Over the last few years, T-Mobile (NASDAQ:TMUS) has consistently outperformed the entire wireless industry when it comes to adding new customers. But last quarter, its biggest competitor, Verizon (NYSE:VZ), managed to add more postpaid connections than the UnCarrier.
There's a slight caveat in that most of Verizon's new postpaid subscribers fall under the "other" category, not the highly valued phone subscribers that still seem to flock to T-Mobile. Most of T-Mobile's 1.1 million postpaid subscriber additions were phones -- 891,000. Still, Verizon added a very respectable 431,000 phone subscribers, its highest in two years.
Verizon's fourth-quarter results bode well for its growth in 2018. Management seems to agree, providing a 2018 outlook that surpassed analysts' expectations. Analysts had been expecting revenue growth of around 1% this year, but management said it expects the top line to grow "at low-single-digit percentage rates."
All about unlimited
Consumers are responding extremely well to Verizon's new unlimited plan. T-Mobile pushed the issue in late 2016 when it started offering its own unlimited plan, eventually doing away with bucketed data plans altogether. Verizon resisted for a long time, but eventually, its subscriber losses started piling up, and it decided to create its own plan.
Since it started offering unlimited last February, Verizon has added about 1.2 million postpaid phone customers. That's considerable progress versus the 209,000 net additions from 2016.
While Verizon's network speeds initially took a hit after it rolled out its unlimited plan, it's starting to turn things around. T-Mobile was able to take the lead in average connection speeds, but Verizon is still well ahead of third and fourth place, according to data from OpenSignal. Verizon's network strength is one of its key points of differentiation.
Unlimited plans are still increasing in popularity. 53.4% of smartphone users subscribe to an unlimited plan today. That's up from 51.6% in the previous quarter, according to a survey from Cowen and Company.
T-Mobile says it plans to eventually move all of its subscribers to its unlimited data plans. Verizon may eventually look to do the same as unlimited users begin to make up a larger portion of its subscriber base. With all four major wireless carriers now offering unlimited plans, there's a lot of room to switch over more subscribers. Verizon is well positioned to win a large share of those customers through its existing subscriber base and its brand strength.
Service revenues are starting to turn around
Another negative side effect of Verizon's unlimited plan launch, besides the impact on its network, is the early adopters of unlimited data are those who can benefit from lower costs. Verizon previously offered very large data buckets to consumers that used a lot of data, and it charged overages to subscribers who went over their allotments. Consumers who frequently used a lot of data could actually save some money by switching to the unlimited plan. Naturally, that put some additional pressure on Verizon's already sinking service revenue.
But the new customer additions are starting to add up, and service revenue is starting to trend in the right direction. The third quarter marked the first time Verizon posted a sequential increase in service revenue in 12 quarters. The company continued that trend in the fourth quarter with a very slight sequential increase and a smaller year-over-year decrease in service revenue of just 2.9%.
Management expects to hit year-over-year growth in service revenue by mid-year. That's the product of continued customer additions, and more customers moving up to unlimited plans and paying more per subscriber (unlike early adopters who were able to pay less by switching).
On top of that, Verizon is posting best-in-class EBITDA margins on its wireless business. Verizon's EBITDA margin of 39.8% in the fourth quarter was up 2.9 percentage points from last year. It's also well above the 20% to 30% typically reported by T-Mobile after you take out all of the company's adjustments.
Revenue and margins will only get better as Verizon adds more customers, continues to cut cost, and benefits from the new U.S. tax code. Investors have a lot to be optimistic about in 2018.