Is Verizon Losing the Battle for Growth to AT&T?

Source: Getty Images

Source: Getty Images

Shares of Verizon (NYSE:VZ) fell as much as 2 percent in early trading on Thursday after the communications company reported first-quarter results. Total operating revenues of $30.8 billion, up 4.8 percent on the year (the highest quarterly growth rate in five periods), beat the mean analyst estimate of $30.7 billion. Adjusted earnings of 84 cents per share, up 23.5 percent on the year, fell just short of the mean analyst estimate of 87 cents per share. GAAP earnings of $1.15 per share were up 69.1 percent on the year.

The big news was on the bottom line, where Verizon was able to report its fifth consecutive month of double-digit growth in both earnings and operating income. Operating income of $7.2 billion was up 15.1 percent on the year — consolidated operating margin widened to 23.2 percent from 21.1 percent. Adjusted consolidated EBITDA margin widened to 36.7 percent from 35.1 percent.

“Verizon has delivered double-digit earnings growth in eight of the past nine quarters, and in the first-quarter 2014 we posted our strongest consolidated revenue growth in five quarters,” Verizon Chairman and CEO Lowell McAdam said in a statement. “With the wireless transaction now behind us, we have great confidence in our ability to sustain these strong results.”

That “wireless transaction” was Verizon’s $130 billion acquisition of Vodafone Group’s (NASDAQ:VOD) 45 percent stake in Verizon Wireless. The deal valued the unit, which is the most profitable phone carrier in the U.S., at nearly $290 billion.

“We are already seeing the expected earnings accretion from the transaction,” McAdam said in the earnings report. Immediate accretion is expected at about 10 percent.

“The full access we now have to the significant cash flows of Verizon Wireless is energizing our efforts to provide customers with product and service innovations and to enable powerful solutions to some of the world’s biggest challenges,” added McAdam.

In the first quarter, with just five weeks of full Verizon Wireless cash flow on the books, cash flow from operating activities clocked in at $7.1 billion, down from $7.5 billion in the year-ago period. Adjusted cash flow came in at $3 billion, down from $3.9 billion. However, the company notes that, with 100 percent of Verizon Wireless cash flow available, “free cash flow available to Verizon Communications was approximately $1.4 billion higher in first-quarter 2014 than in first-quarter 2013, assuming all free cash flow at Verizon Wireless had been distributed to the partners.”

But growth still fell short of analyst expectations. Besides slower-than-expected growth on the bottom line, Verizon reported relatively soft wireless customer growth. Verizon said it added 539,000 net postpaid subscribers in the first quarter, down about 20 percent from the 677,000 added in the year-ago period. “Relatively soft” places Verizon postpaid subscriber growth about 13 percent lower than AT&T (NYSE:T), which reported on Wednesday that it added 625,000 postpaid subscribers in the first quarter.

The results suggest that Verizon Wireless is losing some ground to the second-place AT&T. In an interview with Forbes on Thursday morning, S&P Capital IQ Senior Industry Analyst Angelo Zino said that hew thinks AT&T is “now winning when it comes to getting new subscribers.” However, the significance of the victory is unclear. Strong subscriber growth is obviously a pro for AT&T, which has aggressively pursued high-value postpaid customers, but the deceleration at Verizon Wireless isn’t necessarily something to get hung up about. Verizon reported 97.3 million total retail postpaid connections in the first quarter, accounting for about 94.2 percent of Verizon’s 103.3 million total retail connections.

Moreover, Verizon added just 94,000 net new FiOs Internet connections in the first quarter and 57,000 net new FiOs TV connections, for total connections of 6.2 million (up 9.9 percent on the year) and 5.3 million (up 8.7 percent), respectively. Total FiOs revenues increased 15.5 percent on the year to about $3 billion.

AT&T, meanwhile, reported 29 percent year-over-year growth in U-Verse revenue. Total TV and Internet subscribers grew to 11.3 million with 201,000 TV additions (to 5.7 million TV subscribers) and 634,000 Internet additions (to 11 million total).

In addition, Verizon consumer average revenue per use (ARPU) for TV and Internet services increased 11.3 percent to $120.17. AT&T reported 9 percent year-over-year wireline ARPU growth. For wireless, average postpaid revenue of $159.67 was up 6.3 percent on the year at Verizon, and up just 0.4 percent at AT&T.