Verizon Earnings Preview: Watching Impact Of Subsidies And T-Mobile Competition In Q4

Jan 17 2014, 2:48pm CST | by

Verizon Earnings Preview: Watching Impact Of Subsidies And T-Mobile Competition In Q4

Verizon is scheduled to release its Q4 2013 results on January 21st. We will be keenly watching the carrier’s smartphone sales as well as wireless net additions, which should have received a boost during the holiday season. The carrier is likely to see data ARPU rise due to growing smartphone penetration and increasing adoption of 4G LTE, but heavy smartphone subsidies during the holiday season are likely to have caused its margins to take a hit. It will be interesting to see the impact of increasing competition from T-Mobile, which recently launched the iPhone on its network and is aggressively going after rivals with its ‘Uncarrier’ strategy, on Verizon’s wireless net adds in Q4. T-Mobile recently announced its porting ratio figures, and while Sprint and AT&T seem to be the worst hit by T-Mobile’s new service plans, even Verizon seems to be losing more subscribers to T-Mobile than it can gain.

Our $50 price estimate for Verizon is about in line with the current market price.

See our complete analysis for Verizon

LTE’s importance in a saturated market

The U.S. wireless market has become increasingly saturated with wireless connections having exceeded the population in mid-2011. This has made acquiring new subscribers, especially those that pay for the higher-margin postpaid data plans, very tough for the wireless carriers. Despite this, Verizon has banked on its better 4G LTE coverage to do well on the postpaid front in the recent years. Verizon has led LTE deployment in the U.S., completing its initial LTE deployment ahead of rivals and currently looking to widen the gap by increasing network density with LTE-Advanced and supporting new features such as VoLTE (Voice over LTE) ahead of rivals.

2012 saw Verizon rack up 5.1 million postpaid net adds versus AT&T’s 1.4 million for the full year. The trend continued in 2013 as well, with Verizon adding 2.7 million net postpaid subscribers through the end of the third quarter. In the same period, the second largest U.S. wireless carrier, AT&T, added only about 1.2 million postpaid net subscribers. (See Behind In LTE Coverage AT&T Spends Big To Gain New Customers)

Verizon Encourages Data Consumption

Gradually, however, the reality of a saturated wireless market seems to be catching up with Verizon in the absence of a steady supply of defecting iDEN subscribers from Sprint and the presence of a resurgent T-Mobile. Also, its LTE coverage lead over rivals isn’t as wide as was at the start of 2013. As a result, Verizon’s Q3 postpaid net adds declined to about 930,000 from over 1.5 million during the same period last year. The carrier said that supply constraints for the recently launched iPhone 5S prevented net adds from being higher in Q3, so the picture should be a lot clearer during Q4′s earnings call. However, it is unlikely that the carrier will report Q4 postpaid net adds higher than last year’s.

In order to counter growing competition from rivals, Verizon has come up with strategies to increase consumer loyalty and better hold on to its existing customer base. It recently launched a new program called Verizon EDGE, in response to T-Mobile’s aggressive moves, which allows subscribers to upgrade their smartphones every six months so long as they have paid off 50% of the unsubsidized cost of the phone. The carrier has also launched Mobile Share data plans that allow subscribers to add more mobile devices to their service account. Customers who subscribe to these initiatives get further entrenched in the Verizon ecosystem, making it tougher to switch carriers. This is important because rising competition seems to be increasing Verizon’s churn numbers of late. Compared to 0.93% in Q2 2013, Verizon had a churn of 0.84% in the same period last year. Higher churn implies that a carrier is losing more of its existing subscribers, leading to higher costs as it looks to acquire new ones.

However, the increasing adoption of shared data plans will decrease the average revenue per device since non-smartphone connected devices consume much less data. But Verizon’s revenues from each individual subscriber should also rise at the same time, as users connect more devices to its wireless network. It should also help shore up service margins due to low data consumption of these connected devices. Moreover, since the shared data plans are tiered, an increasing usage of Verizon’s high-speed LTE network will cause subscribers to jump to the higher tiers, enabling the carrier to better monetize its existing subscriber base.

Verizon’s Margin-Defending Initiatives To Offset Impact Of Smartphone Subsidies

Driving Verizon’s ARPA (average revenue per account) levels is also the increasing level of smartphone penetration within its subscriber base. Last quarter, almost 85% of Verizon’s retail postpaid activations in Q3 were smartphones, with 33% of those upgrading being first time smartphone buyers. This helped increase its smartphone penetration within the postpaid subscriber base to more than 67% – up from 58% at the start of the year. Increasing smartphone penetration helped drive postpaid ARPA, as smartphone users are usually heavy data users as well. Verizon’s postpaid ARPA grew to over $155 in Q3 2013, almost 7% over the same period last year .

