Verizon emphasizes cost cuts amid fairly solid Q1 earnings, revenues of $22B

Verizon (NYSE: VZ) continued to emphasize its ongoing strategies of targeting high-end wireless subscribers and expanding into media and advertising during its first-quarter earnings call Thursday. But it also pointed out recent cost-cutting efforts, underscoring the increasingly competitive landscape of the U.S. mobile market.

Wireless revenues for the quarter were only $22 billion, down 1.5 percent from the prior year, but the company again attributed the dip to the overall consumer market trend away from subsidized devices to installment plans. Verizon maintains revenues will stabilize once half its customers are on installment plans, which is likely to happen this year.

"Service revenue declined 6.2 percent, versus -5.6 percent in 4Q15, though management reiterated expectations for service revenue declines to flatten once penetration on unsubsidized pricing reaches 50 percent (currently 48 percent)," Jefferies analysts wrote.

Interestingly, CFO Fran Shammo stressed the company's recent successes in cutting costs across its businesses, particularly in wireless.

"We remain focused on cost reduction throughout the entire business and are making progress in increasing efficiencies, reducing overhead costs, and streamlining support," Shammo said early in the earnings call. "In the fourth quarter of 2015 we restructured our wireless organization to improve our ability to address the changing needs of our customers fasters and more efficiently…. Overall consolidated headcount since the end of 2015 is down approximately 3 percent as we continue to increase the opportunity of our operations."

Verizon no longer reports ARPU, which muddies the waters for financial analysts. But while the carrier's ARPU is likely on the wane due to increasing competition and discounted offerings from Sprint and T-Mobile, its first-quarter wireless metrics were solid.

"All in all, Verizon's wireless business is still a healthy one, even considering the continued declines in ARPU," MoffettNathanson analysts wrote. "Going forward, the key question for Verizon remains the broader industry one… will 2016 see a lessening in the ARPU pressures that have plagued the industry since 2014? As has been the case for nine months, the readings are indecisive."

Here's a close look at some key quarter metrics from Verizon:

Subscribers: The top U.S. carrier reported 640,000 retail postpaid net additions, easily beating analysts' estimates that ranged from 480,000 to 491,000, and its .96 percent retail postpaid churn was surprisingly low and down from 1.03 percent year over year. And while Verizon was widely expected to report substantial postpaid net phone losses, it lost only 8,000 postpaid phone users during the quarter. So while T-Mobile once again aggressively marketed its offerings during an otherwise slow first quarter, Verizon appeared to come through largely unscathed.

Financials: The transition to EIPs once again took a toll on wireless service revenues, but analysts are largely unconcerned that trend will continue to play out beyond the next several months. Wireless capex declined 9.5 percent year over year to $22 billion, well below analysts' estimates, and wireless service margins of more than 60 percent also beat expectations. (Verizon said it expects those expenditures to ramp up through the rest of 2016, however.) Verizon Wireless generated $10.2 billion in EBITDA, marking a 1.7 percent increase over the prior year.

LTE: Shammo said roughly 92 percent of its total traffic was delivered through its LTE network during the first quarter, and overall LTE data traffic has increased 50 percent year over year. Verizon will continue to densify its nationwide network, he said, and is looking to carrier aggregation and other technologies and strategies to meet consumers' ever-increasing demand for mobile data.

IoT: Revenue streams from the IoT came in at $195 million during the quarter, Verizon said, marking a 25 percent increase year over year.

Media: Shammo said the AOL, which Verizon acquired last year, enjoyed its highest first quarter revenue total in five years. The carrier will distribute Go90, its OTT video offering, across AOL platforms later this year, he said, and vowed to "open the box at some point in time" to provide more transparency regarding the success of its media businesses. Shammo declined to discuss any potential acquisition of Yahoo's online business, however.

5G: Shammo reiterated Verizon's intention to be the first U.S. carrier to deploy 5G, saying the carrier continues to test next-generation technologies in advance of commercial rollouts expected to begin next year. And he said Verizon continues to work with standards bodies in an effort to address fragmentation concerns that surround 5G.

Summary: Verizon continues to maintain its position atop the U.S. mobile market despite the ongoing success of T-Mobile and recent bargain-basement offers from Sprint. It has benefited from the lower industry churn related to extended handset replacement cycles, and will likely continue to do so as users hold on to their phones longer. But real concerns remain about the carrier's spectrum holdings, its media strategy, and the U.S. mobile market in general.

"We continue to be bearish on the U.S. Wireless sector as the challengers underprice the incumbents to take share," analysts at New Street Research wrote. "We are particularly bearish on Verizon given what we view as an asset deficit – they have less spectrum than peers relative to their sub base and they don't have much wireline infrastructure left with which to deploy small cells as a substitute for spectrum."

For more:
- listen to Verizon's earnings call
- see this Reuters report

Related articles:
Verizon notches 1.52M net adds in Q4, vows to be first to deploy 5G
T-Mobile to be the only major U.S. carrier to see postpaid net phone gains in Q1, Wells Fargo predicts
John Legere: T-Mobile 'took 108% of the industry's postpaid phone growth last year'
T-Mobile jabs at Verizon in new ad that highlights its 700 MHz LTE coverage expansion

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