Verizon Communications (VZ 1.17%) may have the best wireless network, with the company awarded J.D. Power Awards for Wireless Network Quality across all six regions of the U.S. this year. Unfortunately, that's not translating into subscriber gains.
Verizon's second-quarter report on Tuesday was a mixed bag. Revenue of $32.6 billion dropped 3.6% year over year and fell short of analyst estimates, while adjusted earnings per share of $1.21 edged out expectations. Verizon maintained its full-year guidance, which calls for wireless service revenue growth between 2.5% and 4.5%. The company expects to generate adjusted EPS between $4.55 and $4.85, down from $5.18 in 2022.
Losing consumers
Like Verizon's headline results, the company's subscriber metrics were a mixed bag. The consumer side of the business struggled with subscriber losses, while business and broadband performed better.
Verizon added 1.6 million consumer wireless retail postpaid phone subscribers on a gross basis in the second quarter, but elevated churn led to a net loss of 136,000 subscribers. The prepaid business fared even worse, booking a net loss of 304,000 subscribers.
On the business side, Verizon scored 144,000 net new retail postpaid phone subscribers, enough to fully offset consumer losses. This growth has slowed, though. In the second quarter of 2022, Verizon added about 50% more business subscribers than it did in the second quarter of 2023.
Verizon's bet on fixed wireless home and business broadband appears to be paying off. While wireline broadband added just 34,000 net new subscribers during the quarter, fixed wireless broadband gained 418,000 net new subscribers. Fios, the company's fiber internet service and part of the wireline segment, gained 54,000 net new subscribers.
There are a couple of things investors should be concerned about. First, Verizon's retail postpaid churn rate has been rising. The metric hit 1.07% in the second quarter, up from 0.81% one year ago. Verizon raised prices on various legacy plans earlier this year, tacking on a fee for those who don't adopt one of the company's newer plans. That may have been a factor in the increasing willingness of subscribers to jump ship.
Second, the rate at which wireless customers upgrade their phones has tumbled. Verizon logged 4 million wireless postpaid upgrades during the second quarter, down a whopping 34% year over year. This decline impacts equipment revenue, but it also provides fewer opportunities for Verizon to prod subscribers into choosing pricier wireless plans.
All in all, Verizon continues to struggle even as rivals AT&T and T-Mobile gain subscribers and keep churn under control.
Tough to get behind
Despite what the company says, Verizon's strategy doesn't seem to be working. The company is driving wireless revenue higher in part by hiking prices, but the downside is that customers are increasingly considering alternatives.
Based on Verizon's earnings guidance, the stock trades for just over 7 times adjusted earnings. That seems cheap, but with consumer wireless subscribers in decline, it will be tough for Verizon to keep growing wireless service revenue. At some point, Verizon will need to shift gears to winning back subscribers, and that's not going to help an already sluggish bottom line.
Verizon continues to generate plenty of cash and pay a generous dividend. Free cash flow was $8 billion in the first half of the year, and the dividend yield is now about 7.7%. But it's tough to see any kind of growth story buried in Verizon's results. A wireless provider struggling to hold on to subscribers looks like a dicey investment to me.
