Verizon reports solid Q2 results as tablets offset slowing smartphone sales

Verizon Earnings

Verizon on Tuesday posted second-quarter results that topped Wall Street’s expectations as huge tablet sales offset the continued decline of cell phone contract additions. Verizon posted earnings of $1.01 per share, or $4.34 billion in profit, which is down significantly from the $5.2 billion profit it recorded in the year-ago quarter. Revenue climbed nearly 6% to $31.48 billion, however. The nation’s top carrier only added 304,000 net new cell phone subscribers in the quarter, but 1.15 million new tablet additions certainly helped to bolster the company’s results.

Verizon’s full press release follows below.

Verizon Delivers Sixth Consecutive Quarter of Double-Digit Operating Income and Earnings Growth

2Q 2014 HIGHLIGHTS

Consolidated

• $1.01 in earnings per share (EPS), compared with 78 cents per share in 2Q 2013.
• 91 cents in adjusted EPS (non-GAAP), compared with 73 cents in adjusted EPS in 2Q 2013, excluding non-operational gains in both periods.

Wireless

• Added 1.4 million net retail connections; low retail postpaid churn of 0.94 percent; 104.6 million total retail connections; 98.6 million total retail postpaid connections.
• 5.9 percent year-over-year increase in service revenues; 5.3 percent year-over-year increase in retail service revenues; 32.5 percent operating income margin; 50.3 percent segment EBITDA margin on service revenues (non-GAAP).

Wireline

• 5.3 percent year-over-year increase in consumer revenues, the eighth consecutive quarter of more than 4 percent growth; consumer ARPU (average revenue per user) up 11.0 percent.
• 14.4 percent year-over-year increase in FiOS revenues; 139,000 FiOS Internet and 100,000 FiOS Video net additions.

NEW YORK – Verizon Communications Inc. (NYSE, Nasdaq: VZ) today reported its sixth consecutive quarter of double-digit percentage growth in operating income and earnings per share. In second-quarter 2014, the company delivered consolidated top-line growth, driven by strong wireless and FiOS revenues, and continued margin expansion.

Chairman and CEO Lowell McAdam said: “Verizon’s second-quarter results continue to demonstrate our ability to deliver strong customer growth, with equally strong financial performance, in a dynamic and competitive environment. We have great momentum heading into the second half of the year. We remain focused on profitable growth and on meaningful network investments that provide our customers with the best, and with a continuously improving, overall experience.”

Verizon has posted double-digit year-over-year percentage growth in reported and adjusted EPS in nine of the last 10 quarters.

Verizon reported $1.01 in EPS in second-quarter 2014, compared with 78 cents per share in second-quarter 2013. Second-quarter 2014 results included an after-tax gain of $434 million (10 cents per share) related to the sale of 700 MHz A Block spectrum licenses.

On an adjusted basis (non-GAAP), Verizon posted EPS of 91 cents in second-quarter 2014, a 24.7 percent increase compared with 73 cents per share in second-quarter 2013.

Consolidated Highlights

• Verizon recorded its highest quarterly revenue growth rate in the past six quarters. Total operating revenues in second-quarter 2014 were $31.5 billion, a 5.7 percent increase compared with second-quarter 2013.
• Continued effective cost management drove second-quarter 2014 operating income to $7.7 billion, a 17.2 percent increase compared with second-quarter 2013.
• Consolidated operating income margin was 24.4 percent for second-quarter 2014, compared with 22.0 percent for second-quarter 2013.
• Consolidated EBITDA margin (non-GAAP, based on earnings before interest, taxes, depreciation and amortization) was 37.6 percent for second-quarter 2014, compared with 35.9 percent for second-quarter 2013.

Verizon Wireless Delivers Strong Customer Additions, Revenue Growth and Profitability

In second-quarter 2014, Verizon Wireless delivered strong growth in retail postpaid net connections and revenues, company-record tablet additions, an increase in smartphone penetration, and continued high segment EBITDA margin on service revenues (non-GAAP).

Wireless Financial Highlights

• Total revenues were $21.5 billion in second-quarter 2014, up 7.5 percent year over year. Service revenues in the quarter totaled $18.1 billion, up 5.9 percent year over year. Retail service revenues grew 5.3 percent year over year, to $17.3 billion.
• Retail postpaid ARPA (average revenue per account) increased 4.7 percent over second-quarter 2013, to $159.73 per month.
• In second-quarter 2014, wireless operating income margin was 32.5 percent and segment EBITDA margin on service revenues was 50.3 percent. This compares with 32.4 percent and 49.8 percent, respectively, in second-quarter 2013.

