Verizon (NYSE: VZ) more than held its own during a brutally competitive fourth quarter in the wireless market, posting 1.52 million net adds and a churn of just 0.96 percent. And it vowed to be the first carrier to deploy 5G in the United States.
The nation's largest carrier continued to maintain a relatively conservative position most of last year, opting primarily to target high-end users while T-Mobile (NYSE:TMUS) and Sprint (NYSE: S) repeatedly launched aggressive promotions to poach customers of their bigger rivals. Verizon's strategy once again paid solid if not spectacular dividends: It posted 449,000 net postpaid phone adds -- down 33 percent year-over-year in a plateauing market -- and 960,000 net tablet additions.
During the company's earnings conference call, Verizon CFO Fran Shammo said the carrier is moving aggressively to deploy 5G technologies. And, he noted, those technologies will be used in a wide variety of ways beyond smartphones and tablets.
"We will be the first company to roll 5G out in the United States," Shammo said, "and we are currently preparing for those field trials. The other thing I would say about 5G is that we would hope that the FCC moves quickly to adopt rules to facilitate 5G deployment. And think about 5G -- it may not just be about mobility. It may be about other use cases, not just about mobility."
Shammo noted that while it's too early to gauge the success of Go90, early uptake of the new video service has exceeded the company's expectations.
Verizon also saw a strong churn of just 0.96, beating estimates from Wells Fargo and Evercore of 1.08 and down from 1.14 percent in the fourth quarter of 2014. Wireless service revenues were $17.2 billion, however, falling slightly short of analysts' expectations and marking a 5.6 percent drop year-over-year. The dip is likely due to costs related to Verizon's transition to equipment install plans (EIPs) and away from subsidized handsets, according to analysts.
"Results were fine," analysts at New Street Research wrote in response to Verizon's earnings, "with consolidated EBITDA [earnings before interest, taxes, depreciation, and amortization] in-line and EPS [earnings per share] a penny ahead of consensus. Wireless phone adds were light (but positive), with lower gross adds and churn contributing to better than expected wireless EBITDA, a trend we expect to play out across the industry this quarter."
Here's a closer look at some key quarterly metrics from Verizon:
Subscribers: Verizon's 449,000 net postpaid phone adds were a marked 33 percent decrease year-over-year and fell short of some analysts' expectations. But its 1.52 million overall net postpaid additions -- excluding wholesale customers and Internet of Things connections -- beat forecasts from Evercore analysts.
Financials: The transition to EIPs took more of a toll on wireless service revenues than some analysts expected. Verizon saw $23.7 billion in total wireless revenues during the quarter, up 1.2 percent over the fourth quarter of 2014. But service revenues were only $17.2 billion, down 5.6 percent year-over-year, as more customers chose to buy devices via installment plans. Equipment revenues rose to $5.4 billion from $4.2 billion year-over-year. Service revenues plus installment billings increased 1.4 percent compared to 2014.
Smartphones: Verizon said it activated 7.6 million phones via device payment plans in the fourth quarter. The carrier claims 25 million such connections in total, accounting for 29 percent of its postpaid phone base. More than 40 percent of its customers are on unsubsidized service plans.
LTE: Roughly 90 percent of Verizon's total wireless data traffic was routed over its LTE network in the fourth quarter, and 4G devices now constitute 79 percent of its retail postpaid connections base. Overall LTE traffic increased by approximately 60 percent in the fourth quarter of 2015 compared to 2014.
Churn: Churn has long been a strong suit for Verizon, and the fourth quarter was no exception. Its 0.96 percent churn beat analysts' estimates and was down 1.14 percent year-over-year. Churn has slightly risen sequentially, however, with Verizon posting 0.93 percent churn in the third quarter and 0.9 percent in the second quarter.
IoT: Verizon reported roughly $200 million in IoT revenues in the fourth quarter of 2015, up 18 percent over the year-ago period. It also said its IoT business generated $690 million during the full year.
Summary: Verizon successfully weathered an ultra-competitive fourth quarter that could have been contentious, which bodes well for the near future as Sprint and T-Mobile continue their aggressive promotions. But New Street Research noted the carrier may face capacity problems due to a lack of mid- or high-band spectrum.
"Verizon faces rising competition with a marked asset disadvantage -- they have 38 percent of industry revenue and just 17 percent of industry capacity," New Street analysts wrote, adding that the upcoming auction of low-band spectrum won't address its needs in that area. "On a positive note, Verizon managed to hang on to subs, despite stiffening competition, with surprisingly low churn. However, we believe maintaining share will become increasingly difficult as competitors push their relative capacity advantage."
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