Verizon Q1 Preview: Revenues, Margins Could Improve On Postpaid Adds, EIP Shift

| About: Verizon Communications (VZ)

Summary

Verizon will publish its Q1 2016 results on April 21. We expect the carrier's earnings and revenues to improve marginally on a year-over-year basis.

It's likely that the recent postpaid subscriber adds will drive some YoY revenue growth for Verizon's wireless operations during Q1. Verizon has also seen its postpaid churn trend lower over the last year, driven by a higher number of connections per account as well as the carrier's strong LTE network and its high-quality customer base.

It could also benefit from the attrition of its lower-value feature phone subscribers and an increase in its smartphone user base. The carrier lost a net of 264k feature phone subscribers in Q4, while its smartphone base grew by 713k subscribers in Q4.

We have a price estimate of $52 for the stock, which is roughly in line with the current market price.

Verizon (NYSE:VZ), the largest U.S. wireless carrier, will publish its Q1 2016 results on April 21. We expect the carrier's earnings and revenues to improve marginally on a year-over-year basis, driven by its recent postpaid customer additions, the shift to equipment installment plans as well as a growing mix of smartphones in the carrier's subscriber base. Below is a quick overview of what to expect when Verizon reports earnings on Thursday.

We have a price estimate of $52 for VZ stock, which is roughly in line with the current market price.

  • Verizon added about 4.1 million retail postpaid subscribers during 2015, taking its total postpaid subscriber base to about 106.5 million as of December 2015. It's likely that the recent adds will drive some year-over-year revenue growth for the carrier's wireless operations during Q1.
  • It could also benefit from the attrition of its lower-value feature phone subscribers and an increase in its smartphone user base. The carrier lost a net of 264k feature phone subscribers in Q4, while its smartphone base grew by 713k subscribers in Q4. Its total smartphone postpaid phone base stood at about 83.7% in Q4 2015.
  • Verizon has also seen its postpaid churn trend lower over the last year (0.96% in Q4, down 18 bps year over year), driven by a higher number of connections per account (2.98 connections per account in Q4 2015, versus 2.77 in Q1 2014) as well as the carrier's strong LTE network and its high-quality customer base. The lower churn figures could aid wireless EBITDA margins, since they could help keep customer acquisition costs in check.
  • The quarterly results could also benefit from the increasing shift to equipment installment plans (a 67% take-rate in Q4 2015). A greater portion of equipment revenues are recognized upfront under these plans, while handset subsidies are also lower. While the impact is only likely to be transitory, it could help to boost wireless EBITDA margins for the quarter. Wireless margins stood at 38.4% in Q4 2015, up 5.8% year over year.

Disclosure: No positions.