Although Verizon Wireless (NYSE: VZ) reported improving margins, the carrier added fewer postpaid customers in the period than many financial analysts had expected. The company also lost 3G smartphone and prepaid customers in the quarter. In the past, Verizon executives have said they are willing to part with such customers and not get bogged down in a price war to retain them.
Analysts expect T-Mobile US (NYSE:TMUS) to lead the pack this quarter in terms of subscriber growth. T-Mobile reports its own first quarter earnings in the next few weeks.
While Verizon did not report much subscriber growth, the company did stabilize its margins in the quarter after seeing them drop in the fourth quarter of 2014 when it spent heavily on promotions.
On the company's earnings conference call, Verizon Communications CFO Fran Shammo said that the carrier is going to protect its base, and that compared to the year-ago quarter Verizon improved its feature phone subscriber losses by more than 400,000. "We have to be rational and we will not chase every customer," he said. [click to tweet]
"But we are making every effort to retain our base and upgrade our customers," Shammo added.
Meanwhile, Verizon saw more customers choose its Edge equipment installment plan in the first quarter, with 39 percent of phone activations in the quarter happening on Edge. Verizon had expected that figure to be at most 35 percent. Around 25 percent of Verizon customers chose Edge in the fourth quarter of 2014. The company expects this percentage to continue to increase. That would bring Verizon more in line with rival AT&T Mobility (NYSE: T), which saw 58 percent of its customers choose its similar Next plan in the fourth quarter of 2014.
Edge offers some customers discounted service pricing and also lets customers upgrade to a new phone after they pay off 75 percent of a device's cost through monthly payments.
Shammo said all of Verizon's retail channels, including indirect and dealers, now offer Edge. But he said it's pushed more heavily in the company's own retail stores.
Here's a breakdown of Verizon's key quarterly metrics:
Subscribers: Verizon added 565,000 retail postpaid net additions in the first quarter, a 4.8 percent increase from the 539,000 it added in the year-ago period. However, Verizon also lost 188,000 retail prepaid customers, compared to a gain of 10,000 prepaid customers a year ago.
Analysts at Wells Fargo had expected Verizon to add around 620,000 postpaid customers in the first quarter. Analysts had expected Verizon to add 587,000 postpaid customers in the quarter, based on the average estimate of five analysts surveyed by Bloomberg.
The company added 621,000 LTE smartphones to its customer base in first-quarter 2015, but also lost 374,000 3G smartphone customers, bringing overall smartphone growth down to 247,000 customers. Verizon added 820,000 LTE tablets and reported a net decline of 385,000 feature phone customers in the first quarter.
At the end of the first quarter, Verizon had 108.6 million retail connections, a 5.1 percent year-over-year increase, and had 102.6 million total retail postpaid connections.
Financials: Verizon said total wireless revenues were $22.3 billion in first-quarter 2015, up 6.9 percent from a year ago. Service revenues clocked in at $17.9 billion, down 0.4 percent from the first quarter of 2014. BTIG analyst Walter Piecyk wrote on Twitter this "was the first time ever that Verizon's wireless service revenue declined" year-over-year.
Equipment revenues increased $1.5 billion compared with the year-ago period as more customers chose Verizon Edge pricing. That continues a shifting pattern at Verizon and in the industry from service revenues to equipment revenues. Service revenues plus Edge installment billings increased 3.1 percent year-over-year, Verizon said.
Verizon's retail postpaid average revenue per account dropped 2.2 percent year-over-year to $156.14 from $159.67. MoffettNathanson analyst Craig Moffett noted that Verizon's ARPA was bound to drop as more revenue shifts from service to equipment. "It appears Verizon's ARPU held in relatively well in Q1," he wrote in a research note.
Margins: Verizon said its wireless operating income margin was 35.0 percent in the first quarter, flat with last year's first quarter but up from 23.5 percent in the fourth quarter. The carrier's wireless segment EBITDA margin on service revenues was 55.8 percent, up from 52.1 percent in the year-ago period and up from 42 percent in the fourth quarter. Shammo said that financial analysts should start to look at wireless segment EBITDA margin on total wireless revenues, given the shift toward equipment revenues. That figure was 44.8 percent in the first quarter, similar to a year ago.
In a research note, Wells Fargo analyst Jennifer Fritzsche noted Verizon's strength "is largely due to the higher than expected Edge take rate of 39% (management had previously guided toward 35%). However, backing out the benefit from Edge, we still calculate margins to be roughly flat y/y--an impressive stat given the competitive environment today."
Smartphones: Verizon said around 6.5 percent of its retail postpaid subscriber base upgraded in the first quarter and 90 percent of those upgrades were to smartphones, which equates to 6 million smartphone sales via upgrades. Verizon said around 80 percent of its postpaid customers have smartphones, up from 72 percent a year ago.
Verizon said it had 3.4 million smartphone sales on Edge in the first quarter. The company now has an Edge phone base of 10 million, or 11.7 percent of its postpaid phone base.
LTE: Verizon added 4.3 million LTE devices to its subscriber base in the first quarter. Around 85 percent of its smartphone customers use LTE smartphones and 86 percent of its mobile data traffic goes over its LTE network, up from 84 percent at the end of the fourth quarter of 2014. Verizon now has 71.7 million retail postpaid LTE connections, or 70 percent of its postpaid subscriber base, up from 49.3 percent at the end of the first quarter of 2014.
Shammo said Verizon will spend between $17.5 billion and $18 billion in total wireless and wireline capital expenditures this year. In terms of wireless, he said Verizon will continue to densify its network by deploying additional AWS-1 spectrum for added capacity, as well as small cells, inbuilding solutions and Distributed Antenna Systems. Verizon has also started to refarm 1900 MHz PCS spectrum from 3G EV-DO service to LTE in select markets.
Churn: Verizon said retail postpaid churn was 1.03 percent in the first quarter 2015, down from 1.14 percent in the fourth quarter of 2014 and 1.07 percent in the year-ago period.
- see this release
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