Verizon Communications Inc (VZ) Com Stk USD0.10
HL comment (21 July 2021)
Verizon has reported $33.8bn in operating revenue, which is up 10.9% on last year and 5.3% on 2019. Management attributed this to "wireless revenue growth, strong Fios and Verizon Media results, and increased wireless equipment revenue."
Operating profits also rose 10.9% to $8.2bn, and underlying earnings per share rose from $1.18 to $1.37.
Management has raised guidance for underlying earnings per share from $5.00-$5.15 to $5.25-$5.35 for the full year.
The shares rose 1.4% in pre-market trading.
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. However, lockdowns and social distancing make it harder to sell new phones - although equipment sales have bounced back well recently. Longer term, the roll-out of 5G could prove a "secret sauce" 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.
Verizon has also announced it's selling 90% of Verizon Media to Apollo Funds for $5bn. Verizon Media hasn't lived up to early expectations or really justified the investment, although it has been doing better recently. The sale will leave Verizon a more focussed business, but it's still a tough reminder of a project that never really worked out.
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: 10.7
- 10 year average 12m forward Price/Earnings ratio: 13.1
- 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.
Revenue in the Consumer segment was $23.5bn, up 11.2% on a last year and 6.7% on 2019. This primarily reflects stronger wireless equipment sales, which are now above 2019 levels. Wireless service revenue rose 5.4% to $13.8bn, although this is still 2.5% behind 2019. Operating profit for the division increased 6.1% to $7.5bn as margins dipped slightly to 31.9%.
Business revenues rose 3.7% to $7.8bn, which is about flat compared with 2019. Wireless service revenue rose 8.0% to $3.1bn, which is 11.4% higher than 2019, and was led by Small and Medium Business and Global Enterprise. Segment operating profit was $856m, down 9.5% on last year as margins fell from 11.0% to 12.6%.
Verizon Media revenues were $2.1bn, up about 50% on last year and 13% on 2019. This reflects strong demand for advertising platforms and high customer engagement.
Verizon's net debt increased by $42.5bn to $136.8bn, which is roughly 2.9 times adjusted cash profits (EBITDA). Free cash flow for the first half was $11.7bn, down 14.5% on last year, largely due to tax payments and higher working capital requirements. Full year capital spending is still expected to be between $17.5bn and $18.5bn, plus another $2-3bn relating the group's C-Band 5g rollout.
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 disclosure for more information.
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