Verizon Communications (NYSE:VZ) reported its first-quarter earnings on April 21, beating analysts expectations for earnings on lower-than-expected sales. The wireless carrier reported a profit of $1.02 per share and $32 billion in revenue. Verizon added 565,000 postpaid connections, but postpaid phone subscribers fell 138,000.
After the report, CFO Fran Shammo and Michael Stefanski, senior vice president of investor relations, spoke with analysts about the quarter's results. Here are five key quotes from Shammo during that call.
The upgrade opportunity
We continue to have an opportunity to upgrade our basic phone and 3G smartphone customer to 4G devices. At the end of the quarter we had roughly 17 million basic phones and about 11 million 3G smartphones remaining in our postpaid connection space.
Verizon continues to shift its customer base to 4G devices, which typically carry higher service fees than basic and 3G phone customers. During the quarter, Verizon added 621,000 4G smartphone customers. As of the end of the quarter, 70% of Verizon's postpaid connections were on 4G devices.
While Verizon has an opportunity to convert its basic phone and 3G smartphone customers, it also must prevent those customers from leaving for low-priced competitors like Sprint and T-Mobile. Last quarter, Shammo said Verizon wouldn't chase customers and lower pricing to compete, but would rely on its superior network coverage. To his credit, basic phone subscriber losses -- the category most vulnerable to the competition -- declined nearly 50%.
The tablet opportunity
We also have a profitable growth opportunity with tablets. We ended the quarter with about 8.8 million tablets in our postpaid connection space, so overall penetration is still under 10%. Tablets provide us good value through increased data consumption and lower churn on the account level.
Tablets are a key part of Verizon's future growth as phone connections remain relatively flat to down. The company added 820,000 4G tablets last quarter, and it's more than doubled the number of tablets on its network over the last 12 months.
Tablets have been a key reason Verizon's wireless segment revenue increased 6.9% year over year. Even though tablets carry lower service fees than most of Verizon's basic phone subscribers that it's losing, they help Verizon keep its most valuable customers.
Verizon loves Edge
If you look at the Edge benefits, you are getting benefits from both lower commissions and so forth, so that is also impacting the SG&A line. ... We were refunding the indirect through a commission payment for the subsidy of the handset. That all goes away [with Edge]. So, you are going to see a decline in the commission expense line.
The take-rate on Verizon's Edge plans, which provides installment billing for equipment, climbed to 39% last quarter. This quarter, Shammo expects that rate to climb higher, as the company has seen a take-rate of 50% in the second quarter so far.
Edge helps Verizon cut costs since it doesn't have to subsidize smartphones. However, it accounts for a large percentage of equipment cost when a person signs an Edge contract. The company is monetizing those contracts by securitizing them and selling them to banks. This helps cash flow keep up with the company's reported revenue, but it doesn't completely follow. So, while Verizon is saving on costs, it's also seeing lower cash flow over the life of a subscriber.
Over-the-top streaming video
[Over-the-top video] is all around having the consumer consume more content on their wireless handset. ... As far as the monetization model ... [t]here could be premium subscriptions. There could be pay-per-views using the multicast technology. There can be advertising model so that the consumer does not pay for the content consumption, or as others would call sponsored data.
Verizon is working on a streaming video service offered exclusively to its wireless customers. The product will offer another way for Verizon to differentiate its service from the competition aside from its network. It could also lead to more tablet sales, as tablets are more conducive to video consumption.
However, customers may be wary of paying for the higher data allotments that the service would inevitably consume. Verizon could offer unlimited streaming of the service on its network, pay-per-view, or sponsored data by including advertisements. Sponsored data was allowed by the FCC in the recent net neutrality ruling, allowing businesses to pay for a customer's data consumed by a specific app.
[Custom TV] is a product that the consumer wants. ... This is a way to give consumer what they want on a choice basis. And we believe that we are allowed to offer these packages under our existing contract.
With Custom TV, Verizon started offering FiOS customers the option to buy a skinny bundle of channels with add-on channel packs organized by niche. Several media companies have come out claiming that the way Custom TV organizes their networks violates their contracts with the pay-TV provider.
Verizon is coming out looking like the good guy, fighting for consumers, while media companies strike them down. So even if it's found that Custom TV violates its current contracts, Verizon is scoring points with customers. Ultimately, Custom TV could exact change among media companies and support more consumer choice.