Verizon reported second-quarter revenue of $32.8bn and underlying cash profit (EBITDA) of $12.3bn, up 0.6% and 2.8%, respectively. Total wireless service revenue rose 3.5% to $19.8bn, driven by higher prices and an increased contribution from fixed wireless products.
Verizon gained 148,000 net monthly bill-paying mobile phone subscribers, better than estimates of a 128,000 gain. In broadband, 391,000 net new subscriptions were driven by growth in mobile broadband – though that was down from last year.
Net unsecured debt, the group's headline debt measure, fell $3.2bn over the quarter to $122.8bn. Free cash flow for the half rose from $8.0bn to $8.5bn.
Full-year guidance is unchanged. Verizon expects total wireless service revenue growth of 2.0-3.5% and underlying cash profit growth of 1.0-3.0%.
The shares fell 2.9% in pre-market trading.
Our view
Second-quarter results were broadly as expected, but a couple of items under the hood disappointed investors. New phone subscribers were better than expected, but a big chunk was due to existing customers taking out second phone lines. That’s not as attractive, raising questions about Verizon’s ability to attract new customers.
Consumer is by far the larger of its two primary segments. It provides mobile and landline services directly to individuals and via wholesalers as well as selling devices like smartphones and laptops. Mobile subscriber growth has been a struggle of late, but trends are improving. The growing 5G network plus new, flexible, plans are starting to show results. Price hikes squeezed consumers early in the new year, but the group is still expecting to deliver some growth over 2024.
There's plenty of scope to grab market share with increased 5G adoption, through traditional mobile and fixed wireless broadband products. Verizon's putting a lot of eggs in this basket and has thrown billions at the task. We think this is the right move. But with the conclusion of the spending program upon us, and revenue growth hard to come by in recent years, the benefits need to start coming.
That's especially true as traditional landline operations are still in decline, and wireless data is a notoriously competitive market. It's hard to offer something meaningfully unique, so telecoms groups often end up competing mainly on price, which is rarely a good thing for profit margins.
Verizon's debt pile is eye-watering too. That's a result of spending listed as "wireless licences." Simply put, governments licence out chunks of the electromagnetic spectrum (think 5G) to telecoms groups to run their networks on, and they charge a pretty penny.
For now, Verizon looks in acceptable financial shape. Although debt is not great, and the choice to hold around 25% at variable rates was clearly a bad one, we're not overly worried - revenue has tended to be reliable and the group's generated a bucket load of cash. The 6.5% yield is lofty but looks well covered so we don't have concerns there. But reducing debt is going to be a priority when capex reduces to more normal levels, at least in the near term.
The valuation isn't too demanding, and we can certainly see how the mammoth cash flows and healthy yield are attractive prospects. But we would urge caution. While the use of debt has helped boost returns for equity holders, it can be a double-edged sword if profits struggle, and no returns are guaranteed.
Environmental, Social and governance (ESG) risk
The telecom industry is low/medium in terms of ESG risk. Data privacy and security is the most significant risk driver, not only because customers are increasingly concerned about privacy, but also because cybersecurity breaches can be costly. Product quality is another key risk, particularly given the networks they manage are considered critical infrastructure. Carbon emissions, human capital and business ethics are also risks worth monitoring.
Verizon’s overall management of material ESG issues is strong.
Verizon has officers responsible for security and privacy, and its cybersecurity centre meets international standards. Climate risks are reported, and it conducts annual impact assessments. The company offers employee development programs, including tuition assistance, and ensures equal pay for women and men.
Verizon key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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