Verizon Communications: Earnings Preview - Seeking Alpha

The largest U.S. mobile service provider Verizon Communications (VZ) is slated to release its fourth quarter and fiscal 2011 earnings on January 24, before the opening bell. The current Zacks Consensus Estimate is pegged at 54 cents for the fourth quarter, representing a year-over-year decrease of 0.27% while for fiscal 2011 it stands at $2.17, representing a substantial increase of 18.49% from the prior year.

With respect to surprises, Verizon had a 1.27% average positive earnings surprise in the trailing four quarters.

The company did not release any financial forecast for the fourth quarter during its third quarter conference call. Notably, Verizon is expected to add 200,000 subscribers in both FiOS TV and FiOS Internet services for the fourth quarter as it cleared the FiOS installation backlog, which stemmed from the severe storm in the East Coast in September and the 14-day labor strike in August last year.

For fiscal 2011, Verizon expects revenue and earnings per share to grow 4%?8% and 5%?8% year over year, respectively.

Third Quarter Flashback

Verizon?s third quarter adjusted earnings of 56 cents per share matched the Zacks Consensus Estimate and was a penny above the year-ago earnings. The storm in the East Coast and the 14-day labor strike in the Wireline segment enhanced the operating cost by $250 million and hurt profitability in the third quarter.

However, on a GAAP basis, earnings more than doubled on strong smartphone sales. Revenue improved during the quarter and surpassed the Zacks Consensus Estimate on continued strength in the wireless segment. Wireless revenue advanced on the back of strong data revenues and subscriber growth. Rapid expansion of 4G Long-Term Evolution (LTE) services, strong adoption of Google inc. (GOOG) Android smartphones and the sale of Apple Inc.'s (AAPL) iPhone led to the strong upside in wireless subscribers.

Despite the solid momentum for FiOS fiber-optic network, Wireline revenue dipped on lower global wholesale and other businesses. The penetration rate of both FiOS Internet and FiOS TV accelerated to approximately 35% and 31%, respectively.

Agreement of Analysts

Estimates reflect a negative bias for both the fourth quarter and fiscal 2011 over the last 7 and 30 days. For the fourth quarter, 2 and 16 analysts out of 27 made downward revisions in the last 7 and 30 days, respectively. For fiscal 2011, out of the 30 analysts, respective 2 and 18 made downward revisions in the last 7 and 30 days.

None of the analysts made positive revisions for the fourth quarter and fiscal 2011.

The analysts made downward revisions primarily based on the iPhone subsidies, which will likely limit Verizon?s margins and profits in the fourth quarter. Although the fourth quarter iPhone sales more than doubled from the prior quarter, Verizon expects the device to impact wireless gross margin by 500?600 basis points (bps).

The wireless margin is now expected to be in the range of 42% to 43% for the fourth quarter versus 47.8% reported in the third quarter. In addition, the iPhone does not support Verizon?s new high-speed 4G network that uses the LTE technology. Further, Verizon faced a number of failures exiting fiscal 2011. Verizon Wireless, a joint venture between Verizon and Vodafone Plc (VOD), had experienced three service outages in its new 4G network last month, denting its reputation for network quality.

Moreover, the analysts believe that persistent access line losses in wireline, competitive pressures from its largest rivals AT&T Inc. (T) and Sprint Nextel Corp. (S), high promotional and restructuring expenses would further limit the earnings upside potential.

The analysts believe these negative attributes offsets Verizon?s strong subscriber count and average revenue per user, which is driven by increased penetration of smartphones and iPhones that recorded astounding performance in the U.S. market.

Magnitude ? Consensus Estimate Trend

The magnitude of revisions for fourth quarter remained stable over the last 7 days at 54 cents, but lowered from 56 cents over the last 30 days.

Similarly, the Zacks Consensus Estimate for 2011 remained static at $2.17 over the last 7 days and was down by 3 cents over the last 30 days.

Neutral Recommendation

We believe Verizon is on track to meet its revenue and earnings targets based on the introduction of new smartphones, tablets and data devices in the Wireless segment as well as continued strong FiOS fiber-optic network and strategic services in the Wireline business. Additionally, the new iPhone 4S, successful integration of Terremark and the recent acquisition of CloudSwitch would boost the company?s growth prospects.

Further, Verizon is progressing fast to acquire more spectrum licenses in order to support its video content and other data services in the rapidly growing smartphone market. In this regard, the company would buy spectrums from Leap Wireless (LEAP), Comcast (CMCSA), Time Warner Cable (TWC), Bright House Networks and Cox Communications Inc.

Although these spectrum deals would be accretive to Verizon in the long term, we believe it might put pressure on the balance sheet in the short term by reducing cash balances and increasing capital expenditures. In addition, persistent erosion in access lines, uncertain returns from investments, iPhone subsidies and intense competition from cable companies and other alternative services providers are threats to the stock.

We are currently maintaining our long-term Neutral recommendation on Verizon. For the short term (1-3 months), the stock retains a Zacks #4 (Sell) Rank.

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Source: http://seekingalpha.com/article/321045-verizon-communications-earnings-preview

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