Verizon Wireless (NYSE: VZ) is going to continue to play a conservative game in terms of its pricing strategy and will not overreact to price cuts by rivals, according to a report from financial analysts who met with the carrier's top executives.
In a research note, Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata detailed their key takeaways from an investor event hosted on Tuesday by Verizon's "senior leadership." The research note indicates that Verizon's top management is confident in its wireless strategy and is also planning for a future when more video will be delivered via over-the-top services.
The confident stance comes as T-Mobile US (NYSE:TMUS) continues to add millions of subscribers with its lower prices and aggressive marketing, and as Sprint (NYSE: S) pushes its value message with shared data plans offering more data than the competition and individual unlimited data plans cheaper than those offered by rivals.
According to the note, Verizon's management "does not believe the wireless industry feels much different than in the past, contrary to the broad view that competition is intensifying to detrimental levels." Verizon Communications CEO Lowell McAdam and Fran Shammo have made similar comments in public at recent investor conferences.
"Management again highlighted that it does not intend to broadly price down its subscriber base, but instead offer discounts to at-risk customers while making surgical plan changes," the Jefferies analysts wrote. "Furthermore, despite an apparent shift from prepaid into postpaid, Verizon has not altered its credit standards, and maintains its same level of qualifying metrics for potential migrations. In management's opinion, Verizon's unit growth and segment margins are reflective of its competitive positioning and disciplined approach."
In the third quarter Verizon said its wireless operating income margin was 31.9 percent in the quarter, down from 33.8 percent in the year-ago quarter. The company said its segment EBITDA margin on service revenues was 49.5 percent, down from 51.1 percent in the year-ago period. Despite those year-over-year declines, Verizon's margins are still significantly higher than the margins at AT&T, T-Mobile and Sprint.
Verizon recently launched new promotions designed to lure customers. For example, new and existing Verizon customers who choose its $80 per month More Everything shared data plan can get 10 GB of data, up from 6 GB before, and those who choose the $100 plan can get 15 GB of data, up from 10 GB before. Additionally, customers who switch and buy a new LTE smartphone with either a two-year contract or under Verizon's Edge handset installment program will get a $150 port-in credit.
The Jefferies analysts said that Verizon's management indicated the promotions "were timed purposely ahead of Black Friday industry promotions. In our view, this implies that the benefits from new additions outweigh the number of subscribers that could potentially price down. Additionally, management expects a higher EIP uptake in 4Q given the promotions, existing iPhone backlog, and anticipated elevated upgrade volumes."
The Jefferies analysts also indicated that Verizon's network teams are focused on deploying AWS spectrum to maintain LTE network performance during the busiest times of usage. "Management focuses on the busy-hour customer experience, not winning any speed race," they wrote. "Network quality will be critical as management believes its OTT offering will have a mobile-first orientation."
Shammo said at an investor conference in September that the company's OTT video plans are still "in very, very early stages," and that the company needs to get content deals together in order to deliver OTT content, which Verizon is working on.
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