Tuesday, October 21, 2014

Verizon 3Q 2014: Revenues Up 4%

Verizon Communications reported 89 cents in earnings per share for the third quarter of 2014, compared with 78 cents per share (or 77 cents on a non-GAAP adjusted basis) in the same quarter of  2013. Whether one is happy with those results depends, as always, on expectations.

Some had estimated Verizon would do even better than it did. But Verizon did post significant revenue growth.

Total operating revenues in the third quarter of 2014 were $31.6 billion, a 4.3 percent increase compared with third-quarter 2013, Verizon reports.

Almost an afterthought these days, Verizon switched access lines (plain old telephone service) declined more than 15 percent, year over year. At that rate, the number of remaining switched access lines will decline by about half in another five years.

By 2023, if current rates hold, Verizon will have lost 80 percent of its current switched access lines.

Of course, at some level, Verizon eventually will lose 100 percent of its switched access lines, as the public switched telephone network actually is retired.

If legacy PSTN lines in service were only replaced, one for one, by IP lines, the change would not be consequential. It has not mattered that mobile voice lines have transitioned from analog to various generations of digital networks, for example.

The problem for the telco fixed network segment of the business is that users are abandoning use of voice lines.

At the same time, the total number of fixed network lines in service is not dropping nearly as fast telcos are losing lines, because market share has been taken by new providers, including cable TV companies, most notably.

The reason the 15 percent annual decline of voice lines is not more consequential is that Verizon is adding new units of high speed access, video entertainment and digital voice at a faster rate than it is losing voice accounts.

Still, total attrition of voice lines (PSTN and IP) is in excess of five percent a year.

One notable observation is the huge disparity between operating income margin between the mobile and fixed network segments, though.

In the third quarter of 2014, mobile segment operating income margin was 31.9 percent and segment earnings (EBITDA) margin on service revenues was 49.5 percent.

In the third quarter of 2013, mobile segment operating income margin was 33.8 percent and earnings (EBITDA) 51.1 percent.

Some might see the dip as an impact of the U.S. mobile marketing wars, as well as the shift by consumers to non-subsidized device plans, which have the impact of lowering service revenues, even if device sales revenue can rise, in the short term.

Compare that performance with results from the fixed network segment. Total revenues were $9.6 billion in third-quarter 2014, down 0.8 percent year over year. So the first comparison is that fixed network revenue declined, while mobile segment revenue grew.

Fixed network  operating income margin was 2.3 percent in the third quarter of 2014, up from 1.5 percent in third-quarter 2013. So mobile operating income margin was an order of magnitude higher than fixed network operating income margin.

In other words, the mobile business is 10 times more profitable than the fixed network business, on an operating income margin basis.  

Fixed network segment earnings (EBITDA, non-GAAP) was 23 percent in third-quarter 2014, flat compared with third-quarter 2013. While fixed network EBITDA was lower than in the mobile segment, earnings margin was not so dissimilar.

Still, consumer revenues were $3.9 billion, up 4.5 percent compared with third-quarter 2013, with FiOS revenues representing 76 percent of the total.

Consumer ARPU for wireline services increased to $125.32 per month in third-quarter 2014, up 10.3 percent compared with third-quarter 2013.

Total FiOS revenues grew 13.4 percent, to $3.2 billion, comparing third-quarter 2014 with third-quarter 2013.

It is possible to attribute the slight decline in fixed network segment revenues to the business customer segment.

Sales of strategic services to enterprise customers increased one percent, to $2.1 billion, compared with third-quarter 2013.

Strategic services include private IP, Ethernet, data center, cloud, security and managed services.

Still, overall sales in the enterprise and wholesale weakened, year over year.

New revenue streams from machine-to-machine and telematics totaled $150 million in third-quarter 2014, or more than $400 million through the first nine months of 2014, an increase of more than 40 percent year to date, from a small base.

Net income for the third quarter was $3.79 billion, which fell year-over-year from $5.58 billion.

Total revenues from the mobile segment were $21.8 billion, up seven percent from the previous year. Service revenues totaled $18.4 billion.

The mobile segment added 1.53 million retail net connections, and at the end of the third quarter the total retail connections the company had was 106.2 million.

Total revenues for the fixed network segment were $9.6 billion, up 0.8 percent from the previous year. Out of this, consumer revenues made up $3.9 billion.

Most service providers likely would be very happy to post results of the sort Verizon just did, in terms of revenue growth and profit margin, on the mobile or fixed network sides of the business.

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