Despite price cuts and aggressive sales promotions from two upstart rivals -- Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS) -- Verizon (NYSE:VZ) on Tuesday posted third-quarter profits that exceeded analyst estimations.
The company reported third-quarter 2015 earnings of $0.99 per share, or $1.04 per share on an adjusted basis (non-GAAP). That's an improvement from the same period a year ago, when Verizon posted EPS of $0.89. Analysts had on average predicted earnings of $1.02 per share, according to Bloomberg. The 2015 Q3 earnings included a $0.05-per-share non-cash charge due to a re-measurement triggered by a pension settlement accounting threshold.
Pushed by strong customer acquisition and retention numbers, total operating revenues in the third quarter were $33.2 billion, a 5% year-over-year increase. Without including the results from AOL, which Verizon purchased in June 2015, the comparable year-over-year growth rate would have been 3.1%. In addition, consolidated revenue growth was 3.3%, after adjusting for the inclusion of AOL in the third quarter and the sale of the public sector business in 2014. Using that same criteria, the company expects consolidated revenue growth of at least 3% for full-year 2015.
These are strong results from a company that faced a pricing war in its mobile business as well as strong competition in its Internet and cable television sectors.
People keep signing up
In the mobile space, even though both Sprint and T-Mobile offer lower prices and have cut Verizon's lead when it come to having the best network, Verizon has been able to sell the public on the idea that it has a better product. The carrier added 1.3 million net retail postpaid connections in the quarter and reported retail postpaid churn of only 0.93%. In addition, wireless revenues increased by 5.4% year over year.
Perhaps even more impressively, Verizon added 114,000 FiOS Internet subscribers and 42,000 net FiOS video customers. That number may be the most important of all, as showing any growth in pay-television revenue in the face of cord cutting bucks industry trends.
"Verizon continues to grow earnings by delivering network reliability and superior value that continues to attract new customers," said Chairman and CEO Lowell McAdam. He continued:
Verizon Wireless posted another quarter of quality connections growth -- even better than in the second quarter -- while maintaining high customer loyalty and profitability. Meanwhile, FiOS customer growth also improved from the previous quarter. We expect future revenue growth from mobile over-the-top video, including digital advertising, and the Internet of Things.
New areas of growth
As McAdam mentioned, in addition to its core segments of wireless phone service and wireline Internet and pay television, the company has been developing new sources of revenue. While the numbers are relatively trivial so far, they show the potential to become a major income source moving forward.
The company booked approximately $175 million in revenue during Q3 2015 for its Internet of Things (IoT) business, raising its take for the the full year to nearly $500 million.
In addition, in August, Verizon launched "hum," a telematics service that creates a smart, connected driving experience with an addressable market of 150 million vehicles in the U.S. No revenue was reported for the product, but it should enhance the company's IoT business going forward.
Good news for the future
In the wireless business, the company has been able to mostly move away from device subsidies into outright purchases or financed phones. For the quarter, phone activations on installment plans grew to 58%, up from 49% in the previous quarter and only 12% in the third quarter of 2014. Verizon said it expects the percentage of phone activations on installment plans to increase to about 70% in the fourth quarter of 2015.
There was positive news on the wireline side as well. FiOS Internet penetration (subscribers as a percentage of potential subscribers) was 41.7% at the end of Q3 2015, compared with 40.6% at the end of Q3 2014. In the same periods, FiOS video penetration was 35.6%, compared with 35.5%.
Strong results in a tough environment
Verizon has done a surprisingly impressive job of growing subscribers across the board despite there being compelling reasons for people to leave or choose other carriers. On the wireless side, the challenge is maintaining the results while companies like Sprint and T-Mobile sell comparable products for less. The Internet business does not face that same pressure, but FiOS pay television remains very vulnerable to people simply deciding that traditional cable no longer makes sense.
These are strong results, and it's encouraging to see the company quickly building its IoT business. That's a smart move given that at some point -- especially in wireless -- simply saying you're better, as McAdam does above, may not be enough to keep subscribers from choosing cheaper providers.