Verizon: Wireless service revenue won't return to growth until 2018

Verizon CFO Matt Ellis. Image: Verizon

Shares of Verizon slid this morning after the company posted fewer subscriber adds than expected in the fourth quarter and saw its wireless service shrink 4.9% year over year. And the carrier warned that wireless revenue won’t return to growth this year.

The nation’s No. 1 mobile network operator added 591,000 postpaid net customers during the quarter, shy of the 715,000 predicted by Wells Fargo Securities, and postpaid churn of 1.1% was worse than the 1.07% Wells Fargo expected. While wireless service revenue of $16.3 billion was in line with expectations, Verizon unexpectedly said year-over-year growth in wireless revenue probably won’t happen in 2017.

“You talk about the wireless margins; this always comes back to where the service revenue trajectory is going to be,” Verizon CFO Matt Ellis said during an earnings call this morning. “We certainly see improvements in service revenue year over year, but we do go into the year at that 4.9% jump-off point from the fourth quarter. We expect to see that continue to improve as we head into 2017, but as I said we now see the point at which we get back to [a] year-over-year positive number pushing out into 2018.”

RELATED: Verizon loses 36K net postpaid phone subs in disappointing Q3

Shares of the company fell more than 4% this morning following its quarterly report.

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

Subscribers: Verizon posted 167,000 net phone adds, beating Wells Fargo’s projection of 57,000, but 196,000 of its total postpaid net additions were lower-value tablets, and another 228,000 postpaid adds fell into the category of “other.” Meanwhile, postpaid churn was short of consensus estimates by five basis points for the second consecutive quarter, according to MoffettNathanson Research. Postpaid ARPU was down 7.6% year over year, leading to the shortfall in revenue.

Financials: Adjusted earnings per share came in at 86 cents on revenue of $32.3 billion, and full-year revenues of $126 billion marked a 4.3% slide. Postpaid ARP was $141.89 compared to Wells Fargo’s projection of $142.40, and overall capex of $5.7 billion—$3.5 billion in wireless and $1.6 billion in wireline—was in line.

Media: Verizon’s media business, led by AOL, generated $532 million in revenue minus traffic acquisition costs, marking a 5% year-over-year decline. The carrier blamed that dip on a revenue lift in the fourth quarter of 2015 related to an AOL deal with Microsoft and said media revenues were up 10% sequentially.

The IoT: Verizon’s growing telematics business paved the way for IoT revenues of $243 million during the quarter, up 21% year over year. IoT revenues including acquisitions increased more than 60% during the quarter, Verizon said, adding that it expects growth to remain strong.

Summary: The U.S. wireless market has become extremely competitive as growth has slowed, and both T-Mobile and Sprint continue to close the gap on their larger rivals. Verizon remains focused on its network, and the carrier maintains that it doesn’t need to embrace the unlimited data plans that its competitors have come to embrace to varying degrees. Verizon may need to make a large-scale acquisition or merger to return to growth.

“As telecom stocks rose in the post-election rally on hopes for industry consolidation, fundamentals in the sector steadily deteriorated. In Verizon’s fourth-quarter results, the signs of that deterioration are everywhere,” MoffettNathanson wrote in a research note. “In a post-election world where strategy has seemingly become synonymous with deal-making, many might argue that the answer for ‘fixing’ Verizon can only be M&A. And at Verizon’s size, that means M&A on a grand scale (to be clear, AOL and Yahoo are not remotely ‘grand scale.’)”

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