EUR 850.00 For Business Accounts Only

Morningstar | Verizon's Solid 2Q Results Driven by Wireless Revenue Growth; Shares Fairly Valued

Verizon reported solid second-quarter results with better-than-anticipated revenue growth, but we are maintaining our $52 fair value estimate for now. We believe the shares are fairly valued. Reported revenue grew 5.4% year over year versus our full-year projection of 1.9%. However, much of the growth was generated from the acquisition of Yahoo and strong equipment sales, which are notoriously volatile. Total reported wireless revenue increased 5.5%. We are particularly pleased to see wireless service revenue growth of 0.8%, the first gain in more than three years. This is partially because the transition away from subsidized phones is almost complete. Verizon added 531,000 retail postpaid devices in the quarter, including 199,000 phones, continuing its subscriber recovery that started one year ago after launching unlimited data plans. This growth along with industry-leading postpaid phone churn of 0.75% demonstrates to us that customers continue to view Verizon as having the best wireless network, which is an important element in our narrow moat rating. We expect Verizon’s reputation will allow it to continue to expand its wireless subscriber base and maintain premium pricing versus the other carriers, though probably not with as big of a spread as in the past. On the wireline side, revenue declined 3.4% as cord-cutting continues. However, the company did add 43,000 Fios broadband customers.

Importantly, Verizon generated strong free cash flow of $6.5 billion, near a record high. This allowed net debt to drop by $4.2 billion, taking it to 2.5 times adjusted EBITDA. Management said on the call that it plans to use free cash flow to continue to increase the dividend and pay down debt, which we believe are much better uses of cash than chasing content deals.

Verizon reported adjusted EBITDA excluding changes in revenue recognition of 35.6%, very close to our full-year projection of 35.8%. We anticipate slow margin improvement going forward.

We talk a lot about fiber buildouts in Europe, but not so much in the United States. Thus, we found it interesting that Verizon announced it had built out fiber in 50 cities outside its incumbent local exchange carrier footprint. This will enhance its ability to offer wireless video services now and its 5G network in the future, starting with launching in four cities this year. The firm announced that Houston would be the third city launched. We were also pleased to hear management say on the call that it expects capital expenditures to generally continue near current levels even as it rolls out its 5G network.