2023-07-24 12:15:33 ET
Summary
- Verizon Communications Inc. will be reporting its Q2 results before markets open tomorrow, July 25.
- Verizon stock has been hammered down due to a barrage of slowdown-related concerns, but the stock seems to be pricing them in already.
- Verizon Communications stock seems like a good buy ahead of earnings.
Verizon Communications Inc. ( VZ ) is scheduled to report its Q2 results before markets open tomorrow , July 25. Shares of the telecom giant have been hammered down lately on concerns relating to a saturating market and intensifying competition, so investors would be closely watching how its revenue growth fares this quarter. But in addition to tracking its top line figure, investors may also want to keep tabs on its subscriber metrics, segment financials, and its management’s outlook for the quarter ahead. These items will shed light on the extent of Verizon’s problems, and I believe they stand to influence where its shares will head next.
Let’s take a closer look to gain a better understanding of it all.
Gauging Subscriber Interest
The biggest concern surrounding Verizon, right now, is intensifying market competition. The telecom giant has invested significantly in its nationwide 5g wireless network. Then in order to properly monetize the surplus network capacity, it leased out its network to other Mobile Virtual Network Operators (or MVNOs) such as Charter Communications ( CHTR ) and Comcast ( CMCSA ). Now, these MVNOs are offering 5G wireless services at attractive price points, and many investors fear they’ll decimate Verizon and AT&T’s ( T ) market share in the wireless telecom space.
So, the first order of business for Verizon investors, should be to track their company’s subscriber additions in its upcoming earnings report. This will shed light on how real is this MVNO-risk for Verizon investors and how well is its 5G bet panning out. Per our database at Business Quant, Verizon’s retail prepaid connections have grown steadily for both retail and postpaid segments in recent quarters.
I expect the trajectory to continue in Q2 and believe Verizon will continue to accumulate customers in the coming quarters. I say this because the company is amongst the top wireless carries that has rolled out nationwide 5G mmWave network and doesn’t have much competition when it comes to nationwide network speed, coverage and stability. Besides, I explained in a prior article why MVNOs don’t represent a threat to Verizon in the foreseeable future.
(Read - Verizon: The Bull Is About To Strike . )
Next, pay close attention to Verizon’s churn rate. This metric is essentially the pace at which Verizon’s existing subscribers are disconnecting their connections. A high churn rate means Verizon’s subscriber base is growing dissatisfied with their network’s value proposition, be it due to cost, coverage, stability, speed, customer support. On the other hand, a lower churn rate would imply that its subscriber base is satisfied with the network quality and prefers not to migrate away to other telecom networks, even if other offerings may be cheaper.
I personally expect Verizon’s churn rate to remain stable or decline sequentially due to its continued investments towards the improvement of its wireless network quality. But having said that, let’s now shift attention to Verizon’s financials.
Segment Financials
To begin with, Verizon classifies its revenue into 6 different business divisions namely, Consumer Service, Consumer Wireless Equipment, Enterprise and Public Sector, Business Markets and SaaS, Wholesale and Other. Its Consumer Service division is by far the largest revenue driver, it comprises of revenue recognized from wireless services, and it contributed nearly 57% to the company’s sales in Q1. This stream has grown marginally in recent quarters and I expect it to grow 0.6% sequentially in Q2, in line with its historic trends. Besides, there aren’t any material drivers that would cause a sudden upsurge in its wireless service sales, so I expect its revenue to grow marginally to around $18.56 billion for the quarter.
Next, Verizon’s Consumer Wireless Equipment revenue comprises of sales of smartphones, wearables and connected devices, and it contributed roughly 16% to the company’s total sales last quarter. This revenue stream has historically been cyclical – it peaks in Q4’s as consumers purchase handsets during the holiday season, which is followed by uneventful Q1’s when everything cools off and the recovery starts in Q2’s. I expect this trend to prevail this time as well, and estimate Verizon’s Consumer Wireless Equipment revenue to grow 6% sequentially, amounting to $5.2 billion during Q2.
Verizon’s Enterprise and Public Sector division, on the other hand, is business centric and its revenue have been subdued of late due to heightened disconnections and falling prices in the business wireline segment. The sequential pace of its revenue decline has fluctuated from 0.8% to 3.1% in recent quarters, and I expect the decline to be somewhere around the middle at 1% during Q2. Verizon hasn’t undertaken any drastic measures to suddenly reverse its continuing decline of business wireline revenue, and I believe this division’s revenue will amount to roughly $3.75 billion in Q2.
Moving on, Verizon’s Business Markets and SaaS division is also business-centric, but it’s not wireline-centric. The segment includes the sales contribution from wireless services, equipment, networking products and conferencing services tailored for businesses. This segment has been doing rather well, in part due to high-speed wireless services without the wireline products bogging down its growth. So, I expect this momentum to continue in Q2 as well and estimate that this division will report sales of $3.17 billion during Q2, up 2.5% sequentially.
Besides, the other 2 remaining segments collectively contributed a little over 6% to Verizon’s total sales last quarter, and they don’t have any major catalysts at play that would significantly impact the company’s financials in the near future. So I believe they’re immaterial to Verizon’s prospects, at least for the time being, and have a lump sum revenue estimate of around $2 billion for both the segments combined.
BusinessQuant.com
This brings us to a company-wide revenue estimate of $32.79 billion for Q2. For the record, this estimate falls in the lower-end of the Street’s estimates that are spanning from $32.79 billion and $33.96 billion at the time of this writing. So, I believe that Verizon is likely to meet the Street’s estimates in its upcoming earnings report.
Lastly, keep a close eye on Verizon management’s revenue outlook for Q3. This will set the tone for FY23 and provide us with clarity about whether the slowdown-related narratives hold any merit.
Final Thoughts
Verizon’s shares have been hammered down of late on slowdown-related concerns. As a result, its EV-to-EBITDA metric is at just 6.4-times, which is hovering close to its 5-year lows. This suggests the stock has been oversold, and it’s pricing in a lot of many risk-factors at current levels.
There's another issue that's being actively peddled of late, that Verizon's cables are causing lead poisoning. But since this is just a media report, and none of the industry bodies or government regulators have actually come out with it, I view this as a non-issue for Verizon investors.
As far as Q2 is concerned, I believe Verizon is poised to meet the Street’s estimates and that MVNO risk has been exaggerated. So, I believe this is a good time to accumulate Verizon’s shares while they’re still discounted. They seem to have little downside, but ample upside potential from the current levels. Good Luck!
For further details see:
Verizon: Consider Buying The Panic