Verizon Earnings Preview: It's All About Wireless
Verizon ( VZ ) is set to announce its Q4 2012 earnings on 22 January. During the earnings call, we will take a close look at subscriber additions, to see how the carrier is performing amid the industry-wide saturation in wireless growth. Considering Verizon's announcement of record holiday sales of 9.8 million smartphones, this would be a very important data point to track. Increasing smartphone penetration will enable the company to post a y-o-y increase in postpaid Average revenue per user (ARPU) levels, bolstered by data ARPU. We are also interested if the company has further updates on its Redbox partnership and future growth strategy for its streaming division. In addition to the company financials, we have a special interest in the uptake in LTE subscriber numbers, as Verizon looks to promote LTE widely this year, challenging AT&T ( T ) and Sprint ( S ) in the wireless market.
We have a price estimate of $44 for Verizon , ~5% upside to the market price.
Saturated Wireless Market
The U.S. wireless market has become increasingly saturated, with wireless connections having exceeded the population in mid-2011. This has made acquiring new subscribers, especially those that pay for the higher-margin data plans, very tough for the wireless carriers. However, Verizon had a tremendous subscriber growth in Q3 2012, adding 1.5 million net postpaid subscribers, up by more than 74% from Q3 2011. We expect the company to have a similar growth in Q4 2012 as well, mainly due to strong holiday sales.
In addition to acquiring new postpaid subscribers in Q3 2012, Verizon also managed to convert more of its existing base to the higher ARPU-yielding smartphones. Verizon said that about 79% of all retail postpaid phone sales in Q3 were smartphones, with 44% of those upgrading being first time smartphone buyers. This helped increase its smartphone penetration within the postpaid subscriber base to more than 53%, up from 50% at the end of Q2 12. Increasing smartphone penetration helped drive postpaid ARPA, as smartphone users are usually heavy data users as well. Verizon's postpaid ARPA (average revenue per account) grew 6.5% over the same period last year.
LTE Adoption Will Continue To Rise Steadily
Verizon saw LTE adoption rates increase in Q3 2012, with both LTE smartphones as well as LTE Internet devices seeing a good uptick in volumes. We expect to see similar growth in the fourth quarter. Increased adoption of 4G will reduce dependence on Verizon's 3G networks, which are under great strain due to heavy data usage by smartphone users. Also, LTE as a network technology not only supports higher speeds, but is also more efficient than the current 3G networks at handling data, thereby improving margins by reducing maintenance and handling costs. It is therefore a good sign that almost 35% of Verizon's data traffic is on its 4G LTE network already. As more people switch to 4G LTE-compatible smartphones, the higher LTE speeds will see subscribers increasingly use data-intensive applications on their smartphones. This will drive data revenues, thereby increasing ARPU levels for Verizon over the coming years.
Verizon Looks To Drive Wireless Data Consumption With Redbox
The streaming market has seen tremendous growth, and entering this growth market with Redbox will not only enable Verizon to make a profitable venture out of it, but also help it differentiate its mobile services from other telecom players in the market. The advent of high speed 4G LTE technology has made streaming good quality videos at high speeds possible. As the growing number of users access Internet on the go, the demand for video streaming from mobile devices is also set to rise.
If Verizon starts offering streaming plans bundled with its existing wireless data plans, it will not only be able to monetize this growing need for video on demand, but also put its high-speed LTE network to greater use. Even otherwise, a standalone streaming service can help drive up the demand for videos and cause customers to consume more data on their mobile devices. Having recently debuted their shared data plans, Verizon will be looking to increase mobile data usage and cause users to move into the higher tiers of their plans. We are hoping Verizon will shed some color on its plans for this business, which we feel is an exciting opportunity for the company.