Verizon's Q2 subscriber growth driven largely by 1.15M postpaid tablet additions

Verizon Wireless (NYSE: VZ) surged back to subscriber growth in the second quarter, though the vast majority of its roughly 1.4 million new subscribers in the period purchased tablets, not phones.

Click here for key slides from Verizon's second quarter earnings presentation.

Of the 1.42 million retail net customers Verizon added during second quarter of 2014, just 304,000 were postpaid phone net additions. The remaining 1.15 million were postpaid tablet subscribers. Verizon lost around 14,000 retail prepaid customers. The quarter marked the carrier's third straight quarter of company-record net additions for tablets.

And it appears Verizon hopes to further goose tablet sales: Starting in April Verizon began offering 1 GB of extra data per month to customers who activated a tablet on the carrier's More Everything shared data plans. The carrier also recently expanded its Edge device financing program to cover tablet purchases.

During the company's second-quarter earnings conference call, Verizon Communications CFO Fran Shammo said that tablets provide "a very good incremental value" through increased data consumption and lower churn, noting that LTE tablets drive more data usage than 3G CDMA smartphones. "We see tablets as a highly profitable growth opportunity," he said, adding that Verizon only has 5.4 million tablet subscribers in its postpaid base and that there is plenty of room for growth.

Interestingly, Shammo also touched on Verizon's LTE Broadcast solution, which the carrier has dubbed LTE Multicast. The technology was demonstrated earlier this year during the Super Bowl but Verizon has said little about it since. Shammo said the company's LTE network will be ready to launch Multicast at the end of the third quarter but that Verizon will not launch it commercially until 2015 as the company seeds its customer base with devices that can take advantage of the technology. LTE Broadcast enables content delivery to multiple users simultaneously through a more efficient connection than standard unicast streaming technology. Vendors and operators are eyeing a host of potential use cases, led primarily by live event streaming and real-time TV streaming, especially for major events. Shammo indicated that is what Verizon is envisioning for the service, at least initially.

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

Subscribers: In the second quarter of 2014 Verizon added 1.42 million total retail net connections, all of which were postpaid; the additions exclude acquisitions and adjustments. In the year-ago quarter, Verizon added 941,000 retail postpaid net connections and 97,000 prepaid retail connections, for a total of 1.038 million total retail additions.

Verizon notched 2.3 million LTE retail postpaid net adds in the second quarter, including 1 million smartphones and 1.2 million tablets. That means Verizon lost around 696,000 feature phone and 3G smartphone customers in the second quarter given the company's total 304,000 postpaid phone net additions in the period. Shammo said "the lower-end phone category continues to be the category that we lose" but that Verizon "made substantial improvements from the first quarter" in that regard, when it actually lost 95,000 postpaid handset customers in the quarter.

At the end of the second quarter, the company had 104.6 million retail connections. This includes 98.6 million retail postpaid connections, a 4.6 percent increase year over year.

Verizon's second-quarter results are a strong sequential improvement from the first part of 2014. In the first quarter Verizon reported weaker subscriber growth on a year-over-year basis due to competition from AT&T and T-Mobile. Verizon added 549,000 retail net connections in the first quarter, including 539,000 retail postpaid net subscribers and 10,000 prepaid customers. The figures were lower than the 720,000 net retail customers Verizon added in the first quarter of 2013.

Financials: Verizon said total revenues clocked in at $21.5 billion in the second quarter, up 7.5 percent year-over-year. The carrier's wireless service revenues in the quarter totaled $18.1 billion, up 5.9 percent from the year-ago period. Retail service revenues were up 5.3 percent year-over-year to $17.3 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. Verizon's retail postpaid ARPA was $159.73 per month, up 4.7 percent year-over-year.

Overall, Verizon said 55 percent of its postpaid accounts are on More Everything pans. The carrier counts an average of 2.80 connections per account on 35.2 million retail postpaid accounts.

Margins: Verizon said its wireless operating income margin was 32.5 percent, compared with 32.4 percent in the year-ago period. Verizon also said its wireless segment EBITDA margin on service revenues was 50.3 percent, up from 49.8 percent in the year-ago quarter.

Smartphones: Verizon activated 8.3 million smartphones in the second quarter, up from 7.5 million in the year-ago period and 7.6 million in the first quarter of 2014. At the end of the second quarter, smartphones accounted for nearly 75 percent of Verizon's retail postpaid customer phone base, up from 72 percent in first quarter and 64 percent in the year-ago period. Verizon said 7.1 percent of its retail postpaid base upgraded in the second quarter and 90 percent of those were smartphones.

Verizon said its retail postpaid ARPA growth rate was impacted in the second quarter because it was the first full quarter of service pricing discounts as a result of Verizon's Edge handset upgrade program. Under Edge consumers do not get a subsidized phone, but pay off the cost of their device in monthly installments and can upgrade to a new phone once they have paid off 60 percent of the phone's cost. The percentage of customers using Edge increased to 18 percent in the second quarter, from 13 percent in the first quarter. Shammo said that Verizon had expected Edge adoption to be 30 percent in the second quarter because Verizon expanded Edge to its indirect sales channels, but he said that promotions around Mother's Day and Father's Day pushed customers to choose traditionally subsidized devices.

LTE: About 76 percent of Verizon's total data traffic currently runs on Verizon's LTE network, up from 73 percent at the end of the first quarter. Verizon's 700 MHz LTE network covers around 306 million POPs. The carrier has also been busy deploying its LTE service on its AWS spectrum to bolster its network capacity, in some markets with an additional 20 MHz of spectrum. The carrier has dubbed the combination of LTE on 700 MHz and AWS spectrum as "XLTE."

Verizon said more than 350 markets now have XLTE service (up from around 300 at the end of June). Verizon's 700 MHz LTE network is available in more than 500 markets in the U.S.

Churn: The carrier's retail postpaid churn was 0.94 percent in the second quarter, down from 1.07 percent in the first quarter and up from 0.93 percent in the year-ago period. Retail churn was 1.25 percent in the second quarter, down from 1.37 percent in the first quarter and up from 1.23 percent in the year-ago period. 

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

Special Report: Wireless in the second quarter of 2014

Related Articles:
Report: Verizon has the most customers paying more than $100 on average
Verizon to report more than 1.4M postpaid net additions in Q2
AT&T expects 800,000 postpaid subscriber adds in Q2, 3.2M Next additions
Verizon falls to AT&T in Q1 with just 539K retail postpaid net adds
Verizon resolves massive billing system outage, rolls out XLTE to 300-plus markets

Click here for Verizon's full PDF earnings presentation.

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