What Verizon's After-Hours Warning Means For Investors

| About: Verizon Communications (VZ)
This article is now exclusive for PRO subscribers.

Summary

Verizon warned on Monday that EBITDA will be pressured, thanks to higher retail postpaid disconnects and a highly competitive wireless environment.

Yet, nothing has really changed within the industry with AT&T or TMUS.

Therefore, has Sprint done something that may be causing Verizon problems?

In an after-hours press release on Monday, Verizon (NYSE:VZ) had some strong things to say about its wireless business, including...

total retail postpaid disconnects are trending higher both sequentially and year over year in this highly competitive and promotion-filled fourth quarter.

As a result, Verizon expects short-term EBITDA pressure on its wireless segment. While investors will have many takeaways from these statements, one really sticks out to me, and it has to do with Sprint (NYSE:S).

The price wars in the wireless space are nothing new. T-Mobile (NASDAQ:TMUS) has been pricing its plans aggressively throughout 2014. AT&T (NYSE:T) joined the party in early 2014. Yet, despite a pricing environment where Verizon's prices have been, at times, 100% higher, the company has still performed exceptionally well.

For example, during the second and third quarters, Verizon added 1.4 million and 1.52 million postpaid additions, respectively. In the same periods, AT&T added just one million and 785,000. The result was higher margins for Verizon and faster year-over-year wireless service revenue growth.

However, Verizon's latest comments suggest that fourth-quarter growth won't be as meaningful, judging by the "postpaid disconnects" comment. So, what has changed?

First, keep in mind that back in October, Verizon unveiled a number of service plans that put its higher data package plan prices on par with AT&T. This serves as proof that Verizon was at least feeling some pressure to lower prices.

Yet, strangely, nothing has really changed with AT&T or T-Mobile in the fourth quarter to cause postpaid disconnects to trend higher. One thing that has changed is Sprint, a company that entered the price wars in August, noted a 60% decline in postpaid net losses in September, and just recently launched an aggressive attack at Verizon and AT&T. This attack includes cutting Verizon and AT&T customer bills in half, along with paying early termination fees.

Given the timing of Verizon's statements, maybe it's Sprint that's causing headwinds for Verizon and making an impact on its postpaid performance.

Ironically, I just wrote an article "Why 2015 Is Make Or Break For Sprint," where I conclude that Sprint's outlook is dismal and a stock price below $3 next year is likely. While all of the risks I noted are still in play, the fact that Verizon's tone changed so drastically from the second and third quarters does at least hint that just maybe Sprint is attracting new postpaid subs. What's yet to be seen is whether Sprint can grow at a fast enough pace to combat the decline in margin from lower service prices.

All things considered, the one thing that's certain is that the wireless pricing war drama is far from over. At this very moment, it looks like Sprint is having at least some effect, which is a minor positive in an otherwise horrible year.

Disclosure: The author is long VZ.

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.