The largest U.S. mobile service provider Verizon Communications (VZ) is slated to release its third quarter 2011 earnings results on October 21, before the opening bell. The current Zacks Consensus Estimate for the third quarter is 57 cents, representing a 1.71% increase year over year.
With respect to surprises, Verizon had a 1.88% average positive earnings surprise in the last four quarters.
The company did not release any financial forecast for the third quarter at its second quarter conference call. Lowell McAdam was appointed as the new CEO. He replaced Ivan Seidenberg who retired on August 1.
Second Quarter Flashback
Verizon’s second quarter earnings outpaced the Zacks Consensus Estimate by two cents and was above the year-ago earnings. The company recorded the strongest revenue growth in the last 10 quarters fueled by continued strength in the wireless segment and improved revenue trends in wireline.
Wireless revenue improved on the back of strong data revenues and subscriber growth. Rapid expansion of 4G coupled with the sale of Apple Inc.'s (AAPL) iPhone led to strong growth in wireless subscribers. Total retail churn remained low, representing the lowest post-paid churn in three years.
Despite the drop in the Wireline revenue, the trend has improved following the acquisition of cloud and managed IT infrastructure leader Terremark Worldwide Inc. In addition, momentum for the FiOS fiber-optic network remained strong, accelerating the penetration rate of both FiOS Internet and FiOS TV to approximately 34% and 30%, respectively.
Agreement of Analysts
Estimates for the third quarter have been trending downward over the last 7 and 30 days. Out of 24 analysts, 3 have made downward revisions in the last 7 days and 9 have moved in the same direction in the last 30 days. None of the analysts made positive revisions for the third quarter.
For fiscal 2011, out of 27 analysts, 3 have made downward revisions in the last 7 days while 10 have moved in the same direction in the last 30 days. None of the analysts made positive revisions for 2011.
The analysts are mainly worried about revenue growth and margin expansion in the wireline division, which was negatively impacted by the 14-day strike by 45,000 employees. Many of these striking technicians install and maintain the company's FiOS fiber-optic network, which represents an integral part of its long-term growth strategy.
Verizon expects the labor strike in August and the storm in the U.S. East Coast in September to increase its overall cost by $200–$250 million (before taxes) in the third quarter.
Further, the analysts believepersistent access line losses in wireline, competitive pressures from its largest rivals AT&T Inc. (T) and Sprint Nextel Corp. (S), high promotional and restructuring expenses as well as heavy iPhone subsidy in the wireless business would limit the earnings upside potential. Verizon might have to spend $3–$5 billion this year to subsidize the iPhone.
On the other side, the wireless division, a joint venture with Vodafone Group Plc (VOD), is doing well and is expected to generate healthy results in the third quarter. The company’swireless growth prospects remain strong, driven by customer growth, higher smartphone adoption and the sale of iPhone that will lead to improved revenue. Verizon remains the leading provider of wireless voice and data communication services in the U.S. as it continues to expand its 3G and 4G mobile broadband networks.
Magnitude — Consensus Estimate Trend
The magnitude of revisions for third quarter remained stable over the last 7 days at 57 cents, but lowered from 58 cents over the last 30 days.
Similarly, the Zacks Consensus Estimate for 2011 is $2.23, flat over the last 7 days and down by a penny over the last 30 days. The 2011 estimate represents a substantial growth of 21.82% year over year.
Neutral Recommendation
Going forward, we believe Verizon will continue to achieve wireless growth and profitability with a focus on gaining share in the retail post-paid market, increasing penetration of smartphones, rapid growth of 4G networks and iPhone sales. As global business markets are showing signs of stabilization, we believe Verizon will drive wireline revenue growth and margin expansion based on FiOS services, enterprise strategic services as well as cost-reduction efforts.
However, persistent erosion in access lines, uncertain returns from investments, iPhone subsidies plus intense competition from cable companies and other alternative services providers are threats to the stock.
We are currently maintaining our long-term Neutral rating on Verizon with the Zacks #3 (Hold) Rank.
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