Verizon Communications - Strong Results Alleviate Worries About A Sprint Nextel Softbank Tie-Up

| About: Verizon Communications (VZ)

Shares of Verizon Communications (VZ) ended the week 1.2% higher. The provider of wireline and wireless communications reported its third quarter results on Thursday.

Third Quarter Results

Verizon Communications reported third quarter revenues of $29.0 billion, up 3.9% on the year. Revenues were in line with analysts expectations.

Operating income rose from $4.6 billion in the third quarter last year to $5.5 billion in the third quarter of 2012. Adjusted non-GAAP earnings per share rose to $0.64 per share, up from $0.56 last year. The company took a $0.08 charge related to patent litigation settlements.

Net earnings per share rose from $0.49 last year, to $0.56 in the third quarter of 2012. Earnings came in exactly in line with analysts estimates.

During the quarter, Verizon sold more than 6.8 million smart phones. Some 3.4 million phones sold were based on Google's (NASDAQ:GOOG) Android system. Verizon sold 3.1 million iPhones, of which 651,000 iPhone 5 models.

CEO and Chairman Lowell Mcadam commented on the results, "In the third quarter, Verizon continued to deliver double-digit earnings growth and strong cash generation, and we remain solidly on track to meet our financial objectives for the year. With our 4G lte network advantage, well-received share everything Plans and unmatched product portfolio, Verizon Wireless continues to do an outstanding job of balancing growth and profitability. Wireless achieved record profitability in a quarter in which we reported the highest number of retail postpaid gross and net adds in four years."

Segmental Information


Verizon Wireless reported a 7.3% increase in total revenues to $19.0 billion for the quarter. Average ARPA (average revenue per account) rose 6.5% to over $145 per month. The company reported a 5.7% growth in the number of retail connections to 95.9 million. During the third quarter net connection additions totaled 1.76 million, compared to 0.97 million last year. Postpaid customer additions totaled 1.54 million, beating analysts consensus of 901,000.

Over 53% of its customer base existed out of smart phones, and 90.4 million subscriptions were post paid. The total retail churn rate was just 1.18% over the quarter.

Operating income for the joint venture rose by 17.4% to $6.05 billion, as operating margins rose by 280 basis points to 31.8%. EBITDA margins hit records of 50.0%, resulting in EBITDA of $8.08 billion.


The wireline division reported third quarter revenues of $9.9 billion, down 2.3% on the year. Non-GAAP EBITDA margins improved by 30 basis points over the year to 21.7%. Operating income fell from $53 million to just $41 million.

Consumer revenues rose by 4.6% on the year, as ARPU rose 10.3% to almost $104. ARPU for FiOS customers was more than $150 as 66% of FiOS customers have purchased "triple play" solutions. Enterprise revenues fell by 3.6% to $3.8 billion. The total number of FiOS customers rose by 27.4% to 12.81 million.


Verizon Communications ended its third quarter with $10.2 billion in cash, equivalents and short term investments. The company operates with $52.8 billion in short and long term debt, for a net debt position of $42.6 billion.

For the first nine months of 2012, Verizon Communications generated revenues of $85.8 billion. The company net earned $5.1 billion, attributable to Verizon, or $1.79 per diluted share. At this rate, the company is on track to generate annual revenues of $115 billion. Net income attributable to Verizon could reach almost $7.0 billion for the year.

The market currently values Verizon at $129 billion. This values the firm at 1.1 times annual revenues and roughly 18 times annual earnings.

Currently, Verizon Communications pays a quarterly dividend of $0.515 per share, for an annual dividend yield of 4.6%.

Investment Thesis

Year to date, shares of Verizon Communications have risen some 12%. Shares briefly fell from levels of $40 in January to lows of $37 during spring months. Shares continued to gain ground during the summer, peaking at $48 in recent weeks. On Friday, shares were exchanging hands at $45 per share.

Over the past five years, shares of Verizon Communications are trading unchanged. Shares fell from $45 in 2008 to lows of $25-$30 during the crisis years. Shares steadily regained ground from that point in time. Between 2008 and 2012, the company steadily increased its revenues from $97.3 billion in 2008 to an estimated $115 billion in 2012.

At the presentation of the third quarter results, Verizon furthermore announced that it signed an agreement with Prudential to transfer pension assets. Verizon purchased a single group annuity contract for 41,000 participants with a total value of $7.5 billion. Earlier this year, General Motors (GM) set up a similar contract with the insurer. Verizon will make a one-time $2.5 billion contribution, resulting in total pension contributions of $3.4 billion for the year.

Obviously, most of the value of Verizon is based on its wireless joint venture with Vodafone (NASDAQ:VOD). The wireless division is doing extremely well, and shareholders are afraid that Softbank's involvement in the US wireless market could create a considerable third competitor in the US wireless market. It is very unlikely that a tie-up between Softbank and Sprint Nextel (S) could create a sizable competitor in the short term.

Dividend investors could pick up some shares on the dips, as Verizon pays out a 4.6% annual dividend yield. The competitive position of the firm remains solid. Verizon owns a cutting edge network and gradually pays off its debt position.

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.