Verizon (VZ 0.69%) posted surprisingly strong third quarter 2015 earnings despite increased pressure in the wireless space from T-Mobile (TMUS 1.18%) and Sprint (S +0.00%).
Despite those two rivals undercutting its prices, Verizon was able to deliver $0.99 in earnings per share and $1.04 in adjusted EPS (non-GAAP), compared with $0.89 the same period last year. The company also added 1.3 million net retail postpaid connections in the quarter, as well as 114,000 fios Internet and 42,000 fios video net additions.
That was very impressive because the release of the new iPhone brought novel leasing offers from Sprint and T-Mobile. While Verizon forced customers to either buy the new outright, upfront at full retail, or finance it at full price, its two rivals offered leases as low as $1 a month for some customers (though the base offer most would pay was $20 per month).
Both Sprint and T-Mobile were also willing to pay off early transfer fees making it easy for contracted Verizon customers to jump ship. The fact that these promotions did not cost the company wireless subscribers was impressive as were Verizon's strong results in general.
Put simply these are good numbers in an increasingly competitive space where the company must not only compete with its wireless, cable, and Internet rivals, but faces the rising appeal of cord cutting in its pay television business. CFO Fran Shammo led a call for analysts after the results were reported on October 20 and he shared some insights into the company's strategy for continued growth and its plans for the future.
Keep investing carefully
Shammo kicked off his presentation by explaining how Verizon plans to continue investing on infrastructure items like building its network while also growing its dividend and increasing spending for other shareholder-friendly programs:
We continue to execute a disciplined capital allocation model. In addition to our consistent investment strategy, we are also committed to returning value to shareholders and maintaining a strong balance sheet. We have had a very active year with capital investments and spectrum purchases, which position us for the future growth, the strategic acquisition of AOL, and the return of more than $11 billion in value to shareholders in the form of dividends and share repurchases while remaining on track with our previously stated deleveraging plan.
The CFO also noted that in early September the company's board approved a 2.7% dividend increase, raising the annualized dividend to $2.26 per share, the ninth consecutive year the board has approved a dividend increase.
Video could be key
In early October Verizon launched go90, which Shammo described as "a differentiated, mobile-first, social entertainment platform." The service is essentially Verizon's take on YouTube offering "premium" content and a suite of social media tools designed to encourage sharing.
The CFO said the launch has gone well with the platform delivering increasing engagement without significant promotion. He expects that growth to continue and for it to produce more ways to make money:
As go90 develops, we will be adding more great content, features, and advertising opportunities. You can expect a flow of product enhancements creating a new ecosystem for digital creators and advertisers, and a video consumption model that we can monetize in multiple ways.
Shammo also sees AOL, which Verizon acquired in June, to pay an increasing role in the company's video strategy moving forward:
The acquisition of AOL significantly improves our digital media and advertising capabilities. These capabilities will be a key component of our video business model, which will be driven by digital mobile advertising in the future.
Making money from video ads rather than subscription revenue is essentially a new model for Verizon. Adding AOL gives it a brand with significant experience in this space.
go90 is an app available for phones and tablets. Source: Verizon
The IoT is starting to matter
Verizon is starting to see meaningful revenue from its Internet of Things products and Shammo expects that to grow moving forward. New revenue streams from the IoT totaled approximately $175 million in third-quarter 2015 and about $495 million year to date, according to the earnings release.
"We are taking a strong leadership position in the Internet of Things," Shammo said during the call. "With our experience in networks, devices, platforms and applications, we are creating an ecosystem that will foster innovation and expand the entire IoT market."
The CFO is particularly excited about the company's Iot efforts in the automotive space and talked about two initiatives:
In August, we announced the commercial availability of hum, an aftermarket vehicle technology and subscription service creating a connected car driving experience that can operate in more than 150 million vehicles in the United States. We are very active in the smart city solutions markets and we have already announced a partnership with the city of Savannah, Georgia. Municipalities like Savannah are looking to take advantage of our intelligent solutions to integrate disparate systems, monitor traffic and safety conditions in real-time to improve efficiency and public safety.
It's very early in the game for the development of IoT-related technologies and Verizon has quietly become a leader in the space. The revenue numbers may be small for a company which had $33.2 billion in revenue in the third quarter, but it's a base which can be built upon.
Verizon has held up well in its core businesses and it appears to be taking smart steps to shore up those efforts while growing into new spaces with large upside potential.
