Verizon (VZ) is a company that always needs a strong growth catalyst in place to push its stock higher. The company's net income and earnings per share have decreased in each of the last three years. Net income dropped from $12.58 billion in 2008 to $2.4 billion in 2011. In the first quarter of 2012 Verizon's earnings finally moved higher. The company reported earnings per share of $0.59, which was a 15% increase from earnings per share of $0.51, in the first quarter of 2011. First quarter revenues were $28.2 billion and first quarter net income was $1.6 billion. With the introduction of the new "Share Everything" plan, investors are wondering if the stock will continue its 2012 bullish trend. I will discuss this below.
What does "Share Everything" plan mean for investors?
Even though Verizon had a strong first quarter, it is still in need of a long-term strategy to grow revenues. It appears that Verizon's much needed growth catalyst could be provided by its new "Share Everything" pricing plans. The Share Everything pricing plans will eliminate nearly all of Verizon's exiting plans, and replace them "with pricing schemes that encourage customers to connect their non-phone devices, like tablets and PCs, to the Verizon network." The new plans will allow families to share a monthly data allowance for up to ten devices. The Share Everything plans will "become available on June 28th. The plans will provide unlimited "phone calls and texts and will start at $90 per month for one smartphone and one gigabyte of data." The success of the Share Everything pricing plans are crucial, because in the first quarter mobile communication companies saw a reduction in the number of phones on contract-based plans, which are the most lucrative.
To keep service revenues rising, companies are betting on increased data usage, and that means getting more data-hungry devices on their networks. The Share Everything pricing plan will nudge "subscribers toward spending more by including unlimited calling and texting by default." Verizon will be the first company to initiate this type of plan, which will probably be copied throughout the industry. AT&T (T) has already made it known that it is considering introducing shared-data plans as well. Smaller companies such as Sprint-Nextel (S) and T-Mobile will probably be unable to compete with this type of pricing plan.
Positives for Verizon moving forward
Verizon's new "Share Everything" pricing plan will enable the company to increase prices, and grow revenues. With the new pricing plan Verizon should also be able to take market share from smaller companies, which will not be able to offers plans that cover multiple devices. In addition, Verizon will be able to initiate these pricing plans with their existing infrastructure, and the end result will be higher revenues, along with higher margins and larger profits.
At the end of 2011, Verizon's Wireless was the nation's biggest wireless communication provider, the division had 108.7 million subscribers, and just edged out its chief competitor AT&T which had 100.7 million subscribers.
"Verizon Wireless' efforts to promote 4G devices have led Motorola's Droid RAZR MAXX to surpass the iPhone as its top-selling model." "Verizon says it will no longer roll out smartphones and tablets on its network that don't support 4G LTE connectivity. The decision represents an attempt by Verizon to exploit its lead relative to T in deploying LTE services, and could be a modest positive for QCOM, given the higher chip content of 4G devices. It also might be another hint the iPhone 5 will support LTE."
Verizon had a strong first quarter of smartphone sales. In the first quarter, "the company sold 3.2 million Apple iPhones and 2.1 million 4G LTE smartphones." Verizon has higher margins on its 4G LTE smartphones, and during the quarter, it sold 500,000 or 30% more 4G LTE smartphones than it did in the fourth quarter. About 20% of smartphones sells were new to Verizon while 80% of the sales were upgrades to the company's existing customer base.
Despite the fact, that Verizon's revenues were slightly lower than the prior quarter, its first quarter net income increased from $-2.02 billion, in the fourth quarter to $1.68 billion, in the first quarter.
Verizon had first quarter free cash flow of $2.4 billion which was more than 3.5 times the amount that it generated in the first quarter of 2011.
Negatives for Verizon moving forward
Verizon's revenue growth has been slow, and first quarter revenues were lower than fourth quarter revenues.
Verizon initiated its Share Everything pricing plans on June 28th. Verizon is hoping the new pricing plan will drive up revenues. However, the Share Everything pricing strategy could be risky, because subscriber will find that the plans are not cheap. For instance, a plan that includes a smartphone and a tablet computer will cost at least $100 per month. While the Share Everything pricing plans will benefit subscribers with multiple mobile communication devices, the higher price tag is likely to push other subscribers away.
Investors have been bullish on Verizon over the past 12 months. During this period, the stock price has risen 29.6%. I think that investors are eager to get in on the mobile communications revolution, and Verizon's business relationship with Apple (AAPL), along with its leadership position in the US mobile communications market is compelling. Investors also like the company's long-term record of stock appreciation and its 4.7% dividend yield. I believe that Verizon stock will continue to trend higher for the rest of 2012, and if the new Share Everything pricing plans work out, the stock price could get an even bigger boost.