Verizon Tops Profit Estimates With Solid Subscriber Gains

  • Phone financing, bigger data offers lure 1.3 million new users
  • Verizon introduced a free mobile-video service last month

Verizon Communications Inc., the largest U.S. wireless carrier, posted third-quarter profit that exceeded analysts’ estimates after sales promotions and tablet deals helped lure more subscribers even as smaller rivals cut prices.

Earnings excluding some items were $1.04 a share, the New York-based company said in a statement Tuesday. That compares with the $1.02 average of estimates compiled by Bloomberg. Verizon added 1.3 million new monthly subscribers in the period, compared with 1.5 million a year earlier. The gains topped the 1.1 million average projection of five analysts surveyed by Bloomberg.

The reliance on promotions underscores the challenges of attracting new users in a mature market amid data giveaways and free music-streaming offers from T-Mobile US Inc. and $1-a-month iPhone leasing from Sprint Corp. Verizon introduced a free mobile-video service last month to help it expand beyond the traditional phone business.

“The Street seems pleased with the core trends of Verizon’s wireless business,” said Kevin Roe, an analyst at Roe Equity Research LLC who recommends buying the stock. “It helped address investors’ fears of possible weakness. It also shows T-Mobile isn’t stomping them with intensifying competition.”

This will also give Verizon “additional runway to demonstrate its mobile video strategy will become a meaningful contributor to revenue and cash flow,” Roe said.

Shares closed up 1.2 percent at $45.24 in New York. That put the stock down 3.3 percent for the year compared with a 1.4 percent decline in the S&P 500 Index.

T-Mobile, the No. 3 in the industry, has been putting pressure on larger rivals Verizon and AT&T Inc. with zero-down leases and other deals. Last month T-Mobile said it was on track to add more than 1 million monthly subscribers, continuing its two-year user growth trend. In response, Verizon has had to increase the size of data allotments, recently offering 18 gigabytes of shared data for $100 a month.

Go90 Video Service

Last month, in a bid to find new growth businesses, Verizon started go90, a free mobile video service with shows aimed at teens.

Verizon Chief Financial Officer Fran Shammo, in an interview, declined to say how many subscribers the service has but said it was “north” of the initial 25,000 the company had said it signed on in the first week.

The go90 service is intended to be advertising-supported and use ad-insertion technology acquired with the $4 billion purchase of AOL Inc.

The mobile video business has had few successes. Using customer data like location and shopping patterns Verizon has chosen ad-driven approach to video that builds on its wireless service, Craig Moffett, an analyst at MoffettNathanson LLC, wrote in a note Tuesday.

“Video creates an advertising opportunity that is a whole new business for Verizon,” said Moffett, who recommends buying the stock.

Verizon’s sales increased 5 percent to $33.2 billion last quarter, topping the $32.9 billion average of analysts’ estimates. The carrier has moved away from heavy phone discounts and two-year contracts in favor of phone financing that spreads the full price of a new phone over two years of monthly payments. In the wake of the change, service revenue fell 4.1 percent to $17.6 billion from a year earlier due to price cuts, while phone revenue jumped 72 percent to $4.3 billion.

The average wireless monthly phone bill fell 5 percent to $152.38 percent from $161.24 a year earlier as more customers switch from combined phone and service contracts to separate handset financing plans and monthly service payments. Analysts predicted $152.57. The profit margin for wireless service revenue widened to 56.4 percent from 49.5 percent a year earlier. Analysts estimated 55.8 percent on average.

Tablet Sales

Verizon is relying heavily on tablets to add new subscribers. Last quarter, it gained 818,000 tablet customers, compared with 430,000 phone customers. Analysts expected additions of 813,000 and 317,000, respectively.

Landline revenue, which accounts for about a third of annual sales, declined 2.3 percent to $9.4 billion, continuing a long trend of declines. Wired home and business lines represent about a third of the company’s total sales. Verizon gained 42,000 FiOS TV customers and 114,000 FiOS Internet subscribers. A year earlier, it added 114,000 TV and 162,000 Internet users.

The company has adjusted its financial forecast twice this year. Last month, Chief Executive Officer Lowell McAdam said profit could plateau next year at 2015 levels, and that sales growth would restart in 2017. In July, Verizon cut its full-year revenue outlook to at least 3 percent from a previous forecast of at least 4 percent.

Verizon is also in negotiations with the Communications Workers of America to replace a union contract that expired Aug. 1.

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