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Verizon Has the Short End of a Wireless Stick

- By Sangara Narayanan

Verizon (VZ), the largest wireless carrier in the U.S., just reported its first quarter 2017 earnings, which missed analyst estimates on both the top line and bottom line. The stock price edged lower immediately after the earnings announcement and was down 1.22% at the time of writing this article.

Verizon reported earnings per share of 95 cents on the back of $29.81 billion in revenues, while the market was expecting slightly higher earnings per share of 96 cents and revenues of $30.39 billion. Quarterly revenues of $29.81 billion were 7.3% lower than what the company posted a year ago, and the decline can be directly attributed to Verizon's dipping wireless segment revenues.


Verizon's wireless segment is the breadwinner for the company, and the segment posted $20.88 billion, compared to $22.004 billion a year earlier, a decline of 5.1%. Retail postpaid connections had a net decline of 307,000. Verizon is still the No. 1 wireless carrier in the U.S., but a loss of 307,000 retail post-paid (contract) connections, including 289,000 phone losses, is horrible, to say the least.

The U.S. is a highly mature wireless market, and that's a given. Smartphone sales have slowed down because the penetration is already at a high and barely ticking upwards. A report from Strategy Analytics says:

"The U.S. wireless market has entered into a new phase, evolving from voice to text to data and now to constant connectivity and what you do with it. While growth has slowed, nearly 100 million wireless connections will be added through 2020, driving a 0.2% growth in wireless service revenue. Verizon Wireless and AT&T are diversifying their revenue streams but will remain strong leaders, even as challengers T-Mobile USA and Sprint gain ground."

According to Strategy Analytics, 100 million more connections may be added through 2020 to reach a penetration of 128%. The reason why penetration goes above 100% is because of people taking multiple connections, a good indicator that the market is either already exhausted or near exhaustion.

Carrier revenues have been moving higher and higher because of the additional customers they sign up each quarter, but that is going to be extremely hard to come by due to the level of maturity that the segment has already reached.

Smaller players like T-Mobile and Sprint have lots of customers to gain, while bigger players like Verizon and AT&T have a lot of customers to lose. That's one of the reasons why Verizon has been pushing into other areas and buying companies like AOL and Yahoo. But the effect of those acquisitions are yet to start making any meaningful impact, and the competition in the wireless industry is starting to hurt the biggest of the lot.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

This article first appeared on GuruFocus.