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Verizon - guidance raised

Nicholas Hyett, Equity Analyst | 21 October 2021 | A A A
Verizon - guidance raised

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Verizon Communications Inc Com Stk US0.10

Sell: 50.27 | Buy: 50.28 | Change -1.39 (-2.69%)
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Revenue for the period rose 4.3% year-over-year to $32.9bn, driven by a 30.1% increase in sales of mobile handsets. An uplift in handset costs meant underlying cash profits were $12.3bn, a 3.3% annual increase.

Excluding the benefits of the group's Verizon Media sale and other one-off items, earnings per share rose to $1.41 from $1.25 at the same time last year.

The group now expects wireless service revenue growth of 4%, at the top end of previous guidance. Management also upped its outlook for underlying EPS from $5.25-$5.35 per share to $5.35-$5.40 per share.

The shares rose 1.4% following the announcement.

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Our view

Verizon is one of the world's largest telecommunications groups. Operations are focused on the US, but there's a wide UK shareholder base, after it bought Vodafone out of a joint venture with a shares-plus cash deal in 2014.

Consumer is by far the larger of its two primary segments, accounting for over two thirds of group revenue. It provides mobile and landline services directly to individuals and via wholesalers as well as selling devices like smartphones and laptops. The Business segment generates just under a quarter of revenue and provides similar services to companies and government organisations.

More broadband connections, and increasing demand for smartphones, have so far provided a favourable backdrop to the group. Equipment sales have been strong, which bodes well for the future. Servicing is where the real money's at - once the group's paid for its infrastructure each new client drops straight through to profit. The hope is that strong mobile sales now will translate into more service customers later. The roll-out of 5G should act as another catalyst if it sparks a boom in the Internet of Things - triggering increased internet needs among consumers and businesses.

However, it's no one way ticket.

Traditional landline operations are in decline, and wireless data is a notoriously competitive market. It's hard to offer something meaningfully unique, so telecoms groups often end up competing mainly on price, which is rarely a good thing for profit margins.

What's more Verizon's net debt jumped substantially recently. That relates to the spending listed as "wireless licences." Simply put, governments license out chunks of the electromagnetic spectrum to telecoms groups to run their networks on, and they charge a pretty penny.

And that's on top of the everyday maintenance of its sprawling asset base. Capital expenditure was $18.2bn last year and looks set to be in a similar ballpark this year, plus another $2-3bn on the 5G rollout.

With the sale of Verizon Media complete, the group has extra cash to help with ballooning costs and a sharper focus on better performing segments of the business. However, in the scheme of things, the $706m profit from the sale is but a drop in the bucket - Verizon will still need to run a tight ship to keep a handle on $141bn of debt.

For now, Verizon looks in acceptable financial shape. Although the recent increase in debt is not great, we're not overly worried - revenue has tended to be very reliable. The potential to provide the infrastructure behind a new age of connectivity is a clear attraction, but that also means significant demands on cash reserves that might otherwise be finding its way back to shareholders.

Verizon key facts

  • 12m forward Price/Earnings ratio: 9.9
  • 10 year average 12m forward Price/Earnings ratio: 13.0
  • Prospective yield: 4.6%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third Quarter Results

Revenue in the Consumer segment rose 7.3% to $23.3bn, reflecting a 33.1% increase in mobile handset sales, a 3.9% rise in service revenue, and an 8.2% decline in other revenue. The costs of handsets rose at a faster rate of 35.2%, bringing operating margins down to 32.5% from 34.2%.

Business revenues declined 0.8% to $7.7bn, as a 7.1% increase in Small and Medium Business revenue wasn't enough to offset declines in Global enterprise, Public Sector and other and Wholesale. An uptick in wireless equipment costs was mostly offset by lower service costs and operating margins were relatively flat at 11.5%.

The sale of Verizon Media was completed on September 1 and yielded a net pre-tax gain on disposal of $706m and a net pre-tax charge of around $247m relating to pension liabilities and redundancy payments.

In the first 9 months of the year, group had a free cash outflow of $29.7bn, compared to an inflow of $14.5bn last year. This was primarily due to $47.0bn spent acquiring spectrum licences this year. Net debt rose to $141.0bn, or roughly 3x cash profits from $106.9bn or 2.3x cash profits on January 1.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.