Verizon: mixed Q2, guidance raised

Verizon’s second quarter revenue rose 5.2% to $34.5bn ($33.7bn expected). Within that, wireless service revenue was up 2.2% to $20.9bn.

Underlying cash profit (EBITDA) rose 4.1% to $12.8bn. Price hikes over the quarter contributed positively to performance but as a result consumer post-paid phone subscribers fell by 51,000.

Free cash flow over the first half rose 3.6% to $8.8bn, driven by higher profits and lower capital expenditure. Net unsecured debt totalled $116.0bn, a $6.8bn improvement on the same time last year.

For 2025, wireless service revenue is still expected to grow 2.0-2.8% with underlying cash profit growth of 2.5-3.5% (previously 2.0-3.5%).

The shares were up 5.0% in pre-market trading.

Our view

Verizon had a decent quarter, but price hikes were a key contributor. That’s a short-term financial boost, but the longer-term impact on customer growth is a little worrying.

Consumer is by far the larger of its two primary segments. It provides mobile and landline services directly to individuals and wholesalers, as well as selling devices like smartphones and laptops. Mobile subscriber growth, or lack of, is the key concern. Higher prices are helping prop up the top-line, but intense competition means customers are switching at an increasing rate.

Works are underway to get things back on track over the second half, including bundles, locked-in prices, perks, and better customer service with the use of AI and 24/7 access. This all makes sense, but competition is using the same strategy, so we’ll have to see if it yields the intended results.

There's plenty of scope to grab market share with increased 5G adoption, through traditional mobile and fixed wireless broadband products. Verizon's putting a lot of eggs in this basket and has thrown billions at the task. We think this is the right move. Growth in this space is picking up nicely but it’s still only a small part of the overall picture.

Wireless data is a notoriously competitive market. The same can be said of traditional broadband offerings. 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.

Verizon's debt pile is eye-watering too. That's a result of spending listed as "wireless licences." Simply put, governments license out chunks of the electromagnetic spectrum (think 5G) to telecoms groups to run their networks on, and they charge a pretty penny.

The chequebook’s got more work to do too, with the proposed $20bn acquisition of Frontier Communications. Integrating Frontier’s infrastructure into its own network could also help accelerate its fibre buildout.

For now, the 6.8% forward dividend yield looks well covered, as easing capex plus some more favourable tax conditions mean free cash flow is looking strong.

The valuation looks about right to us, and we can certainly see how the mammoth cash flows and healthy yield are attractive prospects. But we would urge caution. While the use of debt has helped boost returns for equity holders, it can be a double-edged sword if profits struggle.

Environmental, social and governance (ESG) risk

The telecom industry is low/medium in terms of ESG risk. Data privacy and security is the most significant risk driver, not only because customers are increasingly concerned about privacy, but also because cybersecurity breaches can be costly. Product quality is another key risk, particularly given the networks they manage are considered critical infrastructure. Carbon emissions, human capital and business ethics are also risks worth monitoring.

Verizon’s overall management of material ESG issues is strong.

Verizon has officers responsible for security and privacy, and its cybersecurity centre meets international standards. Climate risks are reported, and it conducts annual impact assessments. The company offers employee development programs, including tuition assistance, and ensures equal pay for women and men.