What's Wrong With Verizon Communications Inc. Today?

Verizon took the baton from AT&T and continued to run the Dow telecoms lower. Both stocks are down more than 3% this week, while the Dow has gained 0.8%.

Anders Bylund
Anders Bylund
Apr 24, 2014 at 2:00PM

On Wednesday, AT&T (NYSE:T) was the Dow Jones Industrial Average's (DJINDICES:^DJI) weakest performer. Gloomy guidance will do that, even if the telecom giant's reported earnings results looked fine.

Ma Bell's weakness also dragged down fellow Dow telecom Verizon Communications (NYSE:VZ), setting the stage for this morning's Verizon earnings. "It will either underscore or contradict what AT&T said today," I wrote yesterday. "Look for that report to get a clearer idea of where the American wireless industry is going."

The results are in, and Verizon turned out to reinforce the ugliest parts of AT&T's message. So today it's Verizon's turn to lead the Dow's list of biggest losers, trading 2.6% lower afternoon trading. That's worth about seven Dow points, holding the blue-chip index back on an otherwise fairly positive market day.

Big Red reported non-generally accepted accounting principles earnings of $0.84 per share on $30.8 billion in total sales. The top-line take just inched past analyst estimates, but earnings fell short of the Street's $0.87 per-share projection.

Image source: Verizon.

Looking ahead, management reiterated full-year 2014 revenue guidance at $125 billion, in line with current analyst views. You could chalk that up to Verizon knowing what it was talking about three months ago, when the first 2014 guidance figures came out, or you can do what Verizon investors are doing today -- namely, thinking that the company is running out of positive catalysts.

In many ways, Verizon is getting dragged into a new era of the wireless business, kicking and screaming. Like AT&T and smaller rival T-Mobile (NASDAQ:TMUS), Verizon introduced a rapid handset upgrade program late last year. It's a customer-friendly program, but these trade-ins may also put pressure on the telecoms' margins if they become popular.

On the analyst call this morning, Verizon CFO Fran Shammo didn't mince words about this trend when talking about the Edge upgrade program.

Verizon CFO Fran Shammo addressed analysts and investors this morning. Image source: Verizon.

"Look, this is a customer choice, this not what I want," he said. But accepting lower margins for Edge customers keeps those subscribers from jumping ship. "It treats our customers the way they want to be treated and it is a retention tool for us. So it will help to deliver a lower churn metric in the future," Shammo said.

So far, less than 15% of Verizon's new subscribers have picked up the Edge option. That rate could double in the next quarter, according to Shammo.

Taken with AT&T's report, it's becoming fairly obvious that competitive pressures will do some damage to the big telecoms' margins over the next several quarters. If Verizon and AT&T want to hang on to their customers in the face of take-no-prisoners innovation from T-Mobile and others, they will have to do business in new ways -- often less profitable, and always uncomfortable to companies that were perfectly happy with the established status quo.