Verizon Misses