Verizon (VZ) Misses on Q3 Earnings, Revenues

Verizon Communications Inc. (VZ) reported disappointing financial results for the third quarter of 2014. Both the top and bottom lines failed to meet the respective Zacks Consensus Estimate despite year-over-year growth. Lower-than-expected financial results were primarily due to higher cost of services and sales and higher interest expenses. Verizon currently holds a Zacks Rank #2 (Buy).

Quarterly net income came in at $3,794 million or 89 cents per share compared with $5,578 million or 78 cents per share in the year-ago quarter. However, earnings per share of 89 cents fell below the Zacks Consensus Estimate of 92 cents. The year-over-year earnings growth was buoyed by strong revenue contribution from wireless services and increased demand for FiOS services.

Verizon Communications, Inc - Earnings Surprise | FindTheBest

Quarterly total revenue increased 4.3% year over year to $31,586 million but lagged the Zacks Consensus Estimate of $31,707 million. The year over year growth was driven by increasing demand for Verizon Wireless, FiOS and Strategic enterprise services.

Total operating expenses in the reported quarter was $24,696 million, up 6.7% year over year. Operating income decreased 3.3% year over year to $6,890 million. Operating margin came in at 21.8% against 23.5% in the prior-year quarter.

Cash Flow & Liquidity

During the first nine months of 2014, Verizon generated $23.2 million of cash from operations compared with $28.4 million in the year-ago period. Free cash flow in the reported quarter was $10.5 million compared with $16.6 million in the prior-year period.

At the end of the third quarter of 2014, Verizon had $7.85 billion of cash and short-term investments and $109.23 billion of debt outstanding compared with $54.1 billion of cash and short-term investments and $93.59 billion of debt outstanding at the end of 2013. Debt-to-capitalization ratio was 0.86 at the end of the reported quarter against 0.48 at the end of 2013.

Wireless Segment

Total revenue for the segment was $21,835 million, up 7% year over year. Retail Service revenues were up 4.6% to $17,556 million. Other Service revenues were $800 million, up 8.1%. Equipment revenues increased 28.9% to $2,480 million and Other revenues were up 4.2% to $999 million.

Operating expense increased 10.1% to $14,880 million. However, operating income also grew 1% to $6,955 million. Quarterly operating margin came in at 31.9% against 33.8% in the year-ago quarter. Segment EBITDA increased 1.7% to $9,094 million. EBITDA margin was 49.5% compared with 51.1% in the prior-year quarter.

At the end of the third-quarter 2014, Verizon had 106.156 million retail subscribers, up 4.9% year over year. Out of this, Retail postpaid subscriber count was 100.103 million, up 5.2% and Retail prepaid subscriber count was 6.053 million, up 1.5%. During the reported quarter, the company added 1.516 million postpaid customers (up a whopping 63.5% year over year) and 0.009 million prepaid customers (down a massive 93.3% year over year).

Quarterly retail postpaid churn rate was 1% compared with 0.97% in the year-ago quarter whereas total retail churn rate was 1.29% against 1.28% in the year-ago quarter. Retail postpaid average revenue per account (:ARPA) grew 3.5% to $161.24.

In the reported quarter, 91% of total phone activated were smartphones compared with 84.9% in the prior-year quarter. Strong sale of Apple Inc.’s (AAPL) iPhone and increased adoption of Google Inc.’s (GOOG) Android-based smartphones and Microsoft Corp. (MSFT) developed Windows smartphones also increased the subscriber numbers.

Wireline Segment

Total revenue for the segment was $9.576 million, down 0.8% year over year. Consumer retail revenues were up 4.5% to $3,902 million. Small business revenues were $613 million, down 4.1%. Strategic services revenues climbed 1% to $2,068 million. Core revenues were down 11.7% to $1,316 million. Global wholesale revenues decreased 4.8% to $1,552 million and Other revenues increased 10.6% to $125 million.

Operating expense decreased 1.7% to $9,351 million. Operating income also jumped 53.1% to $225 million. Quarterly operating margin came in at 2.3% against 1.5% in the year-ago quarter. Segment EBITDA dropped 0.8% to $2,203 million. EBITDA margin was 23%, remaining same year over year.

At the end of the third-quarter 2014, FiOS video subscriber base was 5.533 million (up 7% year over year), FiOS Internet subscribers were 6.471 million (up 8.8%) and FiOS digital video residence connections were 4.514 million (up 10.9%). In the reported quarter, Verizon added a net 114,000 FiOS video subscribers, 162,000 FiOS Internet subscribers and 74,000 FiOS digital video residence connections.

High-speed Internet connection dropped 12.3% to 2.675 million, total broadband connections grew 1.7% to 9.146 million, Primary residence switched access connections decreased 15.1% to 5.794 million and Primary residence connections fell 5.3% to 10.308 million. Total retail residence voice connections dropped 5.9% to 10.743 million and total voice connections decreased 6.4% to 20.089 million.

On a quarterly basis, consumer ARPU was $125.32, up 10.3% year over year. FiOS revenues were $3,200 million, up 13.4% year over year. Strategic services as a percentage of total Enterprise revenues were 61.1% compared with 57.9% in the year-ago quarter.

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