With huge 1.2M customer gains, Verizon shrugs off lack of video service bundled with wireless

Wall Street analyst firm MoffettNathanson, citing company reports and its own estimates and analysis, found Verizon's postpaid quarterly net additions showed a noteworthy rise in the fourth quarter of 2017. (MoffettNathanson)

Although all of its major competitors are pushing bundles of video services with their respective wireless offerings, Verizon’s management argued the company is doing just fine without such subscriptions.

“And in terms of what the competitors are doing: They bundled a number of things into their service over the course of last year and our numbers have stayed very consistent,” Verizon CFO Matt Ellis said today on the carrier’s quarterly conference call with investors. “When you look at our value proposition, it continues to resonate strongly.”

Ellis’ comments are notable considering all of Verizon’s major wireless rivals have added a video component to their offerings in the past year. AT&T continues to push its DirecTV Now offering by offering it at a discount to its unlimited wireless customers, while T-Mobile is offering a free Netflix account to its customers and Sprint is offering a free Hulu account to its customers.

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Those offers appear to have had little effect on Verizon’s fourth quarter. Indeed, Verizon today reported wireless financial and customer metrics that largely exceeded Wall Street expectations. As noted by Scotiabank, Verizon reported 1.2 million postpaid net customer additions in the fourth quarter of 2017, which the firm noted was well above its predictions of 850,000 and general Wall Street expectations of around 500,000.

“Wireless service revenue was $15.9B (-2.9% YOY), generally in line with our $16.0B (-2.5% YOY) and slightly ahead of consensus $15.8B (-3.3% YOY) and an improvement from last quarter’s -5% YOY,” the analysts at Scotiabank wrote in a note issued today to investors. “EBITDA was above our estimates at $9.46B (10% growth YOY) vs. our $9.23B (+7% YOY) as a result of cost cutting and higher revenue.”

“We had a great year on the wireless performance,” acknowledged Verizon’s Ellis, adding that the company’s wireless EBITDA margin was 39.8% in the quarter, up from the 36.9% it reported in the same period last year. “The improvement in EBITDA was a function of better trends in service revenue and lower promotional activity than in the prior year.”

"We really saw a significant change the day we launched unlimited back in February of last year, and from that point forward we have competed very effectively in the marketplace,” he added. “The value proposition is resonating.”

Other analysts agreed with Scotiabank’s largely positive take on Verizon’s fourth quarter results in wireless.

“TBR attributes Verizon’s improved postpaid subscriber additions and equipment revenue growth to the success of the carrier’s unlimited data plans as well as the atypical launch of the iPhone X in November as new iPhone models are usually launched in September,” wrote TBR analyst Steve Vachon this morning. “Verizon’s wireless service revenue decreased 2.9% year-to-year due to lower ARPU stemming from non-subsidized service plans coupled with the loss of 184,000 prepaid subscribers in the quarter. However, Verizon has been able to increase service revenue sequentially the past two consecutive quarters and expects to return to year-to-year service revenue growth in 2018 now that over 80% of its postpaid phone base is on unsubsidized service plans.”

“Wireless results were solid, with a beat on postpaid phone adds and EBITDA driven largely by the benefits of an unusually benign competitive environment,” wrote the analysts at New Street Research in a note to investors issued this morning. “We expect low churn and strong margins to be a common theme across the sector this quarter.”

Here are some other major themes and commentary from Verizon’s fourth quarter report:

  • 5G. Verizon CEO Lowell McAdam described 5G technology as an “unprecedented opportunity” for Verizon, and reiterated that the company’s tests indicate it will be able to supply consistent 1 Gbps speeds at ranges of up to 2,000 feet when it launches its fixed wireless services in 3-5 cities later this year.
  • Media acquisitions. When asked whether Verizon might make some kind of acquisition in the media space, like AT&T is trying to do with Time Warner, Verizon’s McAdam said that nothing is currently in the pipeline for the carrier. “There is nothing going on right now with us considering a large media play,” he said. “Being independent is a very good place to play right now.”

RELATED: Verizon CEO says carrier has no big media acquisition plans

  • Cable MVNOs. “We’re happy with what we’ve seen so far,” explained Verizon’s Ellis, acknowledging that Comcast’s Xfinity Mobile MVNO service is up and running and has so far gained more than 250,000 customers. “We liked those [MVNO] agreements. We signed them in 2011 [with cable companies including Comcast and Charter] and we’re happy to be doing them today,” Ellis added. “Everything that we’ve seen so far is in line with our expectations and we’re glad to have that traffic on our network and monetizing that traffic.”
  • Wireless customer metrics. Verizon reported a net increase of 1.2 million retail postpaid connections in fourth quarter of 2017, a figure that included 647,000 smartphone net additions. That's an increase from 456,000 smartphone net adds in the same quarter a year ago. Verizon’s total customer figures for the fourth quarter of 2017 also included the addition of 193,000 tablets and 550,000 other devices, mostly led by wearables. The carrier’s total retail postpaid churn was 1%, and its retail postpaid phone churn was 0.77%. Verizon said it now counts roughly 80% of its postpaid phone base on unsubsidized service pricing plans, a number up significantly from the 67% it counted at the end of the year in 2016.
  • Fiber. Verizon’s McAdam said that Verizon would continue to look for opportunities to purchase more fiber but added that he expects the company to mainly focus on building out its fiber footprint organically.
  • Tax reform effects. Verizon said it expects savings from the recently passed tax reform to generate a net $3.5 billion to $4.0 billion in “uplift to cash flow from operations in 2018,” the company said. “VZ is the first telecom to report in a posttax reform world and the $3.5B-$4B in operating cash flow uplift is well ahead of our expectations,” noted the analysts at Wells Fargo.
  • 2018 outlook: Verizon said that for the full year of 2018, it expects consolidated revenues “will grow at low-single-digit percentage rates on a GAAP basis. Excluding the impact from the new revenue recognition standard, Verizon is on track to achieve year-over-year wireless service revenue growth by the middle part of 2018. On a GAAP basis, Verizon expects service revenue growth to turn positive around the end of 2018 or early 2019.” The carrier added that its capital spending for 2018 will be in the range of $17 billion to $17.8 billion, a figure that includes the commercial launch of 5G.

“I think we’re breaking into one of the most exciting times that I’ve seen in my career,” summed Verizon’s McAdam. “I’m very excited about 2018, about what lies ahead before us.”