Verizon's Prepaid 3G Rebuild Will Help Spur Growth

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Verizon (NYSE: VZ) recently launched a promotion to rebuild its position in the prepaid 3G domain. To do this, the company aims to expand its 3G prepaid market, while placing 4G post paid plans for smartphones on the shelf. Verizon has formulated a lucrative double-digit promotional offer to prepaid subscribers until January. According to the terms of the offer, Verizon is providing subscribers with 2GB of data for prepaid $80 unlimited-talk-and-text plan in place of the customary 1GB data. I believe this promotion will positively affect future financial statements of the telecommunication giant, which will improve investor sentiment and positively impact its share value.

In its 2012 third quarter report, Verizon reported that wire line consumer revenues grew 4.6 percent compared with third-quarter 2011. This is the highest year-over-year quarterly revenue increase in a decade and compares with a 2.5 percent year-over-year increase in the second-quarter 2012. Consumer ARPU for wire line services increased to $103.86 in third-quarter 2012, up 10.3 percent compared with third-quarter 2011. This is an acceleration from an 8.5 percent ARPU increase, comparing second-quarter 2012 with second-quarter 2011. However, while retail post paid net adds were 1,535K, the company only had 22K retail prepaid net adds.

Why did retail prepaid 3G adds not match the retail post paid? The situation is blamed on the entry of 4G long-term evolution (LTE) in the market and its increasing popularity among carriers and subscribers. With the growing market penetration of 4G, Verizon expects its 3G network to be wiped out within the next few years. Believing it will ultimately shut down the network, it tends to highlight its 4G network. "With our 4G LTE network advantage well received and Share Everything Plan and unmatched product portfolio, Verizon continues to do an outstanding job of balancing growth and profitability," said Lowell McAdams, Verizon's Chairman and CEO while delivering the third quarter report. "Wireless achieved record profitability in a quarter in which we reported the highest number of retail post paid gross and net adds in four years."

Despite its preference for wireless, the company acknowledged the success achieved by its wire line sector. Sure, its third-quarter 2012 operating revenues were $9.9 billion, a decline of 2.3 percent compared with third-quarter 2011. But this is not all the story. "We recorded the highest growth in consumer wire line revenues in 10 years. We are confident that we have the right plan in place to meet the challenges while improving the long-term profitability in both consumer and enterprise," said McAdams. There were 136,000 FiOs internet and 199,000 FiOS Video net additions, with continued increased sales penetration for both products. While post paid revenues went up only 7.2%, retail prepaid revenue went up a whooping 41.8% year-over-year, the highest in a decade.

Why did retail prepaid increase surpass retail post paid growth? Last year Verizon launched a similar promotion to the one it has just launched. Last year's promotion was only applicable to new customers who purchased CDMA smartphone and didn't apply to LTE. Though the plan was the most expensive one in the 3G prepaid market, Verizon found a second life for its CDMA network. It served as a back up in areas where its 4G service was unavailable, even though such areas were far and between.

It is clear that Verizon last year's prepaid promotion has improved this year's figures. In addition to this, 3G prepaid activities didn't hamper total operating revenue, which went up 3.9% to $29 billion on a consolidated basis year-over-year. Despite it, full-year 2012 capital expenditures are expected to be lower than the 2011 capital expenditure of $16.2 billion. Cash flows from operations still totaled $24.8 billion in the first nine months of 2012, compared with $21.5 billion in the first nine months of 2011.

With earnings per share of $1.08, compared to AT&T's (NYSE: T) $0.76, Sprint's (NYSE: S) -$1.44, and others below that mark, and price-to-earnings ratio of 40.78, compared to AT&T's 45.15 and the industry average of 31.60, Verizon does seem to be ahead of the others. Though its price-to-sales ratio is 1.10, it is cheaper than 1.50 for AT&T and 1.25 for the industry average. It must also be noted that Verizon is one of the biggest names in the niche it is operating. It has done far better than other networks such as Frontier (FTR) and CenturyLink (CTL). Looking at the results of the previous promotion and the improving margins this year, I can say Verizon's plan will be successful and the company is a good buy at the moment.

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