Earnings Preview: Verizon - Analyst Blog

The largest U.S. mobile service provider Verizon Communications ( VZ ) is slated to release its first quarter 2012 earnings on April 18, before the opening bell. The current Zacks Consensus Estimate is pegged at 57 cents for the first quarter, representing a year-over-year increase of 12.59%.

With respect to surprises, Verizon had a 1.25% average positive earnings surprise in the trailing four quarters. In the year-earlier quarter, the company had surprised us by reporting earnings 2.0% higher than what we had expected.

The company did not release any financial forecast for the first quarter during its fourth quarter conference call.

Fourth Quarter Flashback

Verizon's fourth quarter adjusted earnings missed the Zacks Consensus Estimate by a penny and were two cents below the year-ago earnings. The company recorded the highest year-over-year quarterly revenue growth in 11 years mainly driven by continued strong wireless services, FiOS fiber-optic services 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, strong adoption of Google Inc. ( GOOG ) Android smartphones and the sale of Apple Inc. 's ( AAPL ) iPhone led to the growth in retail wireless subscribers that was the highest in three years.

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 35.5% and 31.5%, respectively.

Fiscal 2011 Flashback

Verizon exited the year with improving top and bottom lines. Wireless business remained healthy while Wireline business started showing stability. Gross subscriber additions remained strong and the monthly churn rate (customer switch to competitor) was among the lowest in the industry.

The company enhanced its balance sheet by reducing debt. Net debt reduced to $41.8 billion from $46.1 billion at the end of fiscal 2010. Net debt-to-adjusted EBITDA improved to 1.2 times from 1.3 times last year. This shows the company's ability to expand its business further.

Agreement of Analysts

Estimates reflect a negative bias for both the first quarter and fiscal 2012 over the last 30 days. For the first quarter, 11 analysts out of 26 made downward revisions while 2 moved in the opposite direction. For fiscal 2012, out of the 31 covering analysts, 15 revised their estimates downward while 1 revised it positively.

The analysts made downward revisions primarily based on iPhone subsidies, which will likely limit Verizon's margins and profits throughout the year. Verizon is currently facing major setbacks regarding its spectrum deals with a group of cable companies, including ComcastCorporation ( CMCSA ), Time Warner Cable Inc. ( TWC ) 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 term.

Further, the analysts believethat persistent access line losses in wireline, competitive pressures from its largest rivals AT&T Inc. ( T ) and Sprint Nextel Corp. ( S ), high promotional and restructuring expenses would further limit the earnings upside potential.

The analysts believe these negatives offset Verizon's strong subscriber count and average revenue per user, which is driven by increased penetration of smartphones and iPhones, in the U.S. market in particular.

Magnitude - Consensus Estimate Trend

The magnitude of revisions for first quarter remained stable over the last 7 days at 57 cents, but decreased from 58 cents over the last 30 days.

Similarly, the Zacks Consensus Estimate for 2012 is $2.47, down by a penny over the last 7 days and 2 cents over the last 30 days.

Neutral Recommendation

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 as well as continued strong FiOS fiber-optic network and strategic services in the Wireline business.

However, 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 rating on Verizon. For the short term (1-3 months), the stock retains a Zacks #3 (Hold) Rank.

APPLE INC ( AAPL ): Free Stock Analysis Report

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TIME WARNER CAB (TWC): Free Stock Analysis Report

VERIZON COMM (VZ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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