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Verizon (VZ) Q2 Earnings Surpass Estimates, Revenues Lag

Zacks Equity Research

Verizon Communications Inc. VZ reported relatively healthy second-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.

Quarter Details

GAAP earnings for the reported quarter were $4,074 million or 95 cents per share compared with $4,246 million or $1.00 per share in the year-ago quarter. The year-over-year decrease in GAAP earnings, despite lower operating expenses, was primarily attributable to early debt redemption costs. Excluding non-recurring items, adjusted earnings were $1.23 per share compared with $1.20 in the year-earlier quarter and beat the Zacks Consensus Estimate by 3 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

Consolidated GAAP revenues declined 0.4% year over year to $32,071 million as wireless service revenue growth was offset by lower wireless equipment and wireline service revenues. The top line missed the Zacks Consensus Estimate of $32,395 million. Operating income improved 18.6% year over year to $7,709 million as diligent execution of operational plans led to lower operating costs.

Segment Performance

The company has reorganized its operating segments under its new operating structure dubbed Verizon 2.0. Under this operating structure, the new segments of the company are Consumer and Business

Consumer: Total revenues from this segment were almost flat year over year at $21,995 million. Service revenues improved 1.9% to $16,350 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 8.2% to $3,903 million as focus on high-end devices and technology upgrades led to soft sales, while Other revenues totaled $1,742 million, up 2.3% year over year.

Operating income improved 3.9% to $7,336 million due to higher retail postpaid connections. Quarterly operating income margin was 33.4% compared with 32.1% in the year-ago quarter. Segment EBITDA was $10,217 million, resulting in EBITDA margin of 46.5% compared with respective tallies of $10,057 million and 45.7% in the prior-year quarter.

Verizon reported 126,000 retail postpaid net additions in second-quarter 2019. Quarterly retail postpaid churn rate increased to 0.97% from 0.93% in the year-ago quarter. Wireless retail postpaid ARPA (average revenue per account) was $118.15 compared with $115.53 in the year-ago quarter.

Business: Total revenues in the segment were $7,768 million, down 1.1% year over year owing to lower Wholesale revenues (down 15.1% to $818 million) and Global Enterprise (down 4.8% to $2,673 million). Small and Medium revenues increased 5.4% to $2,785 million, while Public Sector and Other revenues were up 3.8% to $1,492 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 34,000 Fios Internet connections due to strong demand for value broadband connections, it lost 52,000 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 income was $1,071 million compared with $1,101 million in the year-ago quarter. Segment EBITDA fell 2% to $2,117 million for EBITDA margin of 27.3% compared with 27.5% in the year-ago quarter.

Cash Flow and Liquidity

Verizon generated $15,836 million of cash from operating activities in the first half of 2019 compared with $16,433 million in the year-ago period. The year-over-year decrease was driven by higher cash taxes and cash payments related to the Voluntary Separation Program. At quarter end, Verizon had $1,949 million of cash and cash equivalents and $104,598 million in long-term debts.

The company recorded high capital expenditures of $7,967 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.

Till date, Verizon has achieved $4.1 billion of cumulative cash savings and remains on track to achieve cumulative cost savings of $10 billion by 2021. The company completed the third and final phase of its Voluntary Separation Program and has realized approximately $480 million of expense savings year to date.

Guidance Reiterated  

For full-year 2019, Verizon reiterated its earlier 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, while GAAP revenues 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 select markets across the country, as it gears up to increase the tally of 5G Ultra Wideband mobility cities to 30 in 2019.

We remain impressed with the healthy growth prospects of this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry include United States Cellular Corporation USM, sporting a Zacks Rank #1 (Strong Buy), and Cogent Communications Holdings, Inc. CCOI and Nokia Corporation NOK, both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

United States Cellular Corporation delivered an average positive earnings surprise of 79.3% in the trailing four quarters, beating estimates on each occasion.

Cogent Communications has a long-term earnings growth expectation of 8%.

Nokia delivered an average positive earnings surprise of 89.3% in the trailing four quarters, beating estimates thrice.

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