The largest U.S. mobile service provider Verizon
Communications (VZ) is slated to release its first quarter
2011 earnings results on April 21, before the opening bell. The
current Zacks Consensus Estimate for the first quarter is 51 cents,
representing a 9.79% decline year over year.
Verizon had a 1.82% average positive earnings surprise in the
last four quarters. We expect first quarter earnings to be slightly
dampened by higher handset subsidies, partially offset by iPhone
sales and solid 4G services.
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 has been adopting by
customers well.
Further, Verizon’s first 4G handset “ThunderBolt”, launched in
mid-March, will enjoy the first-mover advantage of the company’s
latest Long-Term Evolution (LTE) network. This is expected to
increase profitability throughout 2011. The company’s 4G services
cover approximately 38 markets with around 110 million people at
year-end 2010. Verizon plans to expand its 4G LTE network in 140
additional markets by the end of 2011and cover virtually its entire
nationwide 3G footprint by the end of 2013.
We believe all these developments along with increased
smartphone adoption will make it more competitive against
Sprint Nextel Corp. (S) and AT&T. Further, 4G
networks and iPhone sales will boost Verizon’s earnings and revenue
going forward.
Moreover, Verizon has positioned itself for growth in cloud
services in 2011. The company 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.
On its fourth quarter conference call, Verizon had not released
any financial forecast for the first quarter.
Fourth Quarter Flashback
Verizon’s fourth quarter earnings had missed the Zacks Consensus
Estimate by a penny due to higher discounts on Verizon’s family and
unlimited plans. But earnings improved year over year on the back
of continued strength in Wireless, FiOS and strategic business
services.
Revenues improved slightly driven by wireless revenue on lower
churn (customer switch) and higher data revenues. However,
Verizon’s subscriber growth plunged as it struggled to compete with
AT&T in the smartphone market.
Wireline revenue remained under pressure due to persistent
erosion of access lines. FiOS services remained strong across all
markets with the penetration rate of both FiOS Internet and FiOS TV
reaching approximately 31.9% and 28%, respectively.
Agreement of Analysts
Estimates for the first quarter have been trending downward over
the last 7 and 30 days. Out of 25 analysts, 5 have made downward
revisions in the last 7 days and 8 moved in the same direction in
the last 30 days. None of the analysts made positive revisions for
the first quarter.
For fiscal 2011, out of 30 analysts, 3 revised their estimates
downward over the last 7 days while none moved in the opposite
direction. Over the last 30 days, 5 analysts have made downward
revisions while one revised the estimate upward.
The analysts are concerned about persistent erosion in access
line, slowdown in post-paid subscriber growth as well as high
promotional expenses, which may drag near-term earnings.
Though Verizon Wireless is the largest U.S. wireless carrier
with 94.1 million subscribers at the end of December 2010, it was
losing its market share to AT&T’s iPhone exclusivity till early
February.
The sale of the iPhone strengthens 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. However, the
iPhone carries risks to Verizon. 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 be a drag on profits.
Magnitude — Consensus Estimate Trend
The magnitude of revisions for first quarter and fiscal 2011 has
been static at 51 cents and $2.22 respectively, over the last 7 as
well as 30 days. The Zacks Consensus Estimate for 2011 reflects an
annual increase of 21.28%.
Although Verizon continues to expand its 3G wireless and
wireline FiOS network footprints, returns from investments in these
businesses are uncertain. Further, AT&T threatens customer
retention initiatives across all the segments of Verizon.
Our Analysis
We believe Verizon’s continued investments in its upgraded
broadband network,strong wireless and FiOS services, 4G LTE mobile
broadband networks, higher smartphones penetration, cloud computing
business, and other data devices will lead to revenue growth. The
offerings, including smartphones that support 4G network would
strengthen Verizon’s position relative to its peers. Further, a
healthy balance sheet and strong commitment to shareholders’ return
make the stock more attractive for income-oriented investors.
Driven by iPhone as well as new LTE handsets, smartphone
penetration is expected to increase from the current 26% to more
than 50% by the end of 2011. We expect increased penetration of
smartphone and other integrated devices to boost data revenue.
However, the 4G infrastructure may be an obstacle if other
service providers shift to different generation technologies.
Additionally, upgrading to 4G services as well as Verizon’s iPhone
might increase operating costs of the company. Further, intense
competition from cable companies and other alternative services
providers may provide downside risk to the stock.
We currently have a long-term Neutral rating on Verizon
supported by the Zacks # 3 (Hold) Rank.
APPLE INC (AAPL): Free Stock Analysis Report
SPRINT NEXTEL (S): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
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