Why did Verizon’s margins increase in 1st quarter 2014?

Market Realist

Analyzing Verizon's growth opportunities and important risks (Part 6 of 6)

(Continued from Part 5)

The EDGE program is accretive to Verizon’s wireless margins

In the previous part of this series, we discussed how although the ARPA metric for Verizon (VZ) has increased, it could decline due to the increasing popularity of the EDGE program. We also discussed how competitors AT&T (T) and T-Mobile US (TMUS) have also introduced similar plans to EDGE.

Not only is the EDGE plan good for customers, but it’s also good for Verizon. These plans are good for Verizon because it’s not paying the cost of the subsidy, while the customer bears the entire cost of the smartphone. This was one of the factors that let Verizon increase its wireless EBITDA margin from 50.4% in Q1 2013 to 52.1% in Q1 2014, as the chart below shows. The EDGE plan also helps Verizon lower its churn rate, as it helps out-of-contract subscribers move over to EDGE.

Increasing adoption of EDGE plans is pushing up margins

During the conference call to announce Q1 2014 earnings, Verizon’s management commented, “Let me be very clear and provide the financial impacts of our Verizon EDGE plans for the first quarter. As you would expect, the number of customer activations on EDGE increased sequentially and is also running ahead of our expectations. The estimated EBITDA benefit from the accounting treatment under these plans was worth about $165 million, which equates to less than 2% of total EBITDA in the quarter. The benefit to our service EBITDA margin was approximately 90 basis points. While EDGE had a favorable effect on profitability, our results demonstrate that we delivered EBITDA growth and margin expansion over and above the benefits of equipment monthly payment plans.”

Verizon’s Wireline margins also increased

Increases in Verizon’s margins help the iShares U.S. Telecommunications ETF (IYZ) and iShares Global Telecom ETF (IXP), which have high exposure to Verizon. Verizon’s Wireline EBITDA margin increased from 21.4% in Q1 2013 to 22.3% in Q1 2014.

Management observed, “From an overall Wireline perspective, total operating revenues were down 0.4%, EBITDA was $2.2 billion, up 3.4% resulting in an EBITDA margin of 22.3% for the quarter. Our strategic investments in network technology enable us to deliver reliable and high quality services and solutions to consumers, small businesses and enterprise customers.”

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