The technological change in the region has been rapid with most companies now upgrading to the 4G-LTE networks. We have seen several consolidation attempts in the industry with Deutsche Telekom’sT-Mobile bidding for MetroPCS and Japan’s Softbank bidding for Sprint Nextel.
The industry has also witnessed an uptick in its average revenue per user (ARPU), as more and more subscribers choose high-end smartphones in contrast to low-end feature phones. The operators derive a major chunk of their revenue through data services as against the voice and text services a while ago.
The faster adoption rate of smartphones, however, has been a winner’s curse for the telecom players as they have to shell out a huge sum of capital on handset subsidies, thus taking a hit on the margins. Once the smartphone penetration peaks, I believe there will be lesser potential left for such players to grow the ARPU. In such a scenario, the most obvious choice left for smartphone developers will be to increase prices.
Key players, including Verizon and AT&T Inc. (NYSE:T), have already increased the length of the handset upgrade cycle from 20 months to 24 months in order to delay their cash outflow on handset subsidies. Both companies also charge an early up-gradation fee of $35 if a subscriber wants to switch the phone prior to the contract end date.
Verizon’s performance relative to competitors
Verizon Communications Inc. (NYSE:VZ)’s wireless division is the market leader in the U.S. telecom industry with approximately 100 million subscribers and a market share of approximately 35%. It outperformed its peers in terms of both profitability and subscriber growth in the recent quarters. Its service revenue during the first quarter of 2013 grew by 8.6% to $15.4 billion. In contrast, AT&T and Sprint Nextel Corporation (NYSE:S) reported a revenue growth rate of 3.4% and 8.8%, respectively.
Verizon also witnessed robust growth of 6.9% in average revenue per account (ARPA), which confirms that it’s gradually increasing its revenue from each individual subscriber. The company’s earning per share stood at $0.68, which represents 15.3% growth; in contrast, AT&T reported 12% growth in its earning per share.
The first quarter results clearly exhibit that Verizon has outperformed both its peers AT&T and Sprint Nextel. Additionally, the timely adoption of LTE by Verizon enabled the company to reduce the call-drop rate to an industry best of 0.7%.
According to a recent research report made available by ROOTMetrics, Verizon’s LTE network is now available in 475 markets. In comparison, AT&T Inc. (NYSE:T) and Sprint Nextel Corporation (NYSE:S) only offer services in 135 and 58 distinct markets, respectively.
It must be noted that Verizon Communications Inc. (NYSE:VZ) doesn’t disclose the ARPU for the wireless segment anymore. Nevertheless, its wireless postpaid ARPU presently stands at $150.27, which represents approximately 7% growth from the previous year in the same quarter. On the contrary, the postpaid ARPU for AT&T and Sprint Nextel stood at $65.01 (+0.9%) and $63.67 (+2%), respectively.
Furthermore,Verizon has managed to keep its retail postpaid churn close to 1% during the past few quarters with Q1 2013 churn rolling at around 1%. This is primarily underpinned by the early adoption of the LTE network.
In comparison, churn rates of AT&T and Sprint Nextel stood at 1% and 1.8%, respectively. It is an understood fact that a lower churn rate in this case is indicative of Verizon’s ability to attract a higher volume of users.
During 2012, Verizon introduced the all new “Share Everything” plan. By gaining access to this, users can simply connect multiple devices to one single plan, based on which users get unlimited voice and text and a single pool of shareable data that can be shared by at least 10 different devices.
By launching “Share Everything” Verizon Communications Inc. (NYSE:VZ) has revolutionized the industry by eliminating the concept of “voice” and “text,” as both features are now integrated and users only pay for the amount of data consumed. This has facilitated Verizon into gaining a competitive edge over apps such as Skype and Whatsapp. Recently, AT&T also came out with its own version of the mobile-share plan, signifying its intent on competing with Verizon.
Stock performance
After closely reviewing Verizon’s share price, we observe that it has appreciated by approximately 20% during the early part of 2013. A five-year stock performance chart (below) reveals that Verizon has outperformed the S&P 500, whereas both AT&T and Sprint Nextel have underperformed the index during the same period
Five-year stock performance of Verizon, AT&T and Sprint vs. the S&P 500
(Source: Yahoo! Finance)
Wireline business division
Verizon Communications Inc. (NYSE:VZ)’s wireline division has predominantly under-performed, as EBITDA margins declined from 27% during 2008 to 20% by the end of fiscal 2012. The company has established a network of high-speed fiber optic cables (FiOS), which can provide bandwidth as high as the cable operators.
However, the penetration of FiOS is extremely low (between 10% and 15%) and the cost of expansion is relatively higher. This, coupled with increasing competition from the cable players, will make it harder for Verizon to report growth in the wireline business.
Take away
The ongoing discussions for the sale of Vodafone Group Plc (ADR) (NASDAQ:VOD)’s 45% stake in Verizon Wireless is potentially a $100 billion deal that would enable Verizon complete control over its wireless operations. I believe this will allow the company to realize its full potential in the U.S. telecom market.
Verizon Communications Inc. (NYSE:VZ) is expected to raise $50 billion by issuing debt instruments in order to fund the buyout. If the transaction goes through, it’s expected to increase the company’s free cash flow, implying a higher valuation. Besides owning the entire wireless business, it will add immense value to the company, especially in an environment where interest rates are relatively low and the company is outperforming its rivals in the rapidly-growing wireless market.
The article Why You Should Go Long on Verizon originally appeared on Fool.com and is written by Kiran Gulati.
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