Verizon shrugged off short-term competitive impact from rivals T-Mobile and Sprint, notes 5G trials remain on track for 2017 and IoT continues to grow
Verizon Communications released third-quarter financial results this week that show a considerable influence from rivals in the mobile space on growth, but the carrier remains calm on the impact. Looking ahead, company management remains on track for “5G” trials to begin next year, with the “internet of things” showing robust growth.
Speaking with investors, Verizon Communications CFO Fran Shammo admitted to the increased competition during the latest quarter, highlighted by rate plan changes from rivals centered on “unlimited” services. In response, Verizon focused its marketing efforts on network quality and tweaks to its rate plans, but refrained from entering the unlimited fray.
“Competitive activity in the wireless market increased during the third quarter as expected and we responded in a measured way to grow and retain our valuable customer base by introducing new wireless plans and disciplined promotions,” Shammo explained. “We have been successful in retaining our high-value postpaid smartphone base and improving service revenue trends.”
For the quarter, the carrier posted 525,000 net direct connection additions, which was less than half the 1.2 million the carrier posted for the same period last year. All of that decline was on the back of Verizon Wireless’ postpaid business, which managed to add just 442,000 connections in Q3, which was well below predictions and impacted by net “phone” losses.
Breaking down those numbers, Verizon noted it added 357,000 LTE smartphones, which was more than offset by net losses in 3G smartphones and basic devices and resulted in an overall net loss of 36,000 “phone” connections. The carrier did show success in posting 221,000 net tablet additions for the quarter, as well as 257,000 net connections for other devices, which Verizon said was primarily made up of its Hum in-car product.
As for the tablet market, expected higher churn on the devices coinciding with a two-year-old promotion caused an uptick in postpaid churn, though Shammo added postpaid phone churn remained below .9% for the sixth consecutive quarter.
Also impacting the carrier’s wireless growth performance was a combination of Samsung’s wide-reaching recall of its high-end Galaxy Note 7 device, which hit in the final month of Q3, and a backlog on fulfilling orders for Apple’s iPhone 7 models, which launched in final two weeks of the quarter.
Shammo showed calm in the activity, noting Apple has nearly caught up in terms of fulfilling iPhone 7 orders and the carrier was pivoting away from the Note 7 with other Samsung devices and its carrier exclusivity with Google’s latest Pixel devices. The carrier also witnessed slowing enthusiasm connected to the unlimited rate plans offered up by rivals, which is a market Verizon Wireless plans to stay out of.
“As I’ve said, there’s going to be a two- to three-week period of time where there is an impact to our growth and we saw that,” Shammo said. “But as I’ve always said, after that three weeks everything kind of normalizes back out. … Obviously, we responded on the equipment side of the equation, but as we continue here unlimited is still not something that we’re going to move to, but as you saw also we launched new pricing this quarter, which we believe also addressed two of the major pain points for our customers.”
On the prepaid side, Verizon Wireless managed to reverse recent connection losses, which Shammo attributed to price plan changes. The carrier early in the quarter added a data throttling feature to its branded prepaid plans similar to the “Safety Mode” launched as part of its postpaid plan changes, which followed up on overall prepaid rate plan changes in May.
“As you saw also, we made some moves in prepaid because where we’re losing the subscribers is mostly in the basic phone category and we know that our postpaid pricing is more premium to the marketplace and less attractive to that segment,” Shammo noted. “So we did launch some new prepaid pricing and what we did see was … a double amount of our postpaid subscribers move over to our prepaid – more than we’ve seen in history – and that accounted for a little less than 50% of our prepaid net adds this quarter. So we did see some shift in our base, but the good news there is … we didn’t lose the customer. We maintained the customer at least on the Verizon Wireless network.”
Despite the positive spin, Verizon Wireless is expected to fall short of its smaller rivals in terms of overall wireless growth, with both T-Mobile US and Sprint having already announced robust preliminary results.
Data center sale could boost bottom line
Financially, Verizon Communications management said the flat results were expected as it continues to migrate its postpaid customer base to unsubsidized rate plans. This was highlighted by mixed average revenue per account results showing traditional ARPA excluding device payments dropping 4.9% year-over-year to $144.94, though increasing 3.2% when taking into account monthly device payments to $169.49.
The carrier also expects full-year capital expenses to come in at the low-end of its previous forecast of between $17.2 billion and $17.7 billion. Shammo noted some capital expenditure was lost during the labor strike that impacted its wireline operations, which it did not expect to make up by year-end.
Verizon could see a boost from the impending sale of its data center business, with Shammo noting the carrier is in negotiations with one entity and that it plans to announce a deal early in the fourth quarter. The carrier has been looking to offload 48 data centers, with reports indicating a price tag in excess of $2.5 billion.
A further financial impact could be seen from Verizon’s ongoing attempt to acquire Yahoo, which has run into issues following a significant security breach at the internet player. Shammo admitted there could be a “material impact” on Yahoo that might play into the deal.
“We are still evaluating what it means for this transaction,” Shammo explained. “This was an extremely large breach that has received a lot of attention from a lot of different people. So we have to assume they will have a material impact on Yahoo. Lawyers had their first call yesterday with Yahoo to provide us information, but as I understand that’s going to be a long process. So unless Yahoo comes up with a different process it’s going to take some time to evaluate this. So until then we haven’t reached any final conclusions around this issue.”
Looking ahead to 5G, IoT
As for plans surrounding next-generation services like 5G and IoT, Verizon indicated it continues to make progress.
Shammo said the carrier remains on track to begin commercial trials of 5G technology, which depending on the success of those trials plans to be the first domestic carrier to launch a 5G-based fixed wireless broadband service. Verizon continues to downplay any development issues connected with the fact 5G standards are still likely 18 to 24 months away.
“The big issue that still has to be answered, quite honestly, is the scaling of the technology,” Shammo said. “So for each small cell, how much can each small cell deliver to how many households and still deliver a consistent one gigabit of speed or some speed that is comparable to a broadband connection to the home? So that still has to be answered and we expect to do gain more knowledge around that in 2017 with the number of commercial trials that we’re going to launch.”
The carrier in July noted lab tests had shown transmission speeds in excess of 1 Gbps, with ongoing field trials being used to investigate propagation characteristics of millimeter wave spectrum in real-world conditions.
IoT also is receiving increased attention at the carrier, with recent moves in telematics, its ThingSpace division, smart city and other segment initiatives. Shammo said “organic IoT revenue” increased 24% year-over-year in Q3, hitting $217 million, while in-quarter revenue growth was up more than 30% on the back of its Telogis acquisition.
The full impact of Verizon’s Q3 results should be felt by later next week following the release of results from nationwide rivals AT&T, T-Mobile US and Sprint.
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