Wireless Operational Highlights

• Verizon Wireless added 1.4 million retail net connections, all of which were postpaid, in the second quarter. These additions exclude acquisitions and adjustments.
• At the end of the second quarter, the company had 104.6 million retail connections. This includes 98.6 million retail postpaid connections, a 4.6 percent increase year over year.
• Verizon Wireless had 35.2 million retail postpaid accounts at the end of the second quarter, up 0.7 percent over second-quarter 2013, and 2.80 connections per account, up 3.7 percent year over year.
• During second-quarter 2014, the company added 304,000 postpaid phone net additions and 1.15 million postpaid tablets. At the end of the quarter, smartphones accounted for nearly 75 percent of the Verizon Wireless retail postpaid customer phone base, up from 72 percent in first-quarter 2014. This was also the third straight quarter of company-record net additions for tablets.
• Retail postpaid churn was 0.94 percent in the second quarter, down 13 basis points sequentially and up 1 basis point year over year. Retail churn was 1.25 percent in the second quarter, down 12 basis points sequentially and up 2 basis points year over year.
• The company continued to enhance its 4G LTE smartphone lineup. In the second quarter, Verizon Wireless launched the Samsung Galaxy S 5 and ATIV SE, the Lucid 3 by LG and the HTC One (M8). The company also launched the Samsung Galaxy Tab 4 8.0 tablet and announced the Samsung Galaxy Tab 4 10.1 and Galaxy Tab S. Earlier this month, Verizon Wireless launched the Sony Xperia Z2 tablet and the LG G3 smartphone.
• During the second quarter, Verizon Wireless continued to add capacity to its 4G LTE network, the largest in the United States, using AWS spectrum. The additional bandwidth, called XLTE, is now available in more than 350 markets across the country.

Wireline Consumer Revenue Growth Remains Strong

Verizon’s wireline segment reported continued strong results for consumer services, where year-over-year quarterly revenues now have grown by more than 4 percent for eight consecutive quarters.

Wireline Financial Highlights

• Total revenues were $9.8 billion in second-quarter 2014, up 0.3 percent year over year. This is the first quarterly year-over-year increase in total wireline revenues in more than seven years.
• In second-quarter 2014, consumer revenues were $3.9 billion, up 5.3 percent compared with second-quarter 2013, with FiOS revenues representing 75 percent of the total. Consumer ARPU for wireline services increased to $122.57 in second-quarter 2014, up 11.0 percent compared with second-quarter 2013.
• Total FiOS revenues grew 14.4 percent, to $3.1 billion, comparing second-quarter 2014 with second-quarter 2013.
• Wireline operating income margin was 2.7 percent in second-quarter 2014, up from 0.8 percent in second-quarter 2013. Segment EBITDA margin (non-GAAP) was 23.2 percent in second-quarter 2014, compared with 22.2 percent in second-quarter 2013.
• Sales of strategic services to enterprise customers increased 3.0 percent compared with second-quarter 2013. Strategic services include private IP, Ethernet, data center, cloud, security and managed services.

Wireline Operational Highlights

• In second-quarter 2014, Verizon added 139,000 net new FiOS Internet connections and 100,000 net new FiOS Video connections. Verizon had totals of 6.3 million FiOS Internet and 5.4 million FiOS Video connections at the end of the second quarter, representing year-over-year increases of 9.3 percent and 7.6 percent, respectively.
• FiOS Internet penetration (subscribers as a percentage of potential subscribers) was 40.1 percent at the end of second-quarter 2014, compared with 38.6 percent at the end of second-quarter 2013. In the same periods, FiOS Video penetration was 35.3 percent, compared with 34.5 percent. The FiOS network passed 19.3 million premises by the end of second-quarter 2014.
• By the end of second-quarter 2014, 55 percent of consumer FiOS Internet customers subscribed to FiOS Quantum, which provides speeds ranging from 50 to 500 megabits per second, up from 51 percent at the end of first-quarter 2014.
• Beginning this week, existing and new FiOS customers are receiving upload speeds that mirror download speeds. Verizon is the first provider to offer symmetrical broadband speeds at no additional charge, enhancing the ability of FiOS customers to upload to the cloud, share videos and photos, and video chat.
• Broadband connections totaled 9.1 million at the end of second-quarter 2014, a 1.5 percent year-over-year increase. Net broadband connections increased by 46,000 in second-quarter 2014, as FiOS Internet net additions more than offset declines in DSL-based High Speed Internet connections.
• Verizon has been replacing high-maintenance portions of its residential copper network with fiber optics to provide customers with more resilient infrastructure and reduce repairs, which improves customer satisfaction and reduces costs. In second-quarter 2014, Verizon migrated an additional 70,000 customers to fiber.
• In the second quarter, Verizon Enterprise Solutions began deploying innovative cloud, security, M2M (machine-to-machine), networking and other technology solutions for a variety of clients around the globe, including healthcare clients Avera, Cardinal Health, Cerner, iCare and Molina Healthcare; as well as 1-800-Flowers, Anadarko Petroleum Corporation, Commonwealth Bank of Australia, Ferrellgas, Johnson Controls, KG Inicis, Northgate Information Solutions, Peninsula Light Corporation and the state of Colorado’s Statewide Internet Portal Authority.

Guidance Reiterated

Verizon continues to target 2014 investments in the range of $16.5 billion to $17 billion, with a decrease in capital spending as a percentage of total revenues for the full year.

Verizon continues to target consolidated top-line growth of 4 percent and adjusted consolidated EBITDA margin expansion in 2014, with positive contributions to profitable growth from both wireless and wireline.

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