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Verizon - downgrades guidance

Second quarter revenue of $33.8bn was flat compared to the same time last year, as declines in service revenues were offset by wireless equipment sales.

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Second quarter revenue of $33.8bn was flat compared to the same time last year, as declines in service revenues were offset by wireless equipment sales.

Operating costs rose to $26.2bn from $25.6bn, meaning operating profit fell 7.5% to $7.6bn.

Verizon has downgraded full year guidance. Changes include expectations for total wireless service revenue growth, which is expected to be 8.5-9.5%, down from 9-10%. Underlying cash profit (EBITDA) is expected to come in flat at best, with the worst-case scenario being a 1.5% decline. That's down from expectations of 2-3% growth.

The shares fell 4.6% in pre-market trading.

View the latest Verizon share price and how to deal

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. It provides mobile and landline services directly to individuals and via wholesalers as well as selling devices like smartphones and laptops. The Business segment provides similar services to companies and government organisations.

More broadband connections, and increasing demand for smartphones, have historically provided a favourable backdrop to the group. Equipment sales are 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. That's shown through in the service division's double digit margins, against the paltry 9% of physical sales. 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. This is where we're disheartened to see total retail net-additions in the consumer contract unit shrinking, especially phones.

What's more, Verizon's net debt jumped substantially recently. That relates to the spending listed as "wireless licences." Simply put, governments licence 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 $20.3bn last year and that's expected to be a touch higher this year, as another few billion goes toward 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 $147bn of debt.

For now, Verizon looks in acceptable financial shape. Although debt is not great, we're not overly worried - revenue has tended to be 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

All ratios are sourced from Refinitiv. 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.

Second Quarter Results

Within the Consumer business, overall revenue rose 9.1% to $25.6bn, as both Service and Wireless sales increased. All costs increased, and this offset the higher revenue and operating profit fell to $7.2bn from $7.5bn.

Revenue in Business fell slightly to $7.6bn. Small and Medium Business revenue rose from $2.9bn to $3.1bn, but all other business areas declined. Total operating expenses were broadly flat, but operating profits still fell 21.1% to $675m, as margins dipped to 8.9% from 11%.

For the first half, free cash flow fell to $7.2bn from $11.7bn as increased infrastructure spending weighed. Net debt stood at $147.2bn as at the end of June.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 22nd July 2022