Before the opening bell today, the largest U.S. mobile service
Verizon Communications Inc.
) reported third quarter 2012 adjusted earnings of 64 cents per
share, excluding charges of 8 cents related to patent litigation
settlements. The quarter's earnings missed the Zacks Consensus
Estimate by a penny but was 8 cents above the year-ago earnings.
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The company generated double-digit earnings growth for third time
in a row and continued reporting significant cash flow growth.
Verizon's new shared wireless data plan - Share Everything -made
a significant contribution to the quarterly earnings.
Total revenue increased 3.9% year over year to $29.01 billion,
but slightly lagged the Zacks Consensus Estimate of $29.02
billion. The year-over-year revenue growth was driven by
continued strong wireless services, FiOS fiber-optic services and
EBITDA (earnings before interest, taxes, depreciation and
amortization) rose 9.6% year over year to $9.65 billion, while
operating income increased 19.6% to $5.5 billion in the reported
revenue increased 7.3% year over year to $19.02 billion on the
back of increased smartphone penetration and high retail
post-paid subscriber growth. Service, Equipment and Other
revenues grew 7.5%, 3.2% and 13.3%, respectively.
Verizon added 1.8 million retail subscribers, including 1.5
million post-paid and 228,000 prepaid customers. The company's
post-paid subscriber additions represent the highest in four
years. At the end of the third quarter, the company had 95.9
million retail subscribers (including 90.4 million post-paid and
5.5 million prepaid customers), reflecting a 5.7% year-over-year
Despite the sluggish growth in the U.S. mobile market, rapid
expansion of 4G Long-Term Evolution (LTE) services, strong sales
) iPhone including the new iPhone 5, and increased adoption of
) Android smartphones led to the strong growth in retail wireless
subscribers. At the end of the reported quarter, smartphones
accounted for 53% of retail post-paid wireless, up from 50% in
the prior quarter.
Further, the company is way ahead of its major rivals
Sprint Nextel Corp.
) in deploying LTE services. As of October 18, the Verizon LTE
deployment covered 419 markets with more than 250 million people.
Retail post-paid churn (customer switch) improved 3 bps year over
year to 0.91% in the reported quarter. Total retail churn also
improved to 1.18% from 1.26% in the year-ago quarter. Retail
post-paid ARPA (average revenue per account) grew 6.5% year over
year. Verizon will now report ARPA instead of ARPU (average
revenue per user) as it introduced shared data plan, where
customers can share data among multiple devices.
revenue dipped 2.3% year over year to $9.9 billion due to
continued decline in global business. Momentum for the FiOS
fiber-optic network and sale of strategic service in the U.S.
however remained strong.
FiOS revenue increased 18% year over year to $2.5 billion. During
the reported quarter, Verizon added 119,000 and 136,000 new
customers to its FiOS Video and FiOS Internet services,
respectively. The company exited the third quarter with 4.6
million (up 15.4% year over year) FiOS Video customers and 5.3
million (up 14.4%) FiOS Internet customers. The penetration rate
(subscribers as a percentage of potential subscribers) of both
FiOS Internet and FiOS Video increased to approximately 37% and
32.9%, respectively, across all markets from the year-ago
respective levels of 34.6% and 30.6%.
Strategic services revenue, including Verizon Terremark cloud and
data center services, security and IT solutions, advanced
communications, and strategic networking, increased 4.4% from the
year-ago quarter, representing 53% of global enterprise revenue
in the third quarter.
Total Broadband connection at the end of the third quarter was
8.8 million, up 2.3% year over year. The DSL-based HSI
connections fell 11.8% year over year to 3.5 million.
The company exited third quarter with cash and cash equivalents
of $9.7 billion, which is less than $10.3 billion at the end of
the third quarter last year. Net debt increased to $43.1 billion
from $41.8 billion at the end of fiscal 2011. Net
debt-to-adjusted EBITDA improved to 1.1 times from 1.2 times at
the end of 2011.
Verizon generated $24.8 billion of cash from operations in first
nine months of 2012 compared with $21.5 billion in the year-ago
period. Capital expenditure reduced to $11.3 billion from $12.5
billion in the year-ago period.
For fiscal 2012, the company continues to expect to generate
double-digit earnings growth of 10% on continued healthy wireless
margins and improving wireline margins. The Zacks Consensus
Estimate for the year is $2.47 and represents 15% year-over-year
Capital expenditures are expected to be lower than the $16.2
billion reported last year.
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
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.