Despite the best efforts of T-Mobile (NASDAQ:TMUS) ,a reenergized, if not resurgent, Sprint (NYSE:S) under new CEO Marcelo Claure, and stiff competition from AT&T (NYSE:T), Verizon (NYSE:VZ) has managed to maintain its standing as the leading wireless provider -- at least when it comes to subscriber totals.
The company has managed to consistently grow reporting a gain of 1.5 million net retail connections in the third quarter while posting $21.8 billion in revenue for the period, up 7% year over year.
Francis Shammo, Verizon's chief financial officer, was interviewed by UBS (NYSE:UBS) analyst John Hodulik at the company's 42nd annual Global Media and Communications Conference where he reflected back a little on what has already happened this year and offered some insight into the company's challenges and opportunities going forward.
The fourth quarter is going to be big
While Shammo noted that the fourth quarter is always an exciting time full of promotions, he expects this year to be busier than usual. The company, Shammo said, has 3.2 million Apple (NASDAQ:AAPL) iPhones coming out of contract in addition to the regular cycle of phone contracts that come due. He expects that to lead to a record quarter.
"With our upgrades what we're seeing is we're probably going to exceed for the first time 9.5% in upgrades, and if you think about our base that's a fairly significant volume," he said.
Increased upgrades is a good thing, but it's even better in this as Shammo said he expects 75% of them to be what the company considers "strategic high-value" upgrades. That is "either a customer going from a basic phone to a 4G smartphone or a 3G smartphone to a 4G smartphone. And we know that when we do that, we see an elevation of revenue from those customers."
Subsidies are here to stay
Though selling subsidized phones will cut into fourth quarter margin due to the up-front hit the company takes fronting the cost of the phone, that appears to be what most customers still want and Shammo said that Verizon acknowledges that and plans to give it to them. He pegged the rate of Edge customers -- those who pay for their phone in installments at 24% -- meaning that three quarters of the company's customers are still on the subsidy model.
"We'd like to say that we really are concentrating on customer choice as to what the customer really wants, and 75% of the customers are still selecting that subsidy model," he said. It's really a question of whether you book service revenue or device revenue, he explained, noting that some companies are trying to shift toward upping the device side.
He did make a point of saying that customers who buy four lines through Edge will pay about $140 a month (before factoring in phone cost) while people choosing the same plan on a subsidized plan would spend around $260 a month. He used that example to take a dig at Sprint, though not by name, which is offering a half-off deal to Verizon and AT&T customers, but only on nonsubsidized plans.
"So when you see these advertisements of 50% off of $260, it's really not that different than just shifting people into a different bucket for different revenues," he said.
Verizon is not worried about the competition
While Sprint and T-Mobile are each trying to outdo the other with promotions designed to take customers from AT&T and Verizon, Shammo does not see them as a long-term threat:
Some of the tactics that some of the competition is using is short-term tactics, because at the end of the day, as [Verizon CEO Lowell McAdam] likes to say, "This is about physics." You need to generate cash to reinvest in your network, and if you don't generate the cash to reinvest in the network, at some point you're going to hit a wall, and we've already seen where some have toned down because they have to start generating that cash.
That's a bit of an oversimplification as T-Mobile, and to a lesser extent Sprint, have fundamentally changed how they do business, which goes beyond their short-term promotions. Still, Shammo is right that that neither company can afford to endlessly cut prices in order to win customers without running into an eventual cash crisis.
Daniel Kline owns shares of Apple. He is a Sprint customer considering jumping to T-Mobile. The Motley Fool recommends Apple and Verizon Communications,. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.