Will Verizon's Growth Continue, Despite Intense Competition?

Verizon has done well so far, but will it be able to sustain its performance, despite rising competition?

Jun 12, 2014 at 1:30PM

Competition is about to get tougher for telecom major Verizon Communications (NYSE:VZ). Although the stock has gained momentum after reporting its first-quarter results in April, Verizon will need to stay on top of its game to sustain that performance. The company is facing threats from different quarters; while AT&T (NYSE:T) is busy bolstering its network, Sprint (NYSE:S) and T-Mobile US (NASDAQ:TMUS) are considering a merger to create another powerhouse in the U.S. telecom industry. 

Will Verizon's strategic moves and investments be enough to counter the impending threats?

Steady moves
Verizon's is making steady and consistent investments in its network and platform to support innovative products and services. The company is focusing on bolstering its wireless and wireline networks to build competitive advantage going forward. Moreover, its focus on operating efficiency and cost controls will help it compete effectively against rivals and drive profitable growth.

As a part of this initiative, Verizon's wireless spending is aimed at adding capacity to its existing 4G network, and utilizing the spectrum to further optimize the network. As the company has already completed the LTE rollout in the U.S., its latest moves will enable it to provide faster services to customers.

Moreover, Verizon's additional capital deployments to add density to its network, and deliver new services such as VoLTE and multicasting to enrich its customers' wireless experience, will enable it to attract even more customers. 

Additionally, the company recently signed agreements to acquire the wireless licenses of Cincinnati Bell, along with some power leases. These investments in the wireless segment will improve Verizon's network quality, reliability, and the overall customer experience.

Key metrics show improvements
Verizon's moves are already delivering the desired growth. For example, in the first quarter, postpaid gross additions were 3.6 million, up 4.1% from last year. Around 56% of its gross additions were smartphones and 33% were tablets and other Internet devices. 

Overall, Verizon added 549,000 new retail connections in the first quarter. Postpaid net additions were 539,000 and prepaid were 10,000. It had 103.3 million total retail connections at the end of March. More importantly, Verizon's industry-leading postpaid connections base reached 97.3 million, and prepaid totaled just over 6 million. The first-quarter postpaid additions mix included 866,000 4G smartphones and a record 634,000 tablets. The company also added 56,000 other connected devices, primarily home phone connections. 

Around 1.5 million, or 27% of its smartphone upgrades, were from basic phones. Verizon is looking to drive smartphone penetration and 4G adoption, which is why the company is seeing strong upgrade numbers. More than 50% of the remaining smartphone upgrades were from 3G to 4G, which Verizon monetized through higher data usage and a lower cost-to-serve. Thus, as the company upgrades more customers to the latest devices, it will see better monetization.

Smartphone penetration for Verizon is at 72% of its total phones. It ended the first quarter with 61.3 million smartphones, but approximately 64% of those were 4G. Hence, the company still has about 22 million 3G smartphones, and just above 23 million basic phones, which means that it has a good opportunity to move more customers to 4G devices. 

Competition is getting stronger
Verizon's primary focus is on making its 4G service as strong as possible, resulting in higher customer upgrades. However, competitors are also making impressive moves. AT&T, for example, added more than 600,000 postpaid subscribers in the previous quarter, along with 255,000 prepaid smartphone subscribers. AT&T is offering attractive data plans to customers, while its Mobile Share value pricing plan is making it easier for subscribers to move off the traditional subsidy model. 

In addition, AT&T is also bolstering its network. The company plans to roll out a high-speed fiber network across 21 metro areas in the U.S., covering more than 100 cities. With this deployment, AT&T plans to deliver ultra-fast broadband to users. On the back of such moves, AT&T could attract a higher number of customers going forward.

On the other hand, Sprint and T-Mobile might pose a serious threat. According to reports, Sprint and T-Mobile, which are the third and the fourth-largest mobile networks in the U.S., are planning to merge. If they do, Verizon will face another strong contender besides AT&T. Sprint already has 225 million people covered by its 4G network, and its enhanced LTE service, Sprint Spark, is also gaining steam. 

Sprint Spark claims to deliver speeds of up to 60Mbps, and the carrier is trying to bring this service to 100 million people by the end of the year. Moreover, if Sprint and T-Mobile do combine, they will be able to offer a fast and comprehensive network that will threaten Verizon's prospects.

The bottom line
There are stiff challenges ahead for Verizon, but the company has tackled those problems so far, thanks to solid execution. Its efforts at bringing more customers onto the 4G network are bearing fruit and leading to better monetization. If Verizon is able to maintain this momentum going forward, it might prove a solid investment, but if it falters, then competitors will eat into its market share.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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