It's an understatement to say Telecom giant Verizon Communications' (VZ +1.43%) second-quarter results sent a mixed message to the market. Earnings topped estimates, but revenue fell short. Cash flow is up through the first six months of the year, yet net income is down. The company is bleeding wireless subscribers, but adding other kinds of customers. Average revenue per user (ARPU) is up, but so are churn rates.
It's a lot for current and would-be shareholders to process.
Here are the top seven things you need to know about Verizon's Q2 earnings report (released Tuesday morning), and where these numbers fit into the company's bigger picture.
Four data points about Verizon are good
For the three-month stretch ending in June, the wireless telecom giant turned $32.6 billion worth of revenue into a non-GAAP (adjusted) profit of $1.10 per share. Both revenue and profits are down from year-ago comparisons of $33.8 billion and $1.24, respectively. And while last quarter's top line fell short of expectations of $33.3 billion, the bottom line topped the consensus estimate of $1.17 per share.
As is so often the case for telecom companies, though, it's the rest of the information quietly buried in Verizon's quarterly report that we're most interested in. There are four such data nuggets to cheer this time around.
First, cash flow is up for the six months ending in June. It's at $18 billion this year, versus a little less than $17.7 billion through the first half of 2022.
Second, long-term total liability levels fell too. A year ago, Verizon was servicing $237 billion worth of total liability obligations. Now that number is only $232 billion, extending a downtrend that began when the long-term debt portion of its liabilities peaked in early 2021 near $150 billion. Although interest rates are higher, the company is poised to pay those higher rates on less debt.
NYSE: VZ
Key Data Points
Third, Verizon's broadband customer count is growing, even if its wireless customer headcount is shrinking. A year ago the organization only boasted 6.63 million fiber-optic internet customers. Now it has 6.85 million. Even more impressive is the continued growth of its nascent fixed-wireless access (FWA) internet service. As of the second quarter of last year, only 384,000 households were signed up for this service. Now there are nearly 1.4 million FWA subscribers.
Finally, overall service revenue was up, even if a big drop in equipment revenue led to an overall decline in the top line. Verizon sold $27.3 billion worth of services last quarter versus $27.1 billion in the same quarter a year ago, with higher prices offsetting the declining number of wireless subscribers.
This fourth and final upside is a critical one to understand. Although wireless equipment revenue fell 21% year over year to just under $5.3 billion last quarter, bear in mind that equipment sales are usually an unprofitable business for telecom service providers. They don't mind it, however, as this loss ultimately leads to even more profitable service sales. This dynamic is a key reason that net income levels held up reasonably well during the tough quarter in question.
Verizon is dealing with three bad points as well
It isn't all good news, though: Verizon is running into headwinds, too. Three stand out.
First, although all of the wireless consumer connections lost last quarter came from the less-profitable prepaid sliver of the market -- offsetting the 1.1 million gain in postpaid customers -- it's still a net loss. And it extends a decline in the company's total number of wireless customers going all the way back to the beginning of last year.
Data source: Verizon quarterly reports. Chart by author.
Second, curiously, while Verizon may have 3,000 fewer employees now than it did at the end of 2022, it's still spending a lot more on selling, general, and administrative expenses. SG&A costs are up 7.4% year to date, reaching $17.6 billion through the second quarter thanks to a 10.1% increase in these expenses in Q2 alone. Broad inflation is the culprit. Nevertheless, that uptick in selling and administrative expenses roughly equals the recent decline in net income.
Last but not least, the churn rate is slowly but persistently growing. Last quarter's churn among Verizon's postpaid wireless customers reached 0.95%. That's down a bit from the first quarter's 1.05% for the same customer cohort, but churn rates usually fall from Q1 to Q2. It's still up from 0.93% in Q2 of 2022, and markedly higher than 0.83% in Q2 of 2021.
Data source: Verizon quarterly reports. Chart by author.
The broadly rising churn metrics suggest Verizon is increasingly struggling to keep the customers it's won over.
Weighing Verizon's good against its bad
There's more to a company than numbers, of course. There's the quality and marketability of its product or service. There's also the ability to adapt to an ever-changing marketplace. Sometimes cash flows freely even if there's no growth at hand.
In light of its second-quarter results and those in its other recent quarterly reports, Verizon is a healthy cash cow that can continue supporting its generous dividend. Newcomers stepping into the stock can reasonably expect the payment -- which translates into an above-average current dividend yield of 7.7% -- to continue being paid at least at its present level.
If you need modest growth, though -- or even above-average dividend growth -- Verizon's Q2 numbers further confirm that this may not be the ideal stock pick for you. The top-line growth is almost entirely a function of inflation, outpaced by even steeper increases in its expenses and offset by shrinking wireless-customer numbers.
The kicker: Pew Research reports that 97% of adults in the United States already own a mobile phone. There's no meaningful market growth to be had here, other than population growth. In the meantime, the major wireless carriers seem to be simply swapping customers with one another. That's fine for paying the bills, but not a recipe for growth.
