% and 32.3%,
Coming to liquidity, Verizon's cash balance has reached to less
than half of $14 billion and debt rose by a significant $4 billion
during the quarter.
(Read our full coverage on this earnings report:
Verizon Outperforms, Adds Users
Despite the ongoing efforts to expand and improve both wireless
and wireline networks, Verizon continues to focus on maximizing
free cash flow. Management expects capital efficiency (capital
expenditure-to-revenue ratio) to continue showing steady
improvements; i.e. the ratio will decline throughout the year.
Agreement of Analysts
The covering analysts have mixed views for the second quarter,
as depicted by their estimate revisions. Out of 26 analysts, 10
made positive revisions while 10 moved in the opposite direction
over the last 30 days.
However, estimates reflect a positive bias for both fiscal 2012
and 2013 over the last 30 days. For fiscal 2012, 14 analysts out of
31 made upward revisions while 10 moved in the opposite direction.
For fiscal 2013, out of the 29 covering analysts, 11 revised their
estimates downward while 5 revised theirs positively.
The analysts believe that Verizon will see improved revenue and
earnings based on both its wireless and wireline businesses.
Verizon is experiencing solid momentum in its wireless business, as
subscriber additions remains strong with a lower churn rate
(customer switch to competitor), in fact the lowest in the
The company is way ahead of its major rival
Sprint Nextel Corp.
) in terms of 4G deployments, which reached 230 markets covering
more than 200 million people as of April 19. Verizon expects to
expand its 4G networks to 400 markets by the end of this year and
the entire nationwide 3G footprint by mid next year.
Further, the company will continue to achieve wireless growth
and profitability with a focus on gaining share in the retail
post-paid market, increasing the penetration of smartphones, and
selling more Internet devices such as tablets.
In the Wireline business, Verizon will continue to improve
long-term profitability by increasing FiOS penetration and
strategic service offerings such as manage network, data center,
security solutions, cloud and IT infrastructure as well as
rationalizing its wireline cost structure.
However, some analysts are concerned about Verizon's potential
spectrum deal setbacks. The company is facing stiff opposition
regarding its spectrum deals with a group of cable companies,
Time Warner Cable Inc.
) and Bright House Networks, as well as 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
Magnitude - Consensus Estimate Trend
The magnitude of revisions for the second quarter remained
stable over the last 7 and 30 days at 63 cents.
The Zacks Consensus Estimate for 2012 is $2.49, unchanged over
the last 7 days but a penny higher in the last 30 days. Similarly,
the Zacks Consensus Estimate for 2012 is stable at $2.78 over the
last 7 days but a penny above in the last 30 days.
With respect to earnings surprises, the company's fairly good
track record is expected to continue in the coming quarters.
Verizon produced a positive average earnings surprise of 1.75% over
the last four quarters, indicating that it outpaced the Zacks
Consensus Estimate by that amount over the last year.
In the recently concluded quarter, the company surprised us by
reporting earnings 3.51% higher than what we had expected.
Fiscal 2012 is expected to be profitable for Verizon considering
the promises in both Wireless and Wireline businesses. Moreover,
the company aims to enhance shareholder value throughout the
However, we remain skeptical about returns from the 4G wireless
and wireline FiOS networks, persistent access line losses, heavy
iPhone subsidies, hindrances in spectrum deals and intense
competition from cable companies and other alternative service
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.
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