Verizon Communications Inc. Sees Subscriber Growth Despite Intense Competition

By Markets Fool.com

Image source: Verizon.com.

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Verizon Communications (NYSE: VZ) reported second-quarter results on July 26. The massive U.S. cellphone provider added subscribers amid fierce competition, but a work stoppage dented profits.

Verizon results: The raw numbers

Q2 2016

Q2 2015

Growth (YOY)

Revenue

$30.532 billion

$32.224 billion

(5.3%)

Adjusted EBITDA

$11.060 billion

$11.079 billion

0.2%

Adjusted EPS

$0.94

$1.04

(9.6%)

Data source: Verizon Communications Q2 2016 earnings press release.

Wireless results

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Verizon added 615,000 new postpaid wireless subscribers in the first quarter, including 356,000 new tablet subscriptions. The company also continued to show signs of strong customer loyalty, with a retail postpaid churn rate of 0.94%.

Those gains come even as rivals such as T-Mobile US (NASDAQ: TMUS) offer aggressive promotions, such as free music- and video-streaming options, as well as sizable cash payments for switching providers.

Image source: T-Mobile.com.

Despite these aggressive moves by Verizon's competitors, the telecom titan's total retail connections rose 3.3% year over year, to 113.2 million at the end of the second quarter.

Wireless revenue, however, fell 4% to $21.7 billion, as more customers chose unsubsidized device-payment plans. Yet these plans tend to be more profitable for Verizon, something that can be seen in the wireless segment's operating income margin, which improved to 36.9% in the second quarter, up from 34% in the year-ago quarter. Segment EBITDA (earnings before interest, taxes, depreciation, and amortization) margin also increased to 47.5% from 43.9%.

Wireline results

In Verizon's wireline division, FiOS-- long a bright spot -- saw its growth impacted by the recent strike by more than 40,000 of Verizon's union employees. Verizon experienced net declines of 13,000 FiOSinternet connections and 41,000 FiOSvideo connections in the second quarter. Verizon reached an agreement with its union workers and said that it "made significant progress in working through a backlog of Fios installations in June and has since returned to its normal run rate of Fios connection growth." Still, with the growing popularity of video-streaming services such as Netflix and Amazon Instant Video, it's possible that Verizon could continue to shed FiOSvideo customers in the quarters ahead.

The work stoppage also negatively impacted the segment's profitability, with Verizon's wireline division reporting an operating loss of $463 million in the second quarter.

Consolidated results

On a companywide basis, Verizon's second-quarter total operating revenue fell 5.3% to $30.5 billion. After adjusting for divested local landline businesses and revenue from AOL, which was not part of Verizon in the year-ago quarter, total revenue fell 3.5%.

More importantly, Verizon's cash generation remained strong, with operating cash flow totaling $5.4 billion in the second quarter.

Looking forward

Verizon reiterated its forecast that full-year 2016 adjusted earnings would be comparable to 2015's results -- excluding the $0.07-per-share impact of the 2016 work stoppage -- which would place 2016 adjusted earnings per share at approximately $3.99.

"Verizon's second quarter shows that the company continues to deliver strong results while evolving operations and advancing a strategy to sustain network leadership, build new ecosystems and deliver the promise of the digital world to customers," said Chairman and CEO Lowell McAdam in a press release.

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Joe Tenebruso has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Netflix, and Verizon Communications. The Motley Fool recommends T-Mobile US. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.