Verizon Communications Inc. (NYSE:VZ) reported first-quarter 2017 results highlighted by strong wireless profitability and customer loyalty as the company introduced its Verizon Unlimited pricing option, and revenue growth for Fios broadband and Internet of Things (IoT) services.
“Our first-quarter results again demonstrated that customers value a high-quality network experience,” said Chairman and CEO Lowell McAdam. “To build on our loyal customer base and the third-party recognition we have received for network leadership, we extended our wireless and fiber network capabilities, began offering an unlimited pricing option and expanded our opportunities in new markets. We’re executing on strategies to capture future growth and create long-term shareholder value.”
Verizon reported first-quarter 2017 EPS of 84 cents. Adjusted first-quarter 2017 EPS (non-GAAP) of 95 cents included a net of 11 cents per share in early debt redemption costs and a gain on a spectrum license transaction. This compares with first-quarter 2016 earnings of $1.06 per share on both a reported and adjusted basis.
Total consolidated operating revenues in first-quarter 2017 were $29.8 billion, a 7.3 percent decrease compared with first-quarter 2016. On a comparable basis excluding divestitures and acquisitions in the period (non-GAAP), consolidated revenue declined approximately 4.5 percent.
Net income was $3.6 billion in first-quarter 2017, and EBITDA (non-GAAP, earnings before interest, taxes, depreciation and amortization) totaled $11.2 billion. Consolidated operating income margin was 24.1 percent. Consolidated EBITDA margin (non-GAAP) was 37.7 percent in first-quarter 2017, compared with 37.2 percent in first-quarter 2016.
Cash flow from operations was $1.7 billion during the quarter, including $3.4 billion in discretionary pension contributions. As a result of the contributions, Verizon’s mandatory pension funding through 2020 is expected to be minimal, which will benefit future cash flows and improve the funded status of qualified pension plans.
Capital expenditures totaled $3.1 billion in first-quarter 2017, as Verizon maintained its network leadership.
In Verizon’s media business, AOL delivered solid seasonal performance in first-quarter 2017. Revenue, net of traffic acquisition costs, decreased about 4 percent, driven by a higher percentage of programmatic advertising.
Total telematics revenues were $214 million in first-quarter 2017. Organically, IoT revenues, which include telematics, increased approximately 17 percent year over year.
Verizon also completed its acquisition of XO Communications’ fiber assets in first-quarter 2017.
- The launch of Verizon Unlimited positively changed the trajectory of customer additions in the quarter. A net decline of 307,000 retail postpaid connections in first-quarter 2017 included 289,000 phone losses. Prior to the launch in mid-February, Verizon had a retail postpaid phone net loss of 398,000; after the launch, Verizon added 109,000 retail postpaid phone connections. For the entire quarter, Verizon added a net of 49,000 smartphones to its retail postpaid phone base.
- Verizon’s retail postpaid connections base grew 1.2 percent year over year to 108.5 million, and retail prepaid connections grew 0.5 percent to 5.4 million.
- Retail postpaid churn was 1.15 percent in first-quarter 2017, a year-over-year increase of 19 basis points primarily due to increased churn in tablets. Phone customer loyalty remained high, with retail postpaid phone churn of less than 0.90 percent for the eighth consecutive quarter.
- Total revenues were $20.9 billion in first-quarter 2017, a decline of 5.1 percent compared with first-quarter 2016, due to decreased overage revenue, lower postpaid customers in the quarter and continued promotional activity.
- At the end of first-quarter 2017, approximately 72 percent of postpaid phone customers were on a non-subsidized service pricing plan. The percentage of phone activations on device payment plans remained steady at about 76 percent in first-quarter 2017, compared with about 77 percent in fourth-quarter 2016. Verizon expects this rate to remain consistent in second-quarter 2017. Approximately 48 percent of postpaid phone customers had a device payment plan at the end of first-quarter 2017.
- In first-quarter 2017, overall traffic on LTE increased about 57 percent compared with first-quarter 2016, while Verizon extended its lead in the industry’s third-party network performance studies across the country.
- Segment operating income in first-quarter 2017 was $7.1 billion, and segment operating income margin on total revenues was 33.9 percent. Segment EBITDA (non-GAAP) totaled $9.4 billion in first-quarter 2017, a year-over-year decrease of 7.5 percent. Segment EBITDA margin on total revenues (non-GAAP) was 45.1 percent, compared with 46.2 percent in first-quarter 2016.
- As previously announced, Verizon plans to launch 11 pre-commercial 5G fixed wireless pilots during second-quarter 2017.
- Total wireline revenues declined 0.6 percent, to $7.9 billion, comparing first-quarter 2017 with first-quarter 2016. Consistent with recent trends and on a comparable basis (non-GAAP), this decline was 3.2 percent, excluding revenues from XO Communications in first-quarter 2017.
- Total Fios revenues grew 4.7 percent, to $2.9 billion, comparing first-quarter 2017 with first-quarter 2016. This supported revenue growth of 0.7 percent in consumer markets and 2.3 percent in business markets.
- In first-quarter 2017, Verizon added a net of 35,000 Fios Internet connections and lost a net of 13,000 Fios Video connections. At the end of first-quarter 2017, Verizon had 5.7 million Fios Internet connections and 4.7 million Fios Video connections, year-over-year increases of 3.3 percent and 0.1 percent, respectively.
- During the first quarter, Verizon Enterprise Solutions and Verizon Business Markets entered into new agreements or continued work with a number of clients, including Block Institute, the State of Connecticut, Georgetown University, HRC ManorCare and Xplor.
- Wireline operating income was $293 million in first-quarter 2017, compared with a loss of $67 million in first-quarter 2016. Segment operating income margin was 3.7 percent in first-quarter 2017. Segment EBITDA (non-GAAP) was $1.8 billion in first-quarter 2017, up 18.3 percent from first-quarter 2016. Segment EBITDA margin (non-GAAP) was 22.7 percent in first-quarter 2017, compared with 19.0 percent in first-quarter 2016.
Outlook and forward-looking items
Verizon expects the following:
- Full-year 2017 consolidated revenues, on an organic basis, to be fairly consistent with 2016, with improvement in wireless service revenue and equipment revenue trends; also, full-year 2017 consolidated adjusted EPS trends to be similar to consolidated revenue trends;
- Consolidated capital spending for 2017 in the range of $16.8 billion to $17.5 billion;
- The 2017 effective tax rate to be in the range of 34 percent to 36 percent, excluding impacts from potential tax reform; and
- That it is on track for a return by the 2018-2019 timeframe to the company’s credit-rating profile prior to the acquisition of Vodafone’s indirect 45 percent interest in Verizon Wireless in early 2014.
Shares of Verizon are down nearly 2% to $48.05 in pre-market trading Thursday. VZ has a 1-year high of $56.95 and a 1-year low of $46.01. The stock’s 50-day moving average is $49.36 and its 200-day moving average is $49.97.
On the ratings front, VZ has been the subject of a number of recent research reports. In a report issued on April 18, Oppenheimer analyst Timothy Horan reiterated a Hold rating on VZ. Separately, on April 13, Barclays’ Amir Rozwadowski reiterated a Hold rating on the stock and has a price target of $49.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Timothy Horan and Amir Rozwadowski have a yearly average return of 12.1% and 22.1% respectively. Horan has a success rate of 77% and is ranked #13 out of 4559 analysts, while Rozwadowski has a success rate of 73% and is ranked #122.
Overall, 11 research analysts have assigned a Hold rating and one research analyst has given a a Buy rating to the stock. When considering if perhaps the stock is under or overvalued, the average price target is $50.29 which is 2.8% above where the stock closed yesterday.