A month has gone by since the last earnings report for Verizon Communications (VZ). Shares have lost about 2.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Verizon due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Verizon Beats on Q1 Earnings Despite Lower Revenues
Verizon reported mixed first-quarter 2023 results with the bottom line beating the Zacks Consensus Estimate but the top line missing the same. The telecom giant is witnessing significant 5G adoption and fixed wireless broadband momentum. Strong demand for Fios and fixed wireless products also led to the best total broadband quarterly performance in over a decade with total broadband net additions of 437,000.
However, the Consumer wireless business struggled with 263,000 retail postpaid phone net losses in the quarter. This dragged the shares down in pre-market trading as investors probably expected healthy subscriber growth.
On a GAAP basis, net income in the quarter was $5,018 million or $1.17 per share compared with $4,711 million or $1.09 per share in the prior-year quarter. The year-over-year increase despite top-line contraction was primarily attributable to high expenses in the year-ago quarter. Excluding non-recurring items, quarterly adjusted earnings per share were $1.20 compared with $1.35 in the prior-year quarter. The bottom line beat the Zacks Consensus Estimate by a penny.
Quarterly total operating revenues decreased to $32,912 million from $33,554 million in the prior year owing to lower wireless equipment revenues driven by a challenging macroeconomic environment. The lower year-over-year revenue was also attributable to the shutdown of the company's 3G network, resulting in the removal of approximately 1.1 million retail connections. The top line missed the consensus estimate of $33,709 million.
Consumer: Total revenues from this segment declined 1.7% year over year to $24,857 million, as higher service revenues were more than offset by lower equipment revenues in the quarter. Service revenues were up 1.8% to $18,456 million, while wireless equipment revenues slumped 9.2% to $4,878 million. Other revenues totaled $1,523 million, down 15% year over year.
The segment recorded 263,000 wireless retail postpaid phone net losses and 351,000 wireless retail prepaid net losses in the quarter. Wireless retail postpaid churn was 1.05%, while retail postpaid phone churn was 0.84%. The company recorded 63,000 Fios Internet net additions as high demand for reliable fiber optic broadband was spurred by increasing work-from-home trend. Fixed wireless broadband net additions were 256,000 for the quarter. However, Verizon registered 74,000 Fios Video net losses in the quarter, reflecting the ongoing shift from traditional linear video to over-the-top offerings. The segment’s operating income declined 3% to $7,099 million with a margin of 28.6%, down from 28.9% in the year-ago quarter. EBITDA decreased 1.6% to $10,313 million with a margin of 41.5% compared with 41.4% in the prior-year quarter due to higher marketing expenses.
Business: The segment revenues were down 2.8% to $7,494 million due to lower wireline and wireless equipment revenues, partially offset by growth in wireless service revenue. The segment had 312,000 wireless retail postpaid net additions in the quarter, including 136,000 postpaid phone net additions. Wireless retail postpaid churn was 1.50%, while retail postpaid phone churn was 1.16%. Fixed wireless broadband net additions were 137,000 for the quarter. Operating income declined to $551 million from $673 million in the year-ago quarter with respective margins of 7.4% and 8.7%. EBITDA was down 5.1% to $1,645 million owing to higher subsidies for a margin of 22% compared with 22.5% in the year-earlier quarter.
Total operating expenses decreased 1.7% year over year to $25,328 million, while operating income was down 2.7% to $7,584 million. Consolidated adjusted EBITDA declined to $11,902 million from $12,032 million for respective margins of 36.2% and 35.9%.
Verizon generated $8,289 million of net cash from operating activities in the quarter compared with $6,821 million in the year-ago period. The improvement was primarily due to working capital improvements driven by lower inventory levels, fewer phone upgrades and a modest improvement in customer payment patterns. Free cash flow was $2,331 million compared with $1,000 million in the prior-year period. As of Mar 31, 2023, the company had $2,234 million in cash and cash equivalents with $140,772 million of long-term debt. Capital expenditure totaled $5,958 million, up from $5,821 million in prior-year period, driven by expenses related to C-Band deployment. The continued build out of OneFiber and C-Band spectrum expansion will expand the reach and capacity of its 5G Ultra Wideband network across the country.
Verizon has reiterated its guidance for 2023 and expects wireless service revenue growth in the range of 2.5%-4.5%. Adjusted EBITDA is likely to be $47-$48.5 billion. The company expects adjusted earnings in the range of $4.55 to $4.85 per share. Capital expenditure is estimated between $18.25 billion and $19.25 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review.
VGM Scores
Currently, Verizon has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Verizon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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