Verizon (VZ +0.21%) isn't giving investors a lot to get excited about in 2023.
The company's fourth-quarter earnings report was full of disappointing numbers, despite revenue and earnings per share beating and meeting expectations, respectively. Management's outlook for the coming year looked even worse. Investors sent the share price lower following the report.
There are three outstanding red flags from the report that investors should pay attention to.
1. Free cash flow disappoints
Verizon's free cash flow was just $1.7 billion in the fourth quarter, falling short of analysts' expectations of $2.9 billion.
The big culprit in the shortfall is increased spending to build out its network using the C-band spectrum licenses it acquired in 2021. It expects to spend an incremental $10 billion total deploying those licenses across its network, of which it's already spent $8.25 billion.
Management plans to return to free cash flow growth with reductions in capital expenditures in 2023 and 2024. It guided for $18.25 billion to $19.25 billion in capital expenditures this year, a reduction from last spring's investor day guidance of $19.5 billion. It expects to return to its usual cadence of $17 billion in capex in 2024.
Management also guided for $20 billion to $22 billion in free cash flow at its investor day last year. But Bank of America analyst David Barden pointed out during the earnings call that the numbers that management provided in its guidance suggest free cash flow of about $17 billion this year. CFO Matt Ellis said he has "the right moving parts there" but wouldn't provide any clarity on free cash flow guidance.
Management continuously touted the reduction in capital expenditures as a tailwind to growing free cash flow. But what happens beyond 2024 as the company returns to a steady level of investment in its network?
NYSE: VZ
Key Data Points
2. Subscriber numbers fall flat
Verizon posted positive consumer postpaid phone subscribers for the first time in 2022, but overall results still fell short of expectations.
Verizon's total postpaid phone net additions of 217,000 were about 12,000 short of consensus estimates for the quarter. The results did show some improvement from the third quarter, when the company raised prices for some retail customers. That led it to lose 189,000 consumer postpaid phone subscribers in the third quarter and add just 8,000 total when including business subscribers.
Additionally, its prepaid business, which includes its Tracfone acquisition in late 2021, is bleeding hundreds of thousands of subscribers. It lost 175,000 subscribers last quarter, where analysts were expecting it to add 2,000 subscribers. For the full year, it lost 445,000 prepaid subscribers.
The results indicate Verizon is unable to retain price-sensitive subscribers, who are more likely to use prepaid plans. Those customers may be flocking to the cable companies.
Management says it's focused on profitability, not volume. And it's not going to participate as heavily in device promotions going forward. That could result in it ceding significant market share over the next few years. But management suggests it can make up the difference in average revenue per account increases.
3. The outlook for 2023
Verizon's outlook for the coming year doesn't paint a very pretty picture.
Profits will decline this year. The EPS outlook of $4.55 to $4.85 is a decline from last year's $5.18 per share. What's more, it's below analysts' estimates for $4.97 per share this year. EBITDA guidance of $47 billion to $48.5 billion also missed the mark.
Verizon's wireless revenue growth expectations of 2.5% to 4.5% is a marked slowdown from last year, when it increased prices for some consumer subscribers. That's actually bolstered by a 1.9-percentage-point benefit from reallocating some revenue to the wireless business, so the slowdown is actually worse.
The disappointing outlook points to the core challenge Verizon is facing in trying to grow its postpaid phone subscriber base while also increasing average revenue per account. After grabbing the easy pickings last year through upgrades and price hikes, there may not be much room to grow for the company.
Even at today's stock price, there are better options to invest in communications stocks.
