Verizon Communications Earnings Hurt by Weak Subscriber Results

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Last Thursday, telecommunications giant Verizon Communications (VZ 0.90%) reported fiscal third-quarter earnings. Investors weren't all that impressed, as shares closed modestly lower that day and have continued to trend lower.

Here's how Big Red did last quarter.

Verizon Communications results: The raw numbers

Data source: Verizon Communications.

What happened with Verizon this quarter?

• While Verizon was able to beat the Street's expectations on the bottom line by $0.02, postpaid net subscriber additions fell short. This important subscriber category saw just 442,000 in net additions, far below the 1.3 million additions a year ago, as well as the 766,000 that analysts were modeling for.
• Verizon continues to focus on profitable postpaid customers, which comprise 93% of phones activated on Verizon's network
• Capital expenditures fell by 5% to $2.77 billion during the quarter. Year-to-date capital expenditures are currently $7.77 billion.
• Wireless services revenue fell 5.2% to $16.68 billion.
• Average revenue per account including installment plan payments rose 3.2% to $169.49, as customers continue to shift toward installment plans. Approximately 70% of phone activations have device payment plans tied to them, up sequentially.
• Wireline operating revenue fell 2.3% to $7.78 billion, but cost-cutting allowed the segment EBITDA margin to expand from 18.9% to 21.2%.
• Verizon has 14.14 million FiOS digital connections, up 2.6%.
• The company still has quite a hefty debt load, largely as a result of its 2014 buyout of Vodafone's stake in Verizon Wireless. Verizon took out nearly $50 billion in debt to help finance that deal. Total debt is now $106.6 billion.
• Verizon's board approved a 2.2% increase in its dividend payout, which is now $0.5775 per quarter.
• During the quarter, Verizon announced its intention to acquire Yahoo!, and closed on its acquisition of Telogis, intended to bolster connected vehicle offerings. The company also announced in August that it would acquire Fleetmatics, which provides fleet and mobile workforce management solutions. Last month, Verizon said it would acquire Sensity Systems to add to its suite of smart city solutions.

What management said

In the release, Chairman and CEO Lowell McAdam stated:

Verizon continues to deliver strong financial and operational results in highly competitive markets while positioning itself for future growth. While we transform our company in a challenging environment, we have maintained the financial flexibility to invest in our industry-leading networks to better serve customers, add scale to bring innovation to the mobile media and Internet of Things (IoT) markets, and increase dividends for a 10th consecutive year.

On the conference call, CFO Fran Shammo acknowledged that competition in the wireless market continues to intensify as expected, but that the company is responding in a "measured way to grow and retain our valuable customer base by introducing new wireless plans and disciplined promotions." Shammo noted that Verizon has been able to retain its most valuable postpaid customers. He also added some context about Verizon's ongoing capital expenditures:

Capital expenditures were $4.1 billion in the quarter driven by increased spending in wireless for densification and in wireline for FiOS installations as volumes expanded post work stoppage. We now expect full-year 2016 capital expenditures to be at the low end of the range of $17.2 billion to $17.7 billion.

Looking forward

The elephant in the room is Verizon's proposed acquisition of Yahoo!, particularly after Yahoo! disclosed in September a massive data breach that could have affected 500 million user accounts. The breach occurred in 2014, and is one of the largest cybersecurity breaches in history. Verizon management continues to evaluate the breach and assess "what it means for this transaction." Given the magnitude of the both the breach and the deal itself, the company says it will be a "long process." There have been unconfirmed reports that Verizon is seeking a $1 billion discount on the deal, which would represent a hefty portion of the initial $4.8 billion price tag.

Things may improve on the customer front in the fourth quarter following the launch of Apple's iPhone 7. Verizon countered some aggressive promotions from T-Mobile and Sprint. Analysts believe postpaid net additions could recover during the holiday quarter.

As far as guidance is concerned, Verizon expects 2016 adjusted earnings to be relatively comparable to 2015 after excluding the impact of a work stoppage that occurred earlier this year. The same is true for consolidated adjusted EBITDA margin, which is expected to be consistent with last year. Capital spending should come in at the low range of guidance, which was previously forecast at $17.2 billion to $17.7 billion. Verizon will also continue working over the next few years to return to the credit ratings that it had prior to the Vodafone buyout, since its debt levels remain elevated for now.