Verizon loses 36K net postpaid phone subs in disappointing Q3

Verizon store
Image: Mike Mozart/Flickr

Verizon posted a 6.7 percent decrease in quarterly revenue as its core smartphone business fell short of analysts’ expectations in an increasingly competitive environment. Which once again illustrates why the nation’s biggest carrier is so eager to expand into digital media, the IoT and other markets.

Verizon lost 36,000 net postpaid phone subscribers during the latest quarter, falling well short of the 92,000 net additions Wells Fargo Securities had predicted it would report. Wireless service revenue came in at $16.7 billion, down 5.2 percent year-over-year and shy of Wells Fargo’s estimate of $16.8 billion, and its retail postpaid phone churn was up 2 basis points year-over-year.

RELATED: AT&T likely the only major carrier to see net postpaid phone losses in Q3: Wells Fargo

T-Mobile and Sprint continue to take aim at Verizon and AT&T in a U.S. smartphone market where growth has slowed to a crawl. So like AT&T, Verizon is increasingly looking to shore up its bottom line by building a digital media and advertising empire and tapping emerging segments such as connected cars.

“While we transform our company in a challenging environment, we have maintained the financial flexibility to invest in our industry-leading networks to better serve customers, add scale and to bring innovation to the mobile media and internet of things markets, and increase dividends for a tenth consecutive year,” CEO Lowell McAdam said in a prepared statement.

Here's a closer look at some of Verizon's key quarterly metrics:

Subscribers: Deutsche Bank Markets Research analysts observed in a press release that “negative postpaid phone adds in wireless were the biggest surprise for us this quarter, with VZ’s -36K the first loss in the company’s history.” And Verizon posted 442,000 net postpaid additions, well below Wells Fargo’s estimate of 657,000 new subscribers. Continued aggressive promotions from T-Mobile and Sprint are clearly taking their toll on the operator.

Financials: The company posted a quarterly profit of $3.75 billion, or 89 cents per share, down from $4.17 billion, or 99 cents per share, during the same period in 2015. Total operating revenue came in at $30.94 billion, down from $33.16 billion a year ago and shy of the $31.14 billion expected by analysts, according to Thomson Reuters I/B/E/S.

IoT: Verizon said IoT revenues increased 24 percent “on a comparable basis” year over year, generating $217 million, with telematics leading the way. Indeed, the operator has moved aggressively into the telematics segment, agreeing in August to acquire Fleetmatics for $2.4 billion and snapping up Telogis two months earlier for an undisclosed sum. “We see the telematics piece to be a really high-growth” market in the future, Verizon CFO Fran Shammo said on a conference call with analysts this morning.

RELATED: With new tech and policy center, Verizon highlights IoT momentum

Media: Verizon continued to emphasize its pursuit of digital media – particularly mobile video and advertising – but Shammo also noted that Yahoo’s recently reported security breach is an ongoing concern. Recent reports have indicated the highly publicized hack may spike Verizon’s proposed $4.8 billion deal to acquire Yahoo, and Shammo said the carrier is still evaluating the potential fallout. “We are still evaluating what it means for this transaction,” Shammo said. “This was an extremely large breach that has received a lot of attention from a lot of people.”

Summary: The U.S. smartphone market is perhaps more competitive than ever, and cable companies are positioned to elbow their way into a segment where four major service providers are already vying for market share. So the looming question for Verizon is how effectively it can tap segments such as connected cars and digital media and advertising.

“Results support our cautious stance on U.S. wireless incumbents and bullish on challengers,” New Street Research analysts wrote. “We believe estimates for Verizon for 4Q16 will likely head lower after these results and, if investors lose faith in the view that margins are structurally higher, incumbent multiples may also face pressure. Verizon is more exposed to these pressures than AT&T.”