Verizon (VZ) 18Q1 Results

Verizon reported 18Q1 GAAP earnings of $1.22 per share, better than last year’s $1.11.  Non-GAAP adjusted EPS of $1.20 were also up from $1.17 last year.  This year’s GAAP results benefited from a $0.02 gain on a pension adjustment related to the company’s voluntary termination program.  Last year’s results were hurt by $0.02 of acquisition-related costs and $0.04 of charges related to early debt retirement.  The $0.03 improvement in non-GAAP EPS was due to $0.07 in operational improvements partially offset by $0.04 of accounting-related costs from the implementation of new accounting standards on revenue recognition and lease accounting.

Revenues of $32.1 billion increased 1.1% from 17Q1’s $31.8 billion.  Wireless revenues increased 3.7% to $22.7 billion, but Wireline revenues declined 3.9% to $7.3 billion.  Corporate and other revenues and eliminations declined 6.5% to $2.2 billion.

Operating income increased 4.9% to $7.7 billion.  Wireline operating income increased 5.2% to $8.5 billion, but Wireline operating income continued to hover near breakeven, slipping to an operating loss of $88 million from an operating profit of $69 million a year ago.  The operating loss not associated with corporate and other activities declined from $769 million to $669 million.

On the wireless side, management highlighted the 4.4% increase in service revenues, which offset a decline in equipment revenue.  Retail connections declined by 115,000 in the quarter, but were up by 1.5% or 1.7 million year-on-year.  Average service revenue per account, excluding installment billing for devices, was up 3.8% over last year.  Operating income, as noted, was up 5.2%, but half of the gain came as a result of decline in depreciation and amortization expense.  Thus, Wireless segment EBITDA  increased by 2.8% to $10.8 billion in the quarter.

The Wireline business continues to face challenges from the steady decline in business revenues (including business, enterprise and partner solutions).  FIOS digital connections slipped 0.9% in the quarter, as declines in video and digital voice were only partially offset by an increase in internet connections.  The company is striving to right-size the business to its current and future expected revenue base, but SG&A costs increased 8.6% in the quarter, despite the 3.9% drop in revenues.  Wireline segment EBITDA declined 8.2% to $1.5 billion.

Management is striving to maintain technology leadership through the implementation of the next generation 5G network and its intelligent edge network architecture, but it is still unclear whether and when these efforts will have a positive impact on the company’s overall results.  The technology promises to open up a whole range of consumer and business applications, including the continued rapid growth in the internet of things (IoT) connected devices.  In the interim, however, the business continues to be pressured by price sensitive consumers who seek more affordable telecommunication service solutions.

In response, Verizon is also focused on reducing its operating costs and maintaining its financial flexibility.  Management noted that its successful efforts to manage the balance sheet have been recognized by the rating agencies which recently raised their outlooks for the company to positive, raising the possibility that its debt may be upgraded.

Even so, equity investors remain concerned about the company’s ability to sustain its revenues.  Although 19Q1 adjusted EPS of $1.20 exceeded the consensus estimate of $1.17, the stock fell by 3.5%  in early trading on the day of the earnings announcement, but managed to claw its way back to close down 2.1%. It ended the week down 2.5%.

Since reaching an all-time high of $61.58 in November 2018, Verizon’s stock is has come to a critical juncture.  After falling during December and January, it rallied back during February and March to within a whisker of the November high, but has since fallen back and is looking to reclaim its 50-day moving average.  For now, this looks like a double-top formation, which raises the risk of a potentially steeper slide, if the stock fails to break above its previous high.

Yet, the stock still offers a 4.1% dividend yield at the current quote and at about 12.5 times forward earnings, it looks cheap relative to the market.  That dividend, which looks sustainable, should help to anchor the share price, as long as the company is able to avoid an erosion in its customer base (and hold back the challenges presented by over-the-top video services and competitive pricing).  Ultimately, Verizon needs to find a way to offer telecommunication services that are more affordable in order to sustain its revenues and profits, if indeed that is possible. Despite the ominous price action, I currently rate the stock a “hold.”

April 29, 2019

Stephen P. Percoco
Lark Research
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Linden, New Jersey 07036
(908) 975-0250

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