Verizon Wireless (NYSE: VZ) edged out T-Mobile US (NYSE:TMUS) in terms of postpaid subscriber additions in the second quarter, but relied far more heavily on adding tablet customers to do so. Despite losing feature phone and prepaid customers in the period, Verizon said it remains happy with its mix of customers.
Verizon said it added 1.134 million total postpaid customers in the second quarter, slightly ahead of T-Mobile's 1 million. T-Mobile pre-announced its subscriber results for the quarter earlier this month. Yet while Verizon reported that it added 321,000 postpaid phone customers, who are typically the most lucrative kind of customers for carriers, T-Mobile said it netted 760,000 such subscribers in the second quarter.
During the quarter Verizon announced and completed its $4.4 billion deal to buy AOL, which it did primarily for advertising technology. Verizon plans to use AOL's ad tech for its forthcoming over-the-the-top mobile video service, which will launch in the "late summer," Verizon Communications CFO Fran Shammo said on the company's earnings call.
Shammo said during the call that Verizon entered the year focused on reducing churn and protecting its subscriber base. In late April Verizon brought back lower promotional pricing for its More Everything shared data plans. The carrier started offering a 10 GB plan for $80 per month; the pricing runs through July 23. The plans do not include the price of monthly access charges for connecting smartphones, tablets and other devices. Still, Shammo said the $80 price point has been "very, very successful for us in the retention of our customer base."
In a research note, New Street Research analyst Jonathan Chaplin wrote: "We have been cautious on U.S. carriers based on our view that increasing competition would drive down pricing, margins and returns. The thesis continues to play out with ARPU declines at VZ accelerating to 7.6% on the back of the migration of the base to lower priced Edge/EIP plans and on promotions. VZ appeared to reverse course on pricing this quarter, discounting to retain subs."
Shammo said Verizon still has opportunity to grow, as it still has 16 million feature phone subscribers and 9 million 3G smartphone customers remaining in its customer base that it can upgrade to LTE smartphones over time. Shammo also said that Verizon will never move entirely to its Edge equipment installment plans and away from subsidized devices, because corporate accounts will not move to EIP programs.
Yet for the consumer market, he said: "I could see us getting to where we're very heavily concentrated on the installment side of the house." Shammo added that it would be easier for retail sales representatives to sell just one product and that is where the market is heading. "The market is moving us there, so we're eventually going to get there.," he said, echoing comments from AT&T's (NYSE:T) Ralph de la Vega, who said in June that he thinks AT&T will eventually stop offering two-year contracts and subsidized smartphones.
Shammo also said Verizon does not have any plans "to do any type of leasing arrangement" for smartphones.
Here's a breakdown of Verizon's key quarterly metrics:
Subscribers: Verizon's 1.134 million retail postpaid net additions in the quarter were more than most financial analysts had expected and were twice the number of postpaid additions in the first quarter. Yet they were also down year-over-year from 1.44 million in the second quarter of 2014.
Verizon said its postpaid phone net additions totaled 321,000 in the quarter as net smartphone adds of 588,000 were partially offset by a net decline of 266,000 feature phones. Verizon said tablet net additions totaled 852,000 in the quarter, and it lost 126,000 net prepaid device customers.
At the end of the second quarter, the company had 109.5 million retail wireless connections, a 4.7 percent year-over-year increase, and 103.7 million retail postpaid connections, a 5.2 percent year-over-year increase. These totals do not include wholesale or Internet of Things connections.
Financials: The carrier said total revenues were $22.6 billion in the second quarter, up 5.3 percent year-over-year. Verizon's service revenues totaled $17.7 billion, down 2.2 percent year-over-year, while equipment revenues jumped 62.5 percent year-over-year from $2.4 billion to $3.9 billion, as more customers chose to buy new devices with installment pricing. The decline of service revenues offset by an increase in equipment revenues continues a trend that started in the first quarter.
Verizon's retail postpaid average revenue per account dropped 3.8 percent to $153.73 in the second quarter, down from $159.73 in the year-ago period and $156.14 in the first quarter. However, Verizon said that retail postpaid ARPA plus installment billings from Verizon's Edge equipment installment plans increased 1 percent from a year ago.
Margins: In the second quarter, Verizon said its wireless operating income margin was 34 percent, up from 32.5 percent in the year-ago quarter. Segment EBITDA margin on service revenues was 56.1 percent, up from 50.3 percent a year ago. The company said segment EBITDA margin on total revenues was 43.9 percent, compared with 42.3 percent in the second quarter of 2014.
Smartphones: Verizon saw more customers choose its Edge equipment installment plan in the second quarter, with 49 percent of phone activations in the quarter happening on Edge. That's up from 39 percent in the first quarter but is a little bit lower than some analysts had expected. Shammo said the figure could rise to 60 percent in the third quarter.
Verizon had 4.7 million smartphone activations on Edge in the second quarter. The company now has an Edge phone base of 14 million, or 16 percent of its postpaid phone base, up from 10 million and 11.7 percent of the postpaid phone base at the end of the first quarter. Overall, Verizon said 7.2 percent of its retail postpaid base upgraded in the second quarter, and 91 percent were smartphones. Verizon said its smartphone penetration rate is now 81 percent, up from 75 percent a year ago
LTE: Verizon said it added 842,000 LTE smartphones to its postpaid customer base in the second quarter. In total, the company added 4.3 million LTE devices to its network in the second quarter, for a total of 76 million (or 73.3 percent of its retail postpaid base). That's up from 53.7 million, or 54.5 percent of the retail postpaid base, in the year-ago quarter. Around 87 percent of Verizon's total mobile data traffic currently rides on Verizon's LTE network, up slightly from 86 percent in the first quarter.
Churn: Verizon said retail postpaid churn was 0.90 percent, down from 1.03 percent in the first quarter and 0.94 percent in the year-ago period. Verizon said the second quarter represented its lowest postpaid churn rate in three years.
- see this release
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