Verizon (VZ) is set to announce its Q3 FY 2012 earnings on Oct. 18. During the earnings call, we will take a close look at subscriber additions to see how the carrier is performing amid the industry-wide saturation in wireless growth. Increasing smartphone penetration should however enable the company to post a year-over-year increase in postpaid ARPU levels, bolstered by data ARPU. In this regard, it will be interesting to see what the company has to say about the adoption of its recently launched shared data plans. In addition to the company financials, we have a special interest in the uptake in LTE subscriber numbers as Verizon looks to promote LTE widely this year, challenging AT&T (T) and Sprint (S) in the wireless market.
Saturated Wireless Market
The U.S. wireless market has become increasingly saturated with wireless connections having exceeded the population in mid-2011. This has made acquiring new subscribers, especially those who pay for the higher-margin data plans, very tough for the wireless carriers. In the last quarter, for example, Verizon added only about 888,000 postpaid subscribers, down by more than 29% over the same period last year. Note that these numbers were probably bolstered by the first full quarter of the new iPad sales. Tablets typically bring in a lot less revenue per subscriber, but are more profitable in the short term due to lower subsidies offered.
With the wireless industry getting more saturated, the focus has shifted from acquiring new subscribers to converting more of its existing base to smartphones. Almost 73% of all retail postpaid phones Verizon sold last quarter were smartphones, with 40% of those upgrading being first-time smartphone buyers. This helped increase its smartphone penetration within the postpaid subscriber base to 50%, up from 47% at the end of the March quarter, and leaves Verizon with enough room to increase smartphone penetration further. Since smartphone users are usually heavy data users as well, this should continue to help increase postpaid ARPUs further. Verizon’s data revenues last quarter soared more than 18% and postpaid ARPU grew 3.7% over the same period last year.
Share Everything Plans
At the same time, Verizon is exploring new growth areas in other non-smartphone connected devices such as M2M, telematics, tablets, and e-readers. The recent Hughes Telematics’ acquisition shows that the carrier is on the lookout for these additional opportunities (see "Verizon Picks Up Hughes Telematics For Connected Devices Push"). Furthermore, the Share Everything data plans that Verizon launched recently is an attempt to get users to add more connected devices to the carrier’s wireless network. This might decrease the average revenue per device considering these connected data-only devices consume much less data, but as users connect more devices to the wireless network, Verizon will be able to draw more revenues from each individual subscriber. Moreover, since their data consumption is low, it will help Verizon shore up its service margins.
The focus on margins is also evident from the fact that Verizon has prohibited its unlimited plan users from availing smartphone subsidies if they want to continue using their plans. This, we believe, is a right step since it will help Verizon more efficiently manage network resources that are not exactly unlimited in nature and monetize every bit of data transferred through its pipes. The limited nature of spectrum is evident from the spectrum crunch that the industry is currently facing, but Verizon seems well-placed after securing approval from the FCC recently for a cable spectrum purchase that will help it augment its LTE buildout (see "Verizon Receives Final Approval For Spectrum Deal").
With Verizon maintaining an enviable lead over rivals AT&T and Sprint in terms of LTE coverage, we will look for numbers that suggest that LTE adoption is picking up. As of last quarter, Verizon had converted only 12% of its postpaid subscriber base to LTE. While LTE adoption has so far been sluggish, we expect the recently launched iPhone 5 launch to help tip the scales. The LTE-capable iPhone 5 finally gives Verizon a good marketing tool to promote its leading LTE coverage and leverage the high iPhone demand to drive LTE adoption (see "Verizon’s LTE Network Leaps To The Fore As iPhone 5 Pre-Orders Start").
An increase in adoption of 4G will reduce dependence on Verizon’s 3G networks, which are under great strain due to heavy data usage by smartphone users. Also, LTE, as a network technology, not only supports higher speeds but is also more efficient than the current 3G networks at handling data, reducing maintenance and handling costs. Furthermore, higher LTE speeds will see subscribers increasingly use data-intensive applications on their smartphones. This will drive data revenues, thereby increasing ARPU levels for Verizon over the coming years.
Disclosure: No positions.