Verizon Earnings: We’d Prefer Management Surrender Customer Growth for Long-Term Profitability
Verizon VZ delivered underwhelming first-quarter results, with an unfavorable balance between new customer wins and customer retention. Cash flow growth remains management’s top priority, but we believe the firm has still placed too much emphasis on customer growth, at least in its communication with investors. We are maintaining our $57 fair value estimate, which assumes Verizon accepts its fate as one of three strong but relatively undifferentiated U.S. wireless carriers. We believe the shares remain attractive.
Verizon lost 127,000 net postpaid wireless phone customers during the quarter, worse than the 36,000 net loss a year ago. The pace of customer defections (churn) jumped to the highest first-quarter level in at least six years. However, management was quick to point out that gross phone customer additions were 5% higher than a year ago, as its Welcome plans and other marketing efforts have taken hold, and that churn levels improved throughout the quarter. With new leadership in place, Verizon expects to see customer metrics improve throughout 2023, building on the modest customer additions posted over the last three quarters of 2022.
At the same time, Verizon’s actions seem to contradict its targeting of customer growth. Wireless service revenue during the quarter increased only about 1.1% year over year (excluding an accounting change; 3% growth as reported), at the lower end of management’s target for the year. The firm expects price increases taken at the end of the first quarter on older rate plans and more efficient phone promotions will benefit revenue growth over the balance of the year. But both moves will likely limit subscriber growth.
In an environment where cable firms are offering aggressive discounts to build wireless momentum, we’d prefer management acknowledge that market share losses over the near term, which we believe would yield better long-term value for shareholders.
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