Verizon points to strong LTE device activations, Edge adoption in Q4

While Verizon Wireless (NYSE: VZ) did not provide specific subscriber growth figures for the fourth quarter, the carrier indicated it will report strong momentum in the period. Verizon's confidence in its fourth-quarter performance, with more than three weeks left in the year and with the holiday shopping season in full swing, speaks to the challenges Sprint (NYSE: S) and T-Mobile US (NYSE:TMUS) face in eating into Verizon's subscriber base.

Verizon said it is seeing "very strong customer demand" for LTE smartphones and tablets on its More Everything shared data plans. The carrier indicated it is seeing retail postpaid gross additions that are higher from both the year-ago period and third quarter.

In the fourth quarter of 2013 Verizon notched 1.6 million net retail postpaid connections, and tablet net adds made up 625,000 of those. In the third quarter Verizon added 1.53 million retail net connections, including 1.52 million retail postpaid connections. Of those though, Verizon added just 457,000 postpaid phones and leaned heavily on 1.1 million postpaid tablet activations in the period.

Verizon said in the fourth quarter so far new device launches are driving "significant" customer phone upgrades--perhaps a reference to Apple's (NASDAQ: AAPL) iPhone 6 and 6 Plus, which launched in September. Verizon said 9.5 percent of its postpaid customer base could upgrade their phones by the end of the quarter. The company's upgrade rate for its postpaid base was 7.4 percent in the year-ago period.

In terms of upgrades, Verizon said three out of every four upgrades were either "strategic or high-quality." Verizon had more than 17 million 3G smartphones and 20 million feature phones on its network at the end of the third quarter, and executives have eagerly talked about upgrading those customers to LTE smartphones. Doing so would put those customers on a more efficient and profitable network, and moving them would allow Verizon to start refarming spectrum used for 3G CDMA services.

Interestingly, Verizon said the percentage of customers choosing its Edge equipment installment plan option so far in the fourth quarter is tracking to 24 percent, or double the rate of the third quarter, which was around 12 percent of total phone activations. However, during an appearance today at the UBS Annual Global Media And Communications Conference, Verizon CFO Fran Shammo said that Verizon doesn't expect its Edge sales to grow too much. "I don't see it going to where others are--50 or 60 percent," he said.

Despite the rosy fourth quarter outlook, Verizon did warn that its customers losses are trending higher both sequentially and year-over-year, likely due to promotions from other carriers. Sprint, for example, is offering to cut customers' bills in half if they switch from Verizon or AT&T Mobility (NYSE: T) through Jan. 15, though customers also need to purchase a new Sprint phone.

Verizon also said its holiday promotions and its subscriber growth will weigh on its margins and earnings.

Wall Street analysts in general took a negative view of Verizon's announcement. Analysts at Credit Suisse wrote that Verizon's announcement indicates that "Verizon is not immune to competition." They also noted that "we continue to believe that Verizon is more exposed to competition than investors expect."

"We believe that Sprint's aggressive plans began to take their toll on VZ even before last week's 'half-off' promo," wrote Macquarie Capital analyst Kevin Smithen. Smithen said Macquarie is raising its fourth-quarter postpaid churn expectations for Verizon to 1.12 percent from 1.03 percent due to the carrier's announcement. He also said the firm is raising its total postpaid net adds expectation from 1.487 million to 1.709 million "but note that Q4 is likely to be sharply skewed towards tablets yet again." He said the firm expects Verizon to report handset net adds of 609,000, up from a previous expectation of 437,000.

Shammo said the carrier expects much of the current promotional pricing in the wireless industry to end next year. "I think things will settle down in 2015," he said.

He also said that, over the long term, Verizon still sees plenty of opportunity in the wireless market, beyond signing up customers to smartphones. "The industry is really maturing to much more than just phones," he said.

For more:
- see this release

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Article updated Dec. 9 with additional commentary from Shammo and analysts. Mike Dano contributed to this report.

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