Verizon Communications (NYSE: VZ) blew away expectations with its second-quarter earnings report. Not only did it post a big beat on the top line, but it also showed investors that its unlimited data plan is working to attract subscribers. Verizon added 358,000 postpaid phone subscribers last quarter, well above analysts' expectations.
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That picks up where Verizon left off in the first quarter. While the company lost 289,000 postpaid phone subscribers during the first three months of the year, management said it would have lost much more without introducing its unlimited plan in February. Now investors are asking whether the momentum is sustainable.
Better retention is a big key to net additions
Verizon posted a record low churn level for its postpaid phone subscribers in the LTE era. Just 0.7% of phone subscribers left for a competitor last quarter. T-Mobile (NASDAQ: TMUS) gave a good indication that Verizon would post a good churn number when it reported very low porting ratios with Verizon with its earnings report.
Management says its ability to retain subscribers is directly a result of its unlimited data plan. At $80 per month for a single line (and discounts as you add more lines), Verizon's pricing is competitive, but still a slight premium to most of its competitors. The only provider with higher pricing is AT&T (NYSE: T), but its $90-per-month plan includes additional incentives like a $25 discount on TV service and free HBO.
Verizon says its ability to retain customers shows people are willing to pay more for a comparable plan on a superior network. Indeed, Verizon's network and brand are two of its biggest competitive advantages. Those advantages shined through later in the quarter as competitors started offering significant switching incentives, including Sprint's (NYSE: S) offer of a free year of unlimited data service. But Verizon's performance in the back end of the quarter was consistent with the first part, according to management.
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Grabbing new subscribers
Of course, retaining subscribers is only half the battle. In order to grow, Verizon had to attract new subscribers. Importantly, it didn't have to resort to expensive customer acquisition promotions like Sprint or AT&T.
That's a strong indication that many subscribers were simply avoiding Verizon until it offered a simple unlimited plan like its competitors. It's another testament to the company's brand strength.
Adding new subscribers to its unlimited plan is key for Verizon, which has seen its service revenue take a hit with the release of the new option. The early adopters of the plan were existing customers that realized they could save money by switching. Combined with other service revenue headwinds like the switch to equipment installment plans, Verizon's service revenue fell nearly 7% year over year. Adding new subscribers at the higher-than-average unlimited plan pricing should help start turning things around for Verizon.
Indeed, management indicated its belief that service revenue has bottomed and will start to turn around in the second half of the year. Management expects the decline in service revenue to come in below 4% by the fourth quarter. As comparable quarters get easier, investors should see service revenue return to growth sometime next year, and operating margin should improve along with it.
Can Verizon keep this up?
The wireless industry is extremely competitive, and Verizon has the most to lose. Verizon's ability to sustain the success it saw in the last two quarters is imperative.
To that end, management is extremely optimistic. "We absolutely think the trend on unlimited is sustainable," CFO Matt Ellis said on the second-quarter earnings call. "Once we gave customers that clear and comparable offer, we see the value of our network and our offering compared to what else is in the marketplace."
There are a lot of things working in Verizon's favor for the near future. AT&T's focus is split in favor of its entertainment business, appealing to a shrinking crowd of pay-TV subscribers. Sprint is desperate for help, and looking for it wherever it can get it. T-Mobile is even showing signs of net addition slow downs, and it recently took steps to raise its prices, indicating a bigger focus on generating meaningful cash flow instead of stealing away customers.
As long as Verizon focuses on keeping its industry-leading network at the top of the charts and maintaining the strength of its brand, it should be able to win back a lot of customers with its unlimited plan. Over time, that should translate into improved service revenue and higher operating margin as well.
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