Verizon Posts Another Strong Quarter on Solid Customer Gains


Verizon Communications posted solid first-quarter results. The firm likely continued to take market share, adding 677,000 postpaid customers during the quarter, while also posting record margins. The fixed-line business also produced improved results within the consumer business. Internet and television customer additions bounced back from a weak stretch over much of 2012, and phone customer losses slowed to the slowest pace in recent memory.

Verizon Wireless again posted accelerating revenue growth during the first quarter. Wireless services revenue increased 8.6% versus a year ago, the fastest pace since early 2012. The quarter’s revenue performance was largely the result of the strong customer gains Verizon Wireless has achieved over the past year. The postpaid base is nearly 6% larger than a year ago and revenue per customer continues to grow despite dilution from data-only devices, namely tablets. About 30% of postpaid accounts are now on shared data plans, nine months after launch, creating a path to continued data revenue growth.

While Verizon Wireless has added and upgraded lots of customers over the past year, the pace slowed during the first quarter. About 6.7% of postpaid customers upgraded during the quarter, lower than any period in 2012. Verizon has benefited from a more stringent upgrade policy implemented in 2011. The firm recently decided tighten its policy further, demonstrating confidence in the strength of its business in the face of new offerings from T-Mobile. The low upgrade rate during the quarter pushed wireless EBITDA up to 50.4% of services revenue, besting the previous record high set during the third quarter of 2012. The margin was also above management’s 49% to 50% target for the year. The launch of the next iPhone will likely pull margins down into that range.

The consumer fixed-line business produced solid growth during the quarter, with revenues up more than 4% yearover- year for the third quarter in a row. Verizon added 99,000 Internet access customers during the quarter, down slightly from a year ago but far better than the 21,000 added over the last three quarter of 2012 combined. Television customer additions similarly accelerated versus the back half of 2012, hitting 169,000 during the quarter. Also impressive, residential phone customer losses dropped to 85,000 from 148,000 during the same quarter a year ago, 238,000 two years ago and 311,000 three years ago. The addition of FiOS services has clearly benefited Verizon’s ability to retain phone customers.

Enterprise and wholesale fixed line revenues remain weak, down 2.6% and 7.2% respectively. The enterprise business is showing signs of life, though, as the revenue decline was entirely tied to equipment sales, which the firm has deemphasized. Strategic enterprise services revenue growth accelerated to 6% and these businesses now represent more than 55% of segment sales. The fixed-line EBITDA margin dropped to 21.4%, the lowest since mid-2011 excluding the storm-heavy fourth quarter last year. Management doesn’t expect to turn fixed-line margins during 2013 but remains confident that profitability will improve next year as new initiatives, like Redbox, contribute and the full benefit of a new union contract kick in.

Consolidated free cash flow totaled $3.9 billion during the quarter, up from $2.4 billion a year ago. Cash flow during the first quarter tends to vary from year to year as a result of the timing of tax payments and other movements in working capital. Cash flow within Verizon fell short of fully funding the dividend and a small amount of share repurchases during the quarter. Net debt at Verizon Wireless dropped to $6.2 billion from $9.3 billion at the end of 2012 while net debt at parent Verizon increased $1.4 billion to $40.5 billion. Verizon management again commented that it is interested in buying the 45% stake in Verizon Wireless that Vodafone holds, adding that it believes it can structure a deal to avoid tax consequences. This last detail seems like an indication that Verizon is thinking more seriously about a deal than it has in the past.


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