Verizon: Is Tablet Growth Enough?

| About: Verizon Communications (VZ)


Verizon is generating record tablet growth.

Wireless phone growth is limited in the saturated U.S. market.

AT&T and Sprint aren't seeing the same level of tablet growth.

A key takeaway from the recent earnings report of Verizon Communications (NYSE:VZ) is that wireless phone growth is practically over. The company and the industry have cornered the market with the four key domestic wireless providers virtually covering all potential customers. As with any company, this leaves the next leg of growth up to developing a new market.

For Verizon, several avenues exist including the growth of tablets and the expansion of broadband Internet services. One involves taking market share from established cable operators and the other involves expansion into a new, growing segment of wireless access for tablets. Does the latter offer enough revenue potential to push Verizon higher? Other wireless providers, including AT&T (NYSE:T) and Sprint (NYSE:S) continue to struggle as revenue from tablets aren't stopping the declining average revenue per user (ARPU).

Tablet Growth

Probably the best number for the second quarter from Verizon was the surge in tablet connections. For the quarter, the wireless provider added 304,000 postpaid phone net additions and 1.15 million postpaid tablets for a total addition of 1.4 million retail net additions. It continues a trend where tablet growth has hit records and phone additions were minimal.

In total, Verizon has 104.6 million net connections on 35.2 million retail postpaid accounts for an average of 2.8 connections per account. The majority of the growth in connections is coming from adding new connections with account growth up only 0.7%.

In its second quarter, AT&T added more smartphone customers at a cost to ARPU. For the second quarter of 2014, the large wireless provider had 700,000 postpaid wireless net adds, but the company only reported 250,000 branded tablet net adds.

Back in the first quarter of the year, Sprint lost a total of 383,000 wireless customers on its platform. The key second quarter number will be whether the upgraded network is starting to generate net wireless additions.

Peaking Service Revenue

The key to the tablet growth detailed in the previous section is that it doesn't add to meaningful revenue growth in the same manner as adding a new account with phone service. The real combination that matters in the equation for Verizon is the amount of accounts and the wireless postpaid average revenue per postpaid account (ARPA). Both amounts offer concerning trends with Verizon posting virtually flat sequential growth in both areas after seeing boosts in prior quarters.

The ARPA only grew $0.06 sequentially to hit $159.73 while adding the highest amount of tablet connections in history. While wireless service revenue grew 5.9% over the prior year to reach $18.1 billion, the service revenue declined from the previous growth rate of 7.5% in the first quarter of 2014.

AT&T previously highlighted concerning ARPU trends back in early June. For the second quarter, the company further discussed how the trend wasn't improving and had caused earnings per share to decline over the prior-year period to only $0.62.

Sprint was already experiencing weak ARPU trends, with the quarter ended in March showing retail postpaid numbers declining from $63.44 last year to $62.98 this year. Unfortunately, these trends aren't expected to improve in the short term.

Bottom line
At nearly $52, Verizon's stock isn't expensive; it trades at a little over 13 times next year's earnings estimates. Investors need to be careful with the trends toward competitive pricing and the growth focused on tablets that aren't producing a lot of revenue. The signs are clear that tablet growth alone isn't enough if the smartphone business faces pricing pressure.

Disclosure: The author is long T. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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