Verizon Communications Earnings: Did the Wireless Buyout Work?

Verizon took full control of its wireless division, but did it boost growth?

Jul 21, 2014 at 11:00AM

Vz Unattributed

On Tuesday, Verizon Communications (NYSE:VZ) will release its quarterly report, and investors have been somewhat nervous about the state of the wireless network business. Even as it and competitor AT&T (NYSE:T) have gone up against Sprint (NYSE:S) and T-Mobile in what initially appeared to be an all-out price war, Verizon has taken steps to ensure that it will be able to sustain its strong margins and offer unparalleled service that it hopes will preserve its competitive advantage.

Verizon's huge acquisition of the 45% of its Verizon Wireless business that it didn't already own stretched the company's finances, forcing Verizon to make huge offerings in the bond market and take on even greater leverage. Yet with the continued growth in mobile devices and increased demand for broadband Internet and video, Verizon has made an aggressive move at an important time. Will that move prove to be the right one? 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

$0.90

Change From Year-Ago EPS

23%

Revenue Estimate

$31.1 billion

Change From Year-Ago Revenue

4.4%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Can Verizon earnings keep climbing?
In recent months, investors have been reasonably comfortable in their views on Verizon earnings, keeping second-quarter estimates stable and boosting full-year projections by $0.02 per share. The stock has climbed 8% since mid-April.

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Verizon's first-quarter earnings report didn't give investors the confidence they wanted, as the company fell short on the earnings front despite matching expectations on revenue. Moreover, Verizon wasn't able to offer improved guidance for the full 2014 year, holding steady on its previous projections of $125 billion in revenue for the year. The company's chief financial officer noted that Verizon had to follow suit with competitors in offering customers ways to upgrade phones more quickly and efficiently, and that hurt margins. Yet with the alternative being to lose those customers entirely to AT&T, Sprint, or T-Mobile, Verizon doesn't have much of a choice.

We've already gotten a sense of how Verizon did during the second quarter, though, as the company revealed some early information on the quarter. CEO Lowell McAdam said that Verizon added more than 1.4 million subscribers for its postpaid wireless service, with record growth in tablet sales and strength in smartphones as well. Given the ultra-competitive market environment right now, those numbers are particularly impressive.

Verizon is taking a different tack in its response to competitive threats than some of its peers, choosing to build up its own integrated services rather than broadening its scope through mergers. Even while AT&T goes through the process of acquiring DirecTV, Verizon has instead invested huge effort in building up its FiOS high-speed broadband Internet service. With hopes that initiatives like the Internet of Things will require unprecedented levels of connectivity, Verizon wants to be the Internet provider of choice in the U.S., and given the lack of good alternatives currently, Verizon has a good chance of succeeding on that front.

Vz Fios
Source: Verizon.

Moreover, Verizon got a vote of confidence from a major investing guru during the quarter, with Warren Buffett revealing a stake in the telecom company. Given Verizon's huge holdings of spectrum assets, it's fair to say that the company has a competitive moat that holds off smaller players from gaining Verizon's stature in the industry. That could prove essential as rivals start to position themselves for an all-out price war.

In the Verizon earnings report, watch to see if the company puts more color on its long-term future strategy. In a changing industry, Verizon has to stay nimble to take advantage of new opportunities while also defending itself against more desperate, smaller rivals looking to break into Verizon's oligopolistic situation. If it can do so, then growth from its wireless takeover could continue into the future.

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Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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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