Zacks_Analysts' Blog : Earnings Scorecard: Verizon - Analyst Blog

The largest U.S. mobile service provider Verizon Communications (VZ) reported first quarter 2011 results on April 21. Adjusted earnings of 51 cents beat the Zacks Consensus Estimate by a penny and were 32 cents above the year-ago earnings.

First Quarter Review

Continued strength in wireless, FiOS and strategic business services led to higher-than-expected earnings in the quarter.

Further, Verizon started selling Apple Inc.'s (AAPL) iPhonefrom February 10, ending the exclusivity that its largest competitor AT&T Inc. (T) enjoyed since 2007. Verizon’siPhone is gaining traction and is being well adopted by customers. The company sold 2.2 million iPhones in two months.

Total revenue improved from the year-ago quarter and surpassed the Zacks Consensus Estimate. Revenues from the wireless segment increased on higher subscribers and lower churn. Wireline revenue, however, remained the dampener with persistent declines in access lines.

Verizon added 1.78 million wireless subscribers in the first quarter to reach 104 million. The increase was attributable to rapid adoption of smartphones, strong post-paid subscribers and growth in wholesale and other connections.

On the wireline front, FiOS fiber-optic network and broadband connections remained healthy while total voice connections remained depressed.

(Read our full coverage on this earnings report: Verizon Beats by a Whisker)

Agreement of Analysts

Following the first quarter earnings, the analysts are skewed more toward the negative side in estimate revisions for the upcoming quarter and fiscal year. This trend was noticed over both the last 7 and 30 days.

For the upcoming quarter, out of 26 analysts, 8 and 1 revised their estimates downward over the last 30 days and 7 days, respectively. 7 analysts made upward revisions in the same time span.

For fiscal 2011, 10 and 1 analysts out of 31 made downward revisions over the last 30 days and 7 days, respectively, while 7 and 1 analysts moved opposite.

The analysts are concerned about persistent erosion in access line, high promotional expenses, maturation of the wireless industry, iPhone near-term dilution and several challenges in wireline business,which may drag near-term earnings.

Verizon may spend to promote the iPhone over the year, which might hurt short-term margins.The company might have to spend $3 billion to $5 billion to subsidize the device in 2011 based on the expected $400 per iPhone subsidy that Verizon will absorb. These handset subsidies are expected to hurt the profitability of the company. Further, AT&T threatens customer retention initiatives across all the segments of Verizon. Thus, in order to retain customers, Verizon is involved in a costly promotional war with AT&T.

For fiscal 2012, the analysts showed positive revisions with 12 and 1 moving north over the last 30 and 7 days, respectively, while 6 and 1 analysts moved in the opposite direction.

These analysts believe the iPhone has strengthened Verizon’s competitive position in the highly coveted smartphone market. Verizon’s iPhone is expected to add 2.1 million net new subscribers in 2011 outpacing AT&T for the first time since 2008. Verizon continues to expand both its 3G and fourth-generation Long-Term Evolution (4G LTE) mobile broadband network.

Following the launch of the 4G network in 38 markets covering 110 million people at the end of 2010, Verizon expects its LTE network to expand to more than 75 markets covering 185 million people by the end of 2011. Additionally, the company plans to expand its 4G network to its entire nationwide 3G footprint by the end of 2013.

Moreover, Verizon has significantly improved its competitive position in the rapidly evolving managed hosting and cloud services business. Verizon recently acquired the information technology service company Terremark Worldwide Inc. (TMRK). Verizon seeks to expand its cloud business to offset declining revenues from traditional fixed lines.

All these developments along with increased smartphone adoption will make Verizon more competitive against Sprint Nextel Corp. (S) and AT&T.

Magnitude –– Consensus Estimate Trend

The Zacks Consensus Estimate for the second quarter remained fixed at 55 cents over the last 7 days but rose by a penny over the last 30 days. The estimate represents a 5.9% decline year over year.

For fiscal 2011, the Zacks Consensus Estimate remained static at $2.22 over the last 7 and 30 days, representing a substantial growth of 21.14% year over year. The Zacks Consensus Estimate for fiscal 2012 is $2.61, unchanged over the last 7 days and 2 cents above the last 30 days.

Earning Surprises

With respect to earnings surprises, the company’s fairly good track record is expected to continue in the coming quarters. Verizon produced a positive average earnings surprise of 1.86% over the last four quarters, which suggests that it outpaced the Zacks Consensus Estimate by that amount over the last year.

Neutral Recommendation

We believe Verizon’s continued investments in its broadband network,strong wireless and FiOS services, cloud computing business, share gain in the retail post-paid market along with increasing smartphones penetration and other data devices will make the stock attractive for the long term. Further, 4GLTE services and iPhone sales will boost the company’s growth prospects.

Although Verizon continues to expand its 3G wireless and wireline FiOS network footprints, returns from investments in these businesses are uncertain. Additionally,persistent erosion in access lines, high promotional expenses and intense competition from cable companies and other alternative services providers may provide downside risk to the stock.

Hence, we are maintaining our long-term Neutral recommendation with the Zacks #3 (Hold) Rank.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/