Verizon (NYSE:VZ) has been working to adjust its business operations with several airwave swaps and sales as well as a large WebTV acquisition from Intel (NASDAQ:INTC). Some aspects of recent financial data reported by Verizon admittedly raise an eyebrow. Nevertheless, given the company's overall successful operations, any current apprehension should be taken as a sign of a buying opportunity.
700 MHz A Block Sale
Verizon is interested in selling an 'A-block' frequency set. This is a 700 MHz frequency block licensed by Verizon to be exchanged for cash from T-Mobile US (NYSE:TMUS). Verizon expects to get roughly $3B from the sale, logging gross profit of $0.6B considering Verizon's $2.4B acquisition of the A-block airwaves in 2008. The sale should add a nice layer of cash for other operations, investor rewards and possibly debt reduction.
Verizon agreed to exchange some licensed airwave territory with T-Mobile. The swap is done to place each company's airwaves closer together on the spectrum. Licensed frequencies scattered all over the spectrum are a nuisance for network management, much like scattered tools and supplies at a factory shop. Network construction for both companies will be facilitated by this deal. Both network providers are struggling with unrelenting increases in mobile traffic. This spectrum-swap proposal will involve 285 counties in the U.S. Verizon is focused mainly on 4G-heavy urban areas at apparent expense of rural coverage where bandwidth is more important than range. T-Mobile U.S. seeks to capitalize on the rural market and evidently believes that $3B is worth the price for what it will gain from operating the anticipated airwave territory.
WebTV Deal with Intel
Verizon is also expanding purchases by negotiating with Intel to purchase Intel's TV unit for approximately $500M. Verizon will try to develop a WebTV business unit that Intel initially tried to develop and monetize on its own. Rather than accept sunk costs, Intel successfully marketed the WebTV service to Verizon. Given that Verizon has greater familiarity with this kind of business, the purchase is likely to pay off for VZ investors.
Financial Statement Overview
In the past several years, ending with FY 2013, net and gross margin have had an interesting relationship. Observe the two margin percentages: gross, net
|Year||Gross Margin%||Net Margin %|
What stands out the most is Verizon's net margin drop in FY 2010-2012. Gross margins remained steady at approximately 60 percent. The cost increase that trimmed margins when the economy was recovering is not encouraging. Of course, the recent boost in net margins in 2012 and TTM of 2013 is a very good sign that injects some optimism into company prospects.
A history of net income available to common shares throws some volatility into the equation. Since the 2001-2002 recession, net income rose from a low of $389M in 2001 to $7.83B in 2004, with net income undergoing a gentle decline, though still at respectable values, finishing at $6.43B in FY 2008. Then the 2008-2009 recession hit, and with it, much of Verizon's income disappeared. Note that since the general economy sluggishly pulled out of recession starting in approximately middle of 2009, an industry leader like Verizon would be expected to regain net income. Instead, VZ net income dropped from $3.65B in 2009 to $875M in 2012.
Verizon's swap with T-Mobile US will likely alleviate the company's demand crunch in urban areas with heavy mobile traffic, thereby improving its reputation and, in the long run, enhancing profit margins. Its deal with Intel also seems like an investment in line with Verizon's expertise. The impending sale of the A Block frequency band will not significantly alienate customers and will give Verizon substantial cash cushioning to maintain market leadership.
Taking a broad view, Verizon has been in the business for a long time. Financial quirks and challenges happen to even the best businesses. Verizon's winning customer satisfaction, as documented by JD Power and Associates '2013 U.S. Residential Internet Service Provider Satisfaction Study,' show that Verizon management is behaving as a customer-attentive and confident industry leader. Based on fundamentals and strong operations, it's hard to deny VZ a 'Buy' recommendation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.