Smartphone sales may increase postpaid subscriber additions and bring in substantial data revenues, but they are also very expensive due to the huge subsidies that carriers provide in return for long-term contract plans. For example, a basic model of the iPhone 5S costs around $650 for carriers who then subsidize it heavily to sell the handset for $199. We expect strong holiday buying to have depressed Verizon’s margins sequentially in Q4. However, Verizon has been able to manage its expenses well, driving operational efficiency through initiatives such as the $36 upgrade fee and the sale of tablets such as the new iPad at unsubsidized rates. (See Verizon Introduces Smartphone Upgrade Fee; Looking For iPhone Subsidy Relief) The carrier has also recently increased the minimum upgrade eligibility from 20 months to 24 in a bid to increase the upgrade cycle and mitigate the margin impact. As a result, wireless EBITDA margins in the first three quarters of 2013 increased almost 200 basis points over the same period last year. We expect a similar strong year-over-year margin improvement in Q4 as well.

See More at Trefis | View Interactive S&P Capital IQ Analyses (Powered by Trefis)

Like our charts? Embed them in your own posts using the Trefis WordPress Plugin.

Source: Forbes Apple

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Childless couples too enjoy family meals
New York, Sep 19 (IANS) Couples without kids in the house are just as likely as adults living with young children or adolescents to eat family meals at home on most days of the week, says a US-based study.
 
 
Now, explore Egyptian pyramids from home
London, Sep 19 (IANS) If you are yet to experience the wonders of the ancient world still surviving in Egypt, you can now turn into a virtual visitor -- thanks to Google Street View -- and explore the pyramids from the comforts of your home.
 
 
Want good raise at work? Get a supportive wife
New York, Sep 19 (IANS) Do not just blame your boss or jealous colleagues for no promotion or salary hike at work - your spouse's personality is equally important to decide if your chosen career will make you richer or poorer.
 
 
People with larger pupil size bad decision makers
London, Sep 19 (IANS) People with larger pupil size tend to be inconsistent in their decisions, says a study.
 
 
 

Latest from the Network

Pakistan facing over 6,000 MW power shortfall
Islamabad, Sep 20 (IANS) Pakistan is facing an electricity shortfall of over 6,000 MW, with many parts of Punjab province witnessing outages of 20 hours a day. Un-announced load shedding in small and rural cities of...
Read more on Business Balla
 
New Zealand opposition leader concedes defeat in elections
Wellington, Sep 20 (IANS) David Cunliffe, leader of New Zealand's main opposition Labour Party Saturday, conceded defeat in the general election. Cunliffe said in a televised address to party faithful that he had...
Read more on Politics Balla
 
Xi's Asia trip new chapter for China's diplomacy: Minister
Beijing, Sep 20 (IANS) Chinese President Xi Jinping's state visits to India, Sri Lanka, the Maldives and Tajikistan opened a new chapter for China's neighbourhood diplomacy, Chinese Foreign Minister Wang Yi said at...
Read more on Politics Balla
 
Asian Games: Indian hoopsters thrash Palestine
Incheon, Sep 20 (IANS) Indian men's basketball team registered a facile 89-49 win over Palestine in their opening Group B match of the 17th Asian Games at the Hwaseong Sports Complex Gymnasium here Saturday. In a...
Read more on Sport Balla
 
Men spikers win, women lose at Asiad
Incheon, Sep 20 (IANS) The Indian men's volleyball team got off to a brilliant start by notching up a 3-1 win over Hong Kong in their opening Group C game at the Asian Games here Saturday. Playing at the Ansan...
Read more on Sport Balla
 
West Indies top ICC Women's Championship table
Dubai, Sep 20 (IANS) The West Indies moved to the top of the ICC Women's Championship table after beating New Zealand 4-0 in the just-concluded bilateral One-Day International (ODI) series with left-arm spinner Anisa...
Read more on Sport Balla
 
Pakistani plane carrying 47 people grounded after bird hit
Islamabad, Sep 20 (IANS) A Lahore-bound Pakistani flight carrying 47 passengers had to be grounded here Saturday when it was hit by a bird shortly after taking off. The incident occurred with Pakistan International...
Read more on Politics Balla
 
BJP leaders discuss Tamil issues with Rajapaksa in Colombo
Colombo, Sep 20 (IANS) A wide range of issues, particularly relating to ethnic Tamils of Sri Lanka, came up for discussion during a meeting of senior BJP leaders Muralidhar Rao and Vijay Jolly with Sri Lankan President...
Read more on Politics Balla
 
Pakistan to get 160 IED-resistant vehicles from US
Islamabad, Sep 20 (IANS) The US government will give 160 Mine Resistant Ambush Protected (MRAP) vehicles, and spare and repair parts worth 198 million dollars to Pakistan, a media report said Saturday. The US State...
Read more on Politics Balla
 
Indian track cyclists fail to qualify (Roundup)
Incheon, Sep 20 (IANS) Indian track cyclists - both men's and women's teams - failed to qualify for their sprint finals at the Incheon International Velodrome in the 17th Asian Games here Saturday. In the men's...
Read more on Sport Balla