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Verizon (VZ) Up 3.8% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Verizon Communications (VZ). Shares have added about 3.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Verizon due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Verizon Q1 Earnings Beat on Wireless Strength, View Up

Verizon started 2019 on a promising note with solid performance in the first quarter, primarily led by the wireless business. The company recorded modest top-line growth led by service revenues and remains well poised to benefit from the impending 5G boom.

Quarter Details

GAAP earnings for the reported quarter were $5,032 million or $1.22 per share compared with $4,545 million or $1.11 per share in the year-ago quarter. The year-over-year increase in GAAP earnings was primarily attributable to higher wireless service revenues. Excluding non-recurring items, adjusted earnings were $1.20 per share compared with $1.17 in the year-earlier quarter and beat the Zacks Consensus Estimate by 3 cents.

Consolidated GAAP revenues increased 1.1% year over year to $32,128 million and missed the Zacks Consensus Estimate of $32,165 million. Operating income improved 4.9% year over year to $7,709 million due to diligent execution of operational plans.

Segment Performance: Wireless

Total revenues from this segment were $22,700 million, up 3.7% year over year. Service revenues improved 4.4% to $16,072 million due to shift to higher-priced plans, incremental contributions from retail postpaid net additions and an increase in connections per account. Equipment revenues decreased 2.2% to $4,931 million as focus on high-end devices and technology upgrades led to soft sales, while Other revenues totaled $1,697 million, up 16.4% year over year.

Operating income improved 5.2% to $8,466 million due to higher retail postpaid connections. Quarterly operating income margin was 37.3% compared with 36.8% in the year-ago quarter. Segment EBITDA increased 2.7% to $10,765 million, resulting in EBITDA margin of 47.4% compared with respective tallies of $10,477 million and 47.8% in the prior-year quarter.

Verizon reported 61,000 retail postpaid net additions in first-quarter 2019. Quarterly retail postpaid churn rate increased to 1.12% from 1.04% in the year-ago quarter. Retail postpaid ARPA (average revenue per account) was $136.68 compared with $131.71 in the year-ago quarter.

Wireline Segment

Total revenues in the segment were $7,264 million, down 3.9% year over year owing to lower Business Markets revenues (down 4.9% to $828 million) and Enterprise Solutions (down 4.5% to $2,140 million). Partner Solutions revenues also decreased 12.5% to $1,075 million, while Consumer retail and Other revenues remained relatively flat at $3,153 million and $68 million, respectively. Despite growth in high-quality fiber products, Verizon continued to face pricing pressures on legacy products and technology shifts.

Although Verizon added a net of 52,000 Fios Internet connections due to strong demand for value broadband connections, it lost 53,000 Fios Video connections amid pressures from cord-cutting of video bundles, reflecting a strategic shift from traditional linear video to over-the-top offerings.

Quarterly operating loss was $88 million, against operating income of $69 million in the year-ago quarter. Segment EBITDA fell 8.2% to $1,472 million for EBITDA margin of 20.3% compared with 21.2% in the year-ago quarter.

Cash Flow and Liquidity

Verizon generated $7,081 million of cash from operating activities in the reported quarter compared with $6,648 million in the year-ago period. The year-over-year increase was driven by strong operating results, tax reform benefits, reduced impacts from the wireless device payment plan model, and lower discretionary pension and benefit contributions. At quarter end, Verizon had $2,322 million of cash and cash equivalents and $105,045 million in long-term debts compared with respective tallies of $1,923 million and $112,734 million in the prior-year period. The company was able to reduce its total debt burden by $4.7 billion during 2018 due to strong cash flow and tax reform benefits.

The company recorded high capital expenditures of $4,268 million during the quarter in order to support the transition for the launch and continued build-out of its 5G Ultra Wideband network, deployment of significant fiber assets across the country and upgrade to Intelligent Edge Network.

To date, Verizon has achieved $3 billion of cumulative cash savings and remains on track to achieve cumulative cost savings of $10 billion by 2021. The company expects to achieve this goal through zero-based budgeting and Voluntary Separation Program, under which it realized approximately $180 million of expense savings during the reported quarter.

Revised Guidance 

For full-year 2019, Verizon has raised its earnings guidance on underlying strength of its business model and healthy momentum in its wireless business. Adjusted earnings per share are likely to increase by low single digits compared to a relatively flat trajectory expected earlier. GAAP revenue expectations remain unchanged and are likely to increase by low single-digit percentage rates driven by expected savings from tax reform and higher cash flow from operations. Capital expenditures for 2019 are likely to be in the range of $17 billion to $18 billion.

Moving Forward

With one of the most efficient wireless networks in the United States, Verizon is likely to benefit immensely from the launch of the 5G Ultra Wideband network in Chicago and Minneapolis. As the company gears up to increase the tally of 5G Ultra Wideband mobility cities to 30 in 2019, it is offering an exclusive 5G moto mod by Motorola Solutions, Inc. to power moto z3 – the world’s first 5G-enabled smartphone – to enable users to fully utilize the network features.

At the same time, Verizon has collaborated with industry-leading web-based video playback services providers, THEO Technologies and IRIS.TV, to enrich its video streaming network. The integration of the THEOplayer Universal Video Player and IRIS.TV’s Video Personalization Platform will expand the capabilities of Verizon Digital Media Services to offer more personalized service to users and thwart competitive pressure.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Verizon has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Verizon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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