5 Things Verizon Communications Inc.'s Management Wants Investors to Know

Source: Verizon.

Verizon Communications (VZ 0.90%) reported its second-quarter earnings last week. The company beat analysts' earnings expectations, but came up short on the top line. Verizon earned $1.04 per share on sales of $32.2 billion. Analysts were expecting $1.01 in EPS and $32.4 billion in revenue.

After the earnings release, CFO Fran Shammo spoke with analysts. Here are five of the most important insights he had for investors.

The competition isn't getting to it

We continue to be an 'and' company. We're going to grow, and we're going to generate the profitability, and we're going to do this in a very disciplined manageable approach, and we've said that we felt that coming into the year that we would hold our margins given all the competitive pressures, and we're still on track to do that. -- CFO Fran Shammo (all quotes courtesy of Seeking Alpha)

Indeed, Verizon is doing all of those things. Its revenue grew 2.8% last quarter, with wireless revenue growing 5.3%. Earnings per share grew 3%, but last year, Verizon benefited by $0.10 per share from the sale of some of its spectrum holdings.

On an adjusted basis, EPS grew 14.3%. Adjusted EBITDA was up 6%, with wireless EBITDA up 9.1%. Verizon's EBITDA margin expanded by 110 basis points, to 36.6%, and wireless EBITDA margin expanded to 43.9% from 42.3% a year ago.

Meanwhile, management has made sure to maintain its leverage ratio as it spends to acquire more spectrum and build out its network. It's also made several key acquisitions. The company has taken a disciplined approach when it comes to customer retention and attraction, going after high-value customers only. Nonetheless, the company posted a three-year low churn rate of just 0.9%.

Growth in 4G and the opportunity

In the past year, our 4G smartphone connections have increased by 17.8 million or about 40% to 61.6 million. We still have a sizable opportunity remaining with roughly 16 million basic phones and about 9 million 3G smartphones in our postpaid connections base. -- Shammo

Customers who use 4G naturally use more data than 3G and basic phone subscribers due to the higher speeds and bandwidth available to them. Verizon is doing an excellent job of converting its subscribers to 4G. At the halfway point of last year, the company still had 42 million subscribers on 3G or basic phone plans. Now that number is 25 million.

Shammo says that the improvement in churn is even better among basic phone subscribers, indicating that the company is converting those subscribers into 4G customers instead of losing them to the competition. Verizon introduced an $80 per month 4G plan earlier this year to help retain those customers, and it seems to be working.

More people signing up for Edge

Looking ahead, we believe that the percentage of phone activations on installment will continue to increase and will likely be around 60% in the third quarter. -- Shammo

In the second quarter, 49% of new activations were made using Verizon's Edge installment plan. That's up from 39% in the previous quarter, and just 18% in the year-ago period. That trend continues to accelerate as Verizon starts to catch up with the competition. AT&T financed 65% of new activations in the first quarter, and Sprint financed 53%.

A significant growth driver for Sprint's equipment installment plans is its leasing program. Thirty-seven percent of its activations in the first quarter came from leases. Leases offer the benefit that customers are able to keep the asset (i.e. a device) on the company's books, and the carrier simply amortizes them over time. However, Shammo says Verizon has no plans at this time to offer leasing plans despite the accounting benefit they offer.

Over-the-top video is coming

In terms of video, we will introduce our mobile-first OTT video product in late summer. As you know, we have already announced some initial content partners. -- Shammo

Verizon soon will join the fray of over-the-top video-streaming services, expanding on its current deal with the NFL to stream every out-of-market game. It will include content from ESPN's college sports networks, as well as AwesomenessTV. The addition of AOL brings content from Huffington Post and its numerous other media properties, as well as the huge amounts of video content it has available on demand.

Verizon sees the product as a complementary service to its FiOS TV service. The streaming service is focused on mobile streaming, and it will likely be used to convince customers to upgrade to 4G data plans, and to attract new customers from the competition.

Participation in the incentive auction

Low-band spectrum, for us, is not a great need. As you know, we build out our LTE on the 700 megahertz, which is contiguous across the United States, which is a competitive advantage for us. We then launched our AWS-1 spectrum for capacity, and now we're in the process of revamping our 1900 PCS. ... If you look at our 1900 megahertz, the yet to be deployed AWS-3 ... we have plenty of capacity to deal with. -- Shammo

The 600 MHz incentive auction is expected to take place next year, but the FCC is still debating specific rules due to pressure from the Save Wireless Choice coalition, which is asking it to set aside more spectrum for smaller carriers. If the rules are more favorable for Verizon, it's more likely it will participate.

But Shammo wants investors to know that the spectrum coming up for auction isn't something the company needs in order to continue growing. It has plenty of capacity to facilitate the growing number of 4G connections on its network, and it will eventually be able to phase out its 3G network and reappropriate it.