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Verizon Earnings Preview: Watching Impact Of Subsidies And T-Mobile Competition In Q4

Verizon Earnings Preview: Watching Impact Of Subsidies And T-Mobile Competition In Q4

Jan 17 2014, 4:33pm CST | by

Verizon is scheduled to release its Q4 2013 results on January 21st. We will be keenly watching the carrier’s smartphone sales as well as wireless net additions, which should have received a boost...

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28 weeks ago

Verizon Earnings Preview: Watching Impact Of Subsidies And T-Mobile Competition In Q4

Jan 17 2014, 4:33pm CST | by

Verizon is scheduled to release its Q4 2013 results on January 21st. We will be keenly watching the carrier’s smartphone sales as well as wireless net additions, which should have received a boost during the holiday season. The carrier is likely to see data ARPU rise due to growing smartphone penetration and increasing adoption of 4G LTE, but heavy smartphone subsidies during the holiday season are likely to have caused its margins to take a hit. It will be interesting to see the impact of increasing competition from T-Mobile, which recently launched the iPhone on its network and is aggressively going after rivals with its ‘Uncarrier’ strategy, on Verizon’s wireless net adds in Q4. T-Mobile recently announced its porting ratio figures, and while Sprint and AT&T seem to be the worst hit by T-Mobile’s new service plans, even Verizon seems to be losing more subscribers to T-Mobile than it can gain.

Our $50 price estimate for Verizon is about in line with the current market price.

See our complete analysis for Verizon

LTE’s importance in a saturated market

The U.S. wireless market has become increasingly saturated with wireless connections having exceeded the population in mid-2011. This has made acquiring new subscribers, especially those that pay for the higher-margin postpaid data plans, very tough for the wireless carriers. Despite this, Verizon has banked on its better 4G LTE coverage to do well on the postpaid front in the recent years. Verizon has led LTE deployment in the U.S., completing its initial LTE deployment ahead of rivals and currently looking to widen the gap by increasing network density with LTE-Advanced and supporting new features such as VoLTE (Voice over LTE) ahead of rivals.

2012 saw Verizon rack up 5.1 million postpaid net adds versus AT&T’s 1.4 million for the full year. The trend continued in 2013 as well, with Verizon adding 2.7 million net postpaid subscribers through the end of the third quarter. In the same period, the second largest U.S. wireless carrier, AT&T, added only about 1.2 million postpaid net subscribers. (See Behind In LTE Coverage AT&T Spends Big To Gain New Customers)

Verizon Encourages Data Consumption

Gradually, however, the reality of a saturated wireless market seems to be catching up with Verizon in the absence of a steady supply of defecting iDEN subscribers from Sprint and the presence of a resurgent T-Mobile. Also, its LTE coverage lead over rivals isn’t as wide as was at the start of 2013. As a result, Verizon’s Q3 postpaid net adds declined to about 930,000 from over 1.5 million during the same period last year. The carrier said that supply constraints for the recently launched iPhone 5S prevented net adds from being higher in Q3, so the picture should be a lot clearer during Q4′s earnings call. However, it is unlikely that the carrier will report Q4 postpaid net adds higher than last year’s.

In order to counter growing competition from rivals, Verizon has come up with strategies to increase consumer loyalty and better hold on to its existing customer base. It recently launched a new program called Verizon EDGE, in response to T-Mobile’s aggressive moves, which allows subscribers to upgrade their smartphones every six months so long as they have paid off 50% of the unsubsidized cost of the phone. The carrier has also launched Mobile Share data plans that allow subscribers to add more mobile devices to their service account. Customers who subscribe to these initiatives get further entrenched in the Verizon ecosystem, making it tougher to switch carriers. This is important because rising competition seems to be increasing Verizon’s churn numbers of late. Compared to 0.93% in Q2 2013, Verizon had a churn of 0.84% in the same period last year. Higher churn implies that a carrier is losing more of its existing subscribers, leading to higher costs as it looks to acquire new ones.

However, the increasing adoption of shared data plans will decrease the average revenue per device since non-smartphone connected devices consume much less data. But Verizon’s revenues from each individual subscriber should also rise at the same time, as users connect more devices to its wireless network. It should also help shore up service margins due to low data consumption of these connected devices. Moreover, since the shared data plans are tiered, an increasing usage of Verizon’s high-speed LTE network will cause subscribers to jump to the higher tiers, enabling the carrier to better monetize its existing subscriber base.

