How the Vodafone Deal Could Send Verizon Earnings Soaring Over AT&T

Verizon (NYSE: VZ  ) will release its quarterly report on Thursday, and the telecom giant just made its biggest gamble yet on the U.S. market by bidding to take full control of its Verizon Wireless joint venture, buying out Vodafone's (NASDAQ: VOD  ) 45% stake for $130 billion. With so much at stake in the massive transaction, the carrier hopes that the impact on Verizon earnings will more than justify the high price tag by representing the last major domestic growth path available to it in its long fight with rival AT&T (NYSE: T  ) .

One of the things that AT&T's failed buyout bid for T-Mobile proved was that regulators aren't willing to see more consolidation in the U.S. wireless network market. Indeed, now that T-Mobile has reinvigorated itself and Sprint has gotten a much-needed capital infusion, the U.S. market is more cutthroat than ever. That could spell more options for U.S. investors, but it will force Verizon to make the most of its network as long as it can hold onto its competitive advantages. Let's take an early look at what's been happening with Verizon over the past quarter and what we're likely to see in its report.

Stats on Verizon

Analyst EPS Estimate

$0.75

Change From Year-Ago EPS

17.2%

Revenue Estimate

$30.17 billion

Change From Year-Ago Revenue

4%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Should you expect Verizon earnings to grow this quarter?
In recent months, analysts have held their views on Verizon earnings surprisingly stable, with no changes to their third-quarter estimates. They've cut full-year 2013 projections by about 1%, though, but that's not likely the cause behind the stock's 6% pullback since mid-July.

Obviously, it's hard to underplay the significance of Verizon's deal last month to buy out Vodafone's stake in Verizon Wireless. From a financial perspective, the price tag is so immense that it set records on several fronts, including $49 billion in bond offerings to help it finance the buyout. With the new debt expected to cost Verizon $2.5 billion in annual financing costs, the company definitely benefited from the low interest rates it was able to lock in even on its longer-term bonds.

The impact on Verizon's business, though, will be equally huge. Operating cash flow will almost double, and the deal will allow Verizon to reap the full benefits of its almost-completed extension of its LTE network. With the most extensive high-speed data network, Verizon has a big advantage over AT&T in appealing to first-adopter users who are most likely to pay up for the highest-quality coverage.

But Verizon isn't just thinking about the impact of its Vodafone deal. Verizon's initiatives to increase revenue more broadly have largely panned out well, with its Share Everything plan becoming such a success that AT&T emulated it with its own Mobile Share plan. Although AT&T originally gave existing customers a chance to keep their old plans, it recently did away with that option for new customers. That validates Verizon's original approach and shows the huge pricing power that it has over data-hungry smartphone users.

Of course, Verizon relies on continued heavy demand for new smartphone technology. The recent release of the latest versions of the iPhone went relatively well, with Verizon and AT&T selling a higher proportion of iPhone 5s phones while Sprint and T-Mobile have somewhat higher proportions of 5c sales than the two larger carriers.

In the Verizon earnings report, watch closely for continued revenue-per-user figures. If Verizon can keep earning more from existing customers, then it should be able to benefit strongly from its full takeover of its U.S. business quickly.

Will Verizon win the smartphone wars?
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