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Verizon (VZ) Q3 Earnings Beat Estimates on Wireless Strength

Zacks Equity Research

Verizon Communications Inc. VZ reported solid third-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 $5,337 million or $1.25 per share compared with $5,062 million or $1.19 per share in the year-ago quarter. The 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 $1.25 per share compared with $1.22 in the year-earlier quarter and beat the Zacks Consensus Estimate by a penny.

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 operating revenues improved 0.9% year over year to $32,894 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 $32,715 million. Operating income improved 6.6% year over year to $8,180 million as diligent execution of operational plans led to lower operating costs.

Segment Performance

Consumer: Total revenues from this segment were up 1.4% year over year to $22,706 million. Service revenues improved 1.5% to $16,433 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 5.6% to $4,257 million as focus on high-end devices and technology upgrades led to soft sales, while Other revenues totaled $2,016 million, up 18.7% year over year.

Operating income improved 3.8% to $7,489 million due to higher retail postpaid connections. Quarterly operating income margin was 33% compared with 32.2% in the year-ago quarter. Segment EBITDA was $10,295 million, resulting in EBITDA margin of 45.3% compared with respective tallies of $10,223 million and 45.6% in the prior-year quarter.

Verizon reported 193,000 retail postpaid net additions in third-quarter 2019. Quarterly retail postpaid churn rate increased to 1.05% from 1.01% in the year-ago quarter. Wireless retail postpaid ARPA (average revenue per account) was $118.89 compared with $117.06 in the year-ago quarter.

Business: Total revenues in the segment were $7,885 million, almost flat year over year as lower Wholesale revenues (down 13.7% to $800 million) and Global Enterprise (down 2.4% to $2,714 million) were offset by higher Small and Medium revenues (up 6.2% to $2,899 million) and Public Sector and Other revenues (up 1.2% to $1,472 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 30,000 Fios Internet connections due to strong demand for value broadband connections, it lost 67,000 Fios Video connections amid pressures from cord-cutting of video bundles, reflecting a strategic shift from traditional linear video to over-the-top offerings.

Operating income from the segment was $977 million compared with $1,154 million in the year-ago quarter. Segment EBITDA fell 10.7% to $1,987 million for EBITDA margin of 25.2% compared with 28.2% in the year-ago quarter.

Cash Flow and Liquidity

Verizon generated $26,748 million of cash from operating activities in the first nine months of 2019 compared with $26,244 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 quarter end, Verizon had $3,020 million of cash and cash equivalents and $101,769 million in long-term debts.

The company recorded high capital expenditures of $12,332 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 $4.6 billion of cumulative cash savings and remains on track to achieve cumulative cost savings of $10 billion by 2021. The company realized approximately $400 million of expense savings from its Voluntary Separation Program during the quarter.

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 #2 (Buy) stock. Some other top-ranked stocks in the industry include United States Cellular Corporation USM, ATN International, Inc. ATNI and Gogo Inc. GOGO, each carrying a Zacks Rank #2. 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 38.3% in the trailing four quarters, beating estimates thrice.

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

Gogo delivered an average positive earnings surprise of 34.9% in the trailing four quarters, beating estimates on each occasion.

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