Verizon's service revenue to improve but churn in danger of rising

A poll conducted among a HITEC audience showed that 70 percent of those in attendance were in favor of texting guests, while 25 percent were undecided and 5 were against it.
Competition is likely to heat up with the expected launch of a redesigned iPhone.

Verizon expects its service revenue to begin to rebound through the rest of the year as fewer customers remain on subsidized-handset plans. But like its rivals, Verizon may struggle to keep churn low as competition begins to heat up in the third and fourth quarters.

The nation’s largest carrier posted an unexpectedly solid second quarter earlier this week, adding 614,000 total postpaid net additions to soundly beat Wells Fargo Securities’ prediction of 112,000. And its 358,000 net postpaid phone adds outperformed Wells Fargo’s estimate of 75,000.

Investors cheered the second-quarter results, sending shares of Verizon up roughly 8% on the news.

But wireless service revenue—which has become a concern for Verizon in recent quarters—was down 6.7% year over year. Verizon’s first quarter saw a 4.9% contraction in wireless service revenue during the fourth quarter of 2016, and it warned in January that service revenue wouldn’t return to growth this year.

Indeed, Verizon’s second-quarter ARPA (average revenue per account) and its service revenue fell short of estimates from Matthew Niknam of Deutsche Bank Market Research.

“Given the shift to newer unlimited plans (and ongoing migration to no-subsidy pricing), top-line growth within Verizon’s wireless base remains challenged,” Niknam wrote in a note to investors. “Second-quarter ARPA and service revenues both saw the year-over-year rate of decline worsen, and came in below our expectations.”

Verizon CFO Matt Ellis said during this week’s earnings call that several factors will help Verizon reverse that course, though.

“During the second quarter, we experienced an improvement in the rate of decline in line-access revenue, as we now have roughly 75% of the postpaid phone base on unsubsidized plans,” Ellis said. “We expect this trend will continue which, combined with adding new accounts and migrating customers to higher access points, will mitigate the lost overage revenue. Therefore, we believe the service revenue trend has flattened, and we expect that there will be an improving trend in the second half, and we should exit the fourth quarter inside a decline of 4%.”

Verizon’s second-quarter postpaid churn came in at 94%, consistent year over year despite increased churn in tablets and beating analysts’ estimates. That figure underscored a relatively uneventful quarter during which most carriers enjoyed significantly lower churn.

But the market will surely heat up in the coming months as Apple is likely to release a redesigned iPhone just ahead of the holiday shopping season. And with the nation’s largest wireless customer base, Verizon could be especially vulnerable to aggressive promotions, particularly from Sprint and T-Mobile.

Verizon’s “recover in subs is also partly due to record-low churn across the industry in general, which we suspect will reverse later in the year with the new iPhone launch,” Jonathan Chaplin of New Street Research wrote. “T-Mobile in particular did not spend much to acquire subs this quarter (sensible given low turnover); we expect a more aggressive push from all carriers later this year.”