Verizon resilient in Q4 with 2M new postpaid subs

Verizon Wireless (NYSE: VZ) delivered strong subscriber growth in the fourth quarter, beating financial analysts' expectations, but the carrier also saw higher than usual churn and its margins dipped amid increasing promotions. Taken together, the results show that while Verizon continues to show resilience it is not immune to rising competition from Sprint (NYSE: S), T-Mobile US (NYSE:TMUS) and AT&T Mobility (NYSE: T).

Verizon added 2.1 million net retail connections in the fourth quarter, including close to 2 million net retail postpaid connections. Analysts at Credit Suisse had expected Verizon to notch 1.9 million postpaid subscribers in the quarter and analysts at Wells Fargo had expected 1.7 million.

Despite postpaid net additions of 672,000 postpaid phones during the quarter, Verizon again relied on tablets for the bulk of the company's additions. The carrier added 1.4 million new LTE tablets during the quarter.

During the company's earnings conference call, Verizon Communications CFO Fran Shammo said that the company has faced highly competitive environments before. He said that Verizon will continue to protect its subscriber base by focusing on net adds and upgrades but only those that make financial sense for the company. However, in perhaps a shot at Sprint and T-Mobile--and maybe even AT&T--Shammo said that the industry is "governed by a fresh cash flow dynamic" and that carriers need to generate cash to invest in their networks and maintain high network quality to remain viable competitors long term.

Shammo noted that Verizon still has 13 million 3G smartphones and 18.5 million feature phones in its subscriber base, which present ample opportunities for the company to upgrade those customers to LTE smartphones. Doing so would move the customers onto a more efficient network and let Verizon refarm spectrum currently being used for 3G CDMA service.

Although Verizon's churn jumped in the fourth quarter, Shammo made clear that there will be limits to how far Verizon will be willing to go to hold onto low-value customers who are leaving the company for lower prices. "There will be certain customers who leave us for price," he said, and Verizon won't compete for those when it doesn't make financial sense to do so.

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

Subscribers: In total Verizon added 2.067 million retail customers in the fourth quarter, including 1.986 million postpaid additions and 81,000 prepaid additions. Verizon added 672,000 net postpaid phone customers, and that figure includes a gain of 1.5 million LTE smartphones but also a loss of 828,000 feature phone and 3G smartphone customers. Verizon ended the fourth quarter with 108.2 million total retail connections and 102.1 million total retail postpaid connections.

"In our view the fear that VZ is losing significant share to competitors is overly draconian," Wells Fargo analyst Jennifer Fritzsche wrote in a research note. "The fact VZ added almost 700K phone adds still very much shows the strength of Big Red."

Financials: Verizon said total wireless revenues were $23.4 billion in fourth quarter, up 11 percent year-over-year. The carrier said service revenues in the quarter clocked in at $18.2 billion, up 2.8 percent from the year-ago period. Retail service revenues grew 2.6 percent to $17.4 billion.

ARPA: Verizon no longer reports average revenue per user (ARPU) but instead now reports 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. Retail postpaid ARPA inched up 1 percent year-over-year to $158.82 per month, and 3.9 percent over the full year. When in adding installment billings from Verizon's Edge equipment installment plan, the growth rates increased to 3.5 percent for the quarter and 5.3 percent for the full year.

Verizon had 35.6 million retail postpaid accounts at the end of the fourth quarter, up 1.5 percent year-over year, and 2.87 connections per account, up 4 percent from a year ago.

Margins: In the fourth quarter Verizon took a big hit in its wireless margins. Verizon's wireless operating income margin was 23.5 percent, and segment EBITDA margin on service revenues was 42.0 percent. Those were down from 29.5 percent and 47.0 percent, respectively, in the year-ago period.

Some analysts said that Verizon may have maintained subscriber growth but that came at a high cost in the quarter. "Verizon held their own on postpaid adds in the most competitive quarter that the industry has seen in many years; however, it cost them dearly," New Street Research analyst Jonathan Chaplin wrote in a research note. "ARPU, service revenue and EBITDA all missed and EBITDA missed by a wide margin. The EBITDA miss comes on the back of estimates being lowered immediately prior to the quarter following mgmt. comments at the beginning of the year. All told, wireless EBITDA missed by $700MM (8%) from where consensus was at the beginning of the quarter."

Smartphones: During the fourth quarter, Verizon said retail postpaid device activations jumped nearly 34 percent year-over-year. The company said around three-quarters of its phone activations in the quarter were customer upgrades, and that around 9.8 percent of the retail postpaid base upgraded devices, and 93 percent of those upgrades were to LTE smartphones. Shammo highlighted new Apple (NASDAQ: AAPL) iPhones and Samsung Electronics phones as particularly popular devices in the quarter. Verizon said its smartphone penetration grew to 79 percent in the quarter, up from 70 percent a year ago.

In the fourth quarter, Verizon said around 25 percent of all of its phone activations were completed through its Edge program, up from 12 percent in the third quarter. Despite the growth, the percentage of Verizon customers choosing its equipment installment program still trails the adoption rate at other carriers, T-Mobile and AT&T in particular. Shammo said that at the end of the fourth quarter around 7 million phones were on Edge, or 8 percent of Verizon's phone base.

LTE: Verizon added 8 million total LTE device connections in the fourth quarter. Shammo said that LTE devices now comprise 66 percent of Verizon's retail postpaid connections. Verizon ended 2014 with 67.7 million smartphones in total and 80 percent were LTE. The company said around 84 percent of total wireless data traffic currently rides on its LTE network, up from 79 percent at the end of the third quarter and 69 percent at the end of 2013. Shammo noted that Verizon has now deployed AWS-1 spectrum to augment capacity in more than 400 markets and that the company is continuing to densify its network via small cells and Distributed Antenna Systems.

Churn: Verizon indicated in December that its churn would jump in the fourth quarter--and it did. Verizon's retail postpaid churn was 1.14 percent in the fourth quarter, up from 1 percent in the third quarter and 0.96 percent in the year-ago period. Total retail churn was 1.39 percent in the fourth quarter, up from 1.29 percent in the third quarter and 1.27 percent a year ago.

Shammo added that more than three out of four smartphone upgrades came from "strategic-quality" subscribers, meaning customers with higher credit scores upgrading to higher margin More Everything plans or subscribers upgrading from a feature phone to a smartphone.

For more:
- see this release
- see this CNET article

Special Report: Wireless in the fourth quarter of 2014

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