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Verizon (VZ) Misses on Q4 Earnings Despite Higher Revenues

Zacks Equity Research

Verizon Communications Inc. VZ reported solid fourth-quarter 2019 results, primarily led by the wireless business. With industry-leading wireless products and services, the company remains well poised to benefit from increased 5G deployment across the country under the new operational framework.

The Headlines

GAAP earnings for the reported quarter were $5,217 million or $1.23 per share compared with $2,065 million or 47 cents per share in the year-ago quarter. The significant year-over-year increase in GAAP earnings was largely driven by top-line growth and lower operating expenses. Excluding non-recurring items, adjusted earnings were $1.13 per share compared with $1.12 in the year-earlier quarter and missed the Zacks Consensus Estimate by a couple of cents.         

Verizon Communications Inc. Price, Consensus and EPS Surprise

 

Verizon Communications Inc. Price, Consensus and EPS Surprise

Verizon Communications Inc. price-consensus-eps-surprise-chart | Verizon Communications Inc. Quote

For full year 2019, GAAP earnings improved to $19,788 million or $4.65 per share from $16,039 million or $3.76 per share in 2018, as diligent execution of operational plans led to lower operating costs. Adjusted earnings for 2019 were $4.81 per share compared with $4.71 in 2018.

Consolidated GAAP operating revenues for the quarter improved 1.4% year over year to $34,775 million as wireless service revenue growth was partially offset by lower wireless equipment and decline in legacy wireline revenues. The top line beat the Zacks Consensus Estimate of $34,520 million. Operating income improved 6.6% year over year to $8,180 million. For full year 2019, Verizon recorded consolidated GAAP operating revenues of $131,868 million, up from $130,863 million in 2018.                      

Segment Performance

Consumer: Total revenues from this segment were up 2% year over year to $24,207 million. Service revenues improved 1.1% to $16,341 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 2.1% to $5,722 million as focus on high-end devices and technology upgrades led to soft sales, while Other revenues totaled $2,144 million, up 23.9% year over year.

Operating income improved 1.2% to $6,886 million due to higher retail postpaid connections, while operating income margin remained relatively stable at 28.4%. Segment EBITDA was $9,658 million, resulting in EBITDA margin of 39.9% compared with respective tallies of $9,773 million and 41.2% in the prior-year quarter.

Verizon reported 852,000 wireless retail postpaid net additions in fourth-quarter 2019. Quarterly retail postpaid churn rate increased to 1.09% from 1.03% in the year-ago quarter. Wireless retail postpaid ARPA (average revenue per account) was $118.03 compared with $115.87 in the year-ago quarter.

Business: Total revenues in the segment were $8,071 million, up 0.8% year over year as lower Wholesale revenues (down 10.6% to $772 million), Public Sector and Other revenues (down 1.6% to $1,487 million) and Global Enterprise (down 1.6% to $2,740 million) were offset by higher Small and Medium revenues (up 7.9% to $3,072 million). 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 35,000 Fios Internet connections due to strong demand for value broadband connections, it lost 51,000 Fios Video connections amid pressures from cord-cutting of video bundles, reflecting a strategic shift from traditional linear video to over-the-top offerings. The segment recorded 396,000 wireless retail postpaid net additions in the quarter, up 18.6% year over year with total retail postpaid churn of 1.28%.

Operating income from the segment was $666 million compared with $799 million in the year-ago quarter for respective margins of 8.3% and 10%. Segment EBITDA fell 10.4% to $1,673 million for EBITDA margin of 20.7% compared with 23.3% in the year-ago quarter.

Cash Flow and Liquidity

Verizon generated $35,746 million of cash from operating activities in 2019 compared with $34,339 million in the year-ago period. The year-over-year increase was driven by operational improvements and lower discretionary employee benefit contributions, partially offset by higher cash payments related to the Voluntary Separation Program. At year-end 2019, Verizon had $2,594 million of cash and cash equivalents and $100,712 million in long-term debt compared with respective tallies of $2,745 million and $105,873 million in the prior-year period.

The company remains focused on reducing its net unsecured debt portfolio into its targeted range of 1.75 to 2.0x, while continuing to actively manage its near-term maturities, optimize overall funding footprint and lower its cost of capital. Verizon recorded high capital expenditures of $17,939 million in 2019 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 architecture.

Till date, Verizon has achieved $5.7 billion of cumulative cash savings and remains on track to achieve cumulative cost savings of $10 billion by 2021. The company realized approximately $1.3 billion of expense savings from its Voluntary Separation Program in 2019.

Guidance  

For full-year 2020, Verizon offered guidance based on underlying strength of its business model and healthy momentum in its wireless business. Adjusted earnings per share are likely to increase by 2-4% year over year, while GAAP revenues are likely to increase by low-to-mid single-digit percentage rates driven by expected savings from tax reform and higher cash flow from operations. Capital expenditures for 2020 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 increase in 5G footprint with the launch of the 5G Ultra Wideband network in more markets across the country.

We remain impressed with the healthy growth prospects of this Zacks Rank #3 (Hold) stock. Better-ranked stocks in the broader industry include ATN International, Inc. ATNI and Bandwidth Inc. BAND, each carrying a Zacks Rank #2 (Buy) and PCTEL, Inc. PCTI, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

ATN International delivered an average positive earnings surprise of 143.9% in the trailing four quarters.

Bandwidth has long-term earnings growth expectation of 12.9%. It delivered an average positive earnings surprise of 67.6% in the trailing four quarters, beating estimates on each occasion.

PCTEL delivered an average positive earnings surprise of 150.6% in the trailing four quarters.

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