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Verizon - full year remains in line as price increases stick

Revenue was up 4% to $34.2bn in the third quarter.

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Revenue was up 4% to $34.2bn in the third quarter.

Underlying earnings per share was down to $1.32 from $1.42, but still slightly ahead of market expectations as was revenue. Net income was down 23.3% to $5bn.

The revenue performance was driven by price increases in the core consumer division. In the same period, Verizon lost 189,000 subscribers in this division. The smaller business to business operations were less sensitive to price increases adding 360,000 subscribers.

Free cash flow fell 28.4% to $12.4bn and Verizon's headline debt measure, net unsecured debt, fell by $1.3bn to $129.3bn.

Full year guidance remains intact, with underlying earnings per share expected to range from $5.10 to $5.25.

The quarterly dividend nudged up to $0.625 per share.

The shares were down 4.2% in pre-open 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. In the first 9 months of 2022, servicing revenue fell 2.0% but still made up most of total revenues. Encouragingly, margins in the division rose to 26%, up from 18.9%. This is vindication for Verizon's pricing strategy. The hope is that strong mobile sales, up 23.7% in the same period, 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. Debt is slowly coming down, but market forecasts suggest management is prioritising dividends.

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.

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.

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
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 21st October 2022