Verizon’s Margin-Defending Initiatives To Offset Impact Of Smartphone Subsidies

Driving Verizon’s ARPA (average revenue per account) levels is also the increasing level of smartphone penetration within its subscriber base. Last quarter, almost 85% of Verizon’s retail postpaid activations in Q3 were smartphones, with 33% of those upgrading being first time smartphone buyers. This helped increase its smartphone penetration within the postpaid subscriber base to more than 67% – up from 58% at the start of the year. Increasing smartphone penetration helped drive postpaid ARPA, as smartphone users are usually heavy data users as well. Verizon’s postpaid ARPA grew to over $155 in Q3 2013, almost 7% over the same period last year .

Smartphone sales may increase postpaid subscriber additions and bring in substantial data revenues, but they are also very expensive due to the huge subsidies that carriers provide in return for long-term contract plans. For example, a basic model of the iPhone 5S costs around $650 for carriers who then subsidize it heavily to sell the handset for $199. We expect strong holiday buying to have depressed Verizon’s margins sequentially in Q4. However, Verizon has been able to manage its expenses well, driving operational efficiency through initiatives such as the $36 upgrade fee and the sale of tablets such as the new iPad at unsubsidized rates. (See Verizon Introduces Smartphone Upgrade Fee; Looking For iPhone Subsidy Relief) The carrier has also recently increased the minimum upgrade eligibility from 20 months to 24 in a bid to increase the upgrade cycle and mitigate the margin impact. As a result, wireless EBITDA margins in the first three quarters of 2013 increased almost 200 basis points over the same period last year. We expect a similar strong year-over-year margin improvement in Q4 as well.

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Source: Forbes Business

 
Update
10

7 weeks ago

RM47mil KWSG contributions still unclaimed

Jun 9 2014 7:54am CDT | Source: Business Times Malaysia

KUALA LUMPUR: About RM47 million of contributions in the Teachers Provident Fund (KWSG) still remain unclaimed, the Dewan Rakyat was ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
9

7 weeks ago

Gold shop lost almost RM1mil

Jun 9 2014 3:50am CDT | Source: Business Times Malaysia

KANGAR: A gold shop owner lost almost RM1 million after after the safe on in his shop was broken ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
8

7 weeks ago

Motion to debate MAS losses in Dewan Rakyat rejected

Jun 9 2014 3:39am CDT | Source: Business Times Malaysia

KUALA LUMPUR: AN emergency motion to debate the losses incurred by Malaysia Airlines last year, amounting to RM1.2 billion was rejected b ...
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Update
7

7 weeks ago

MH370 Tragedy: Hisham: RM27.6 mil spent on 1st phase of SAR

Jun 9 2014 2:11am CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia spent some RM27.6 million in its first phase of the search operations for missing Malaysia Airline flight MH370, said Acting Transport Minister, Datuk ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
6

7 weeks ago

9.1m litres of diesel seized in a month

Jun 8 2014 1:11am CDT | Source: Business Times Malaysia

PUTRAJAYA: The Domestic Trade, Cooperatives, and Consumerism ministry has seized some 9.1 million litres of diesel and property worth RM58 million since mounting ‘Operasi Diesel Selatan’ in the southern states last month. ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
5

8 weeks ago

Girl, 9, awarded RM2.78m compensation for medical negligence

Jun 6 2014 4:56am CDT | Source: Business Times Malaysia

KUALA LUMPUR: A nine-year-old girl who suffered brain damage during her birth at a government hospital was awarded over RM2.78 million in compensation. ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
4

8 weeks ago

Malaysia's total trade in April up 12pc

Jun 5 2014 11:52pm CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia's total trade in April 2014 rose by 12 per cent from a year ago to RM123.86 billion due to growing trading activities, International Trade and Industry Minister Datuk Seri M ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
3

8 weeks ago

Works Ministry to spend RM20m for upgrading works at 50 accident black spots

Jun 4 2014 11:35pm CDT | Source: Business Times Malaysia

JOHOR BARU: The Works Ministry will implement upgrading works at 50 accident prone locations in the country that have been identified this year involving an allocation of RM20 ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
2

8 weeks ago

Najib launches loan scheme for Ramadan traders

Jun 4 2014 10:24pm CDT | Source: Business Times Malaysia

PUTRAJAYA: Prime Minister Datuk Seri Najib Razak today launches RM45 million Ramadan Bazaar Scheme 20 ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
1

8 weeks ago

Residents bring up objection against Kidex to Suhakam

Jun 4 2014 4:49am CDT | Source: Business Times Malaysia

PETALING JAYA: A group of 20 Petaling Jaya residents held a meeting with the Human Rights Commission of Malaysia (Suhakam) over their objection against the proposed RM2.2 billion Kinrara Damansara Skyway (Kidex) today. ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 

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