Why Verizon Should Be in Your Portfolio

Verizon (NYSE: VZ  ) posted better-than-expected third quarter earnings led by the strong growth in the wireless business. Alhough the carrier's customer addition did not match expectations, the company's strong network helped it record remarkable wireless revenue and margin. Net income attributable to Verizon increased 40% compared to last year’s quarter as the company continues to strengthen its customer base. Let's take a look at some of the essential numbers pertaining to the quarter.

A quick glance
Third quarter revenue rose 4.4% to $30.3 billion compared to last year’s quarter. This is mostly attributable to strong growth in its wireless revenue that increased 7.2% to $20.4 billion. Robust data usage, increasing numbers of smartphone and other wireless devices bolstered the service revenue of the mobile operator. The operating income saw a remarkable increase of 30% to $7.1 billion over last year’s third quarter when the company reported $5.5 billion. The income margin also notably improved to 23.5% from 18.9% in the last year.

The postpaid average revenue per account (ARPA), earlier known as the average revenue per user (ARPU), went up 7.1% to $155.74. However net customer additions fell marginally below expectations.

Net addition marginally short of expectation
Verizon reported 1.1 million additional net retail connections, which includes 927,000 retail postpaid customers. This is considerably lower than 1.8 million retail customer addition that the carrier made in last year’s comparable quarter, but better than 1.04 million retail additions that the company made in the second quarter of 2013. Now the total retail connections are 101.2 million subscribers, up 5.5% from last year.

So what restricted the growth of new subscribers? Sluggish third quarter numbers with respect to new customer additions are pretty much attributable to the rising competition from smaller rival T-Mobile (NYSE: TMUS  ) , which is luring subscribers from rival networks using its low priced data plans. It is quite evident from the net additions that the resurgence of T-Mobile is hurting Big Red's market share and subscriber growth. Chief Financial Officer of Verizon, Fran Shammo, also admits that budget-bound customers are shifting to rival services.

The fourth-largest US carrier's "uncarrier" approach of providing low-cost and uncomplicated plans is attracting several subscribers to shift from rival networks. The removal of two-year contract requirement has really worked in favor of T-Mobile. Despite increasing challenge from the smaller carrier, Verizon is determined to widen its gap from fellow players by expanding its LTE coverage to help the New York telecom provider witness better postpaid additions in the last quarter of the fiscal. In addition, the continued shift to Share Everything plan would also increase the company's service revenue through increased data usage.

T-Mobile isn't the only carrier trying to catch up with Verizon. Sprint is also putting in huge effort after it sold a substantial stake to Japan-based Softbank. It is now working extensively to roll out its 4G LTE network across the nation. With the cash infusion from Softbank and spectrum backing from Clearwire, the carrier is preparing to give a tough fight to bigger rivals. Verizon's dearest rival AT&T is also in the race to overtake the Big Red and attract heavy data users. Shammo said that the company is concentrating to expand its network coverage intensively to provide premium service to its subscribers, particularly after the recent speed test where AT&T's network speed was found to be better than Verizon's.

Though competition is intensifying, Shammo says that the subscriber shortfall is attributable to the poor supply of Apple's (NASDAQ: AAPL  ) latest iPhone 5s and 5c.

Apple's inadequate iPhone supply is the culprit
Verizon sold 7.6 million smartphones during the quarter, up 19% from last year. About 51% or 3.87 million handsets were iPhones. Apple posted record sales of 9 million phones in the first weekend after it released the iPhone 5s and 5cin the West and China simultaneously for the first time. Had there been no supply constraints on Apple's part, the number would have been even better. Verizon wasn't able to meet customers demand for the new release and so a huge sales chunk spilled over to the fourth quarter. So, this is good news for both Apple and Verizon.

Also, in a way it is a blessing in disguise for Verizon. The higher the iPhone activation number, the higher the subsidy cost that Verizon pays Apple for every iPhone it sells. This would have squeezed the profitability margin. And although iPhone sales are sequentially flat for Verizon, it is 26% higher from last year's 3.1 million iPhone activations. Also, it must be noted that the iPhone 5s and 5c went on sale on September 20, just 10 days before the quarter’s end.

Foolish Bottom line
Although subscriber additions were a bit soft, results were solid as the carrier maintained the quality and speed of its network. Verizon’s customer growth is expected to be higher in the last quarter. However, the subsidy cost with respect to iPhone activations will eat in profits of the company. But this should not be much of a concern for Verizon, as other carriers including AT&T and Sprint face the same.

The U.S. wireless industry is steadily growing, and Verizon has the best 3G and 4G network coverage. T-Mobile may be offering the most exciting plans, but there is no match between Verizon's robust network and T-Mobile's network coverage. AT&T's network is the only one at present which competes with Verizon's massive coverage.

Verizon's total revenue was $116 billion in 2012. The carrier reported gross margin of 60.05% compared to AT&T which recorded 56.67%. Its operating margin of 11.36% was also better than AT&T's 10.20%. Verizon's financials are pretty strong and it would be better if the company manages to lower its debt a bit. At the current pace the telecom giant is poised to post a solid fiscal year.Verizon appears to be a perfect telecom stock that could brighten your portfolio.

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