Verizon posts 86K net postpaid phone adds, slows prepaid losses

Verizon's (NYSE: VZ) second quarter earnings report helps to explain why the carrier is so eager to expand into digital media.

The nation's largest mobile network operator posted a decidedly mixed quarter, falling short of analysts' expectations for both net postpaid additions and net postpaid phone adds. Verizon's margins were better than expected, however, and postpaid churn of .94 percent was down slightly from last year but slightly better than analysts' predictions of .95 percent. And while ARPU was down 9.2 percent year-over-year, the rate of decline has slowed over the last few quarters, MoffettNathanson observed.

"Somewhat mixed quarter from Verizon," Jennifer Fritzsche of Wells Fargo Securities wrote. "The weaker wireline results are not a huge surprise given the many moving parts of the quarter (labor issues, sale of higher-margin properties to Frontier). However, the weaker wireless subscriber (additions) are somewhat surprising. That said, with 47 percent margins and already very large scale (110-plus million subscribers), Verizon may be taking a similar stance to AT&T and not chasing subscribers at any cost."

Here's a closer look at some of Verizon's key quarterly metrics:

Subscribers: Verizon reported 615,000 net postpaid subscriber additions, well short of analysts' estimates in the range of 800,000, and the 86,000 net postpaid phone adds were down significantly from the 321,000 the carrier reported a year ago. Postpaid churn was strong, though, indicating that while Verizon isn't winning huge numbers of postpaid phone users, it's retaining existing customers despite aggressive promotions from its smaller rivals.

Financials: Overall revenue declined 5.3 percent compared to the second quarter of 2015 to $30.53 billion due in part to the seven-week work stoppage in the company's wireline business. Total wireless revenue fell 4 percent year-over-year to $21.7 billion, but Verizon credited growth of its "high-quality customer base" for a 3.8 percent year-over-year increase in wireless EBITDA to $10.3 billion. Wireless service revenue plus device payment plan billings were up 2.3 percent year-over-year.

IoT: Verizon generated roughly $205 million in the burgeoning Internet of Things market during the quarter, marking a 25 percent increase over the same period last year. IoT revenues saw 25 percent year-over-year growth in the prior quarter as well.

Media: Verizon executives spent much of this morning's conference call with analysts discussing Yahoo, AOL and the carrier's aggressive expansion into digital media, which is focused heavily on video and advertising. "Over the past several years we have dramatically expanded the ways we can deliver content wherever and however the customer wants it including large and small bundles for FiOS TV," CEO Lowell McAdam said during the call.

Prepaid: While Verizon may not be "chasing subscribers at any cost," as Fritzsche wrote, the carrier is clearly refocusing on a prepaid market it had all but ignored in recent quarters. It lost 30,000 net prepaid devices during the quarter, down 7.6 percent year-over-year but a significant improvement from the 177,000 users it bled during the first quarter of 2016.

Summary: Verizon clearly faces huge challenges as the largest player in a smartphone market where growth has slowed to a crawl. Like AT&T, Verizon is hoping to offset that slowing growth by building a digital media empire focused on video and advertising. That strategy may eventually pay dividends, but it isn't likely to have a huge financial impact on one of the world's largest telecoms, according to MoffettNathanson analysts.

"Even if every part of Yahoo's business doubles, it would still only add about a dollar to Verizon's warranted share price," MoffettNathanson wrote in a research note. "Don't get us wrong; we think the strategy has merit. But investors should be sober about how difficult it will be to execute… and how little impact it may have on the battleship that is Verizon even if it does."

For more:
- see Verizon's investor relations page

Related articles:
Verizon to buy Yahoo for $4.83B, doubling down on digital media and advertising
Barclays: Staid Q2 could precede active second half of 2016
Verizon emphasizes cost cuts amid fairly solid Q1 earnings, revenues of $22B
Verizon notches 1.52M net adds in Q4, vows to be first to deploy 5G

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