Verizon falls to AT&T in Q1 with just 539K retail postpaid net adds

Verizon Wireless (NYSE: VZ) reported weaker subscriber growth for the first quarter on a year-over-year basis and its postpaid customer additions in the period were driven by the addition of tablet customers.

Click here for key slides from Verizon's first quarter earnings report.

Still, the carrier saw strong revenue and margin growth in the period.

New Street Research analyst Jonathan Chaplin said in a research note that Verizon is starting to feel the effects of competition. In February, AT&T Mobility (NYSE: T) cut its Mobile Share shared data plan prices, allowing it to offer unlimited voice, texting and 10 GB of data for $160 per month for four lines of service. In response, Verizon earlier this month moved to match that pricing.

"Excluding tablets, Verizon lost 95k handsets; in contrast, AT&T added more handsets in 1Q14 than all of 2013 combined," Chaplain noted in a research note. He said AT&T's aggressive response to T-Mobile US (NYSE:TMUS) "has impacted VZ's sub trends. This puts Verizon in a tough spot: with the price gap that has opened up between AT&T and Verizon and with AT&T's improved network performance relative to Verizon, Verizon is faced with either losing share or cutting price, at least until AWS deployment drives improved network performance for a large portion of the sub base."

Earlier this week, AT&T surprised the market by reporting 625,000 postpaid subscriber net additions in the first quarter, more than analysts had expected and the carrier's best first-quarter postpaid performance in five years.

On Verizon's earnings conference call, Verizon Communications CFO Shammo said the company had started to lose feature phone customers early in the first quarter, which is why Verizon cut the prices of its entry-level shared data plans to entice customers to upgrade to LTE smartphones. He said the company started to see some relief as March progressed.

Verizon said that nearly three-quarters of its wireless data traffic now rides on its LTE network, making its decision to deploy LTE technology on its AWS spectrum that much more necessary.

Here's a breakdown of Verizon's key quarterly metrics:

Subscribers: The carrier said it added 549,000 retail net connections, including 539,000 retail postpaid net subscribers and 10,000 prepaid customers, in the first quarter. These additions exclude acquisitions and adjustments, Verizon said.

Although Verizon's net adds were higher than some analysts had been expected, the figures were lower than the 720,000 net retail customers Verizon added in the  year-ago quarter. Verizon's lucrative postpaid additions were down 20.4 percent from the 677,000 retail postpaid net connections Verizon added in the first quarter of 2013.

In the first quarter of 2014, Verizon notched retail postpaid tablet net adds of 634,000, and said its tablet subscriber base is now at 4.3 million. Chaplin noted that because Verizon recorded a record 634,000 tablet postpaid net adds, Verizon actually lost 95,000 postpaid handset customers in the quarter, mainly from 3G smartphones and feature phones, compared to 336,000 handset additions in the year-ago period.

At the end of the first quarter, Verizon counted 103.3 million retail connections, including 97.3 million retail postpaid connections.

Financials: Verizon said total wireless revenues were $20.9 billion in first quarter, up 6.9 percent from the first quarter of 2013. Verizon's service revenues in the quarter came in at $18 billion, up 7.5 percent year-over-year. The carrier's retail service revenues grew 6.7 percent from the year-ago period to $17.2 billion.

ARPA: Verizon no longer reports average revenue per user (ARPU) but instead now is reporting average revenue per account (ARPA). The company made the change to account for its More Everything shared data plans, which let customers add multiple devices to one account. Verizon's retail postpaid ARPA was $159.67 in the quarter, up 6.3 percent year-over-year. Verizon said 50 percent of its postpaid accounts are on More Everything plans. Verizon had 35.1 million retail postpaid accounts at the end of the first quarter, and 2.77 connections per account, which was up 3.7 percent year-over-year. Verizon's postpaid account and connections per account figures were essentially unchanged from the fourth quarter of 2013.

Margins: Verizon said its wireless operating income margin was 35 percent, compared to 32.9 percent in the year-ago quarter. The company said its segment EBITDA margin on service revenues was 52.1 percent, up from 50.4 percent in the year-ago period.

Smartphones: Verizon said 85 percent of device activations in the first quarter were phones. The company activated 7.6 million smartphones in the first quarter, up from 7.2 million in the year-ago period and down from 8.8 million smartphones in the fourth quarter. At the end of the first quarter, smartphones accounted for more than 72 percent of Verizon's  retail postpaid customer phone base, up from 70 percent at the end of 2013.

In January, Verizon said customers who want to take advantage of its "Edge" handset upgrade program could do so after 30 days. Previously, they had to wait six months to upgrade. Under Edge, customers are still responsible for paying off half the retail cost of their phone before they can upgrade. Additionally, Edge customers must use Verizon's shared data plans.

Verizon said Edge had a "minimal impact" on its first-quarter 2014 ARPA and EBITDA margins. However, the company said "continued Edge adoption will likely have a greater impact on service revenue growth in subsequent quarters, as service revenues shift to equipment revenues."

Shammo said the adoption on Edge was less than 15 percent in the first quarter but he expects that to "potentially double" in the second quarter as Verizon expands Edge to its dealers and indirect retail channel partners. However, he said less than 2 percent of Verizon's postpaid subscriber base is currently on Edge.

LTE: Verizon said it activated 8.1 million LTE devices in the first quarter, bringing the total number of LTE devices on its network 47.9 million. The company said LTE devices now account for 49.3 percent of its total retail postpaid connections, up from 28.2 percent in the year-ago quarter. Importantly, the company said about 73 percent of its total data traffic is currently on its LTE network. Verizon's LTE network now covers around 305 million POPs.

Late last year Verizon said it was experiencing network congestion in certain markets, notably Chicago, New York City and San Francisco, which is why it deployed AWS spectrum to add capacity. "We are through the congestion," Shammo said. "The network performance is delivering what we expect it to." He said that Verizon is focused on densifying its network and will continue to deploy AWS spectrum this year, first in major markets and then in smaller cities and rural areas.

Churn: Verizon's retail postpaid churn was 1.07 percent in the first quarter, up slightly year-over-year. Retail churn was 1.37 percent, also up slightly from the year-ago quarter.

For more:
- see this release
- see Verizon presentation (PDF)

Special Report: Wireless in the first quarter of 2014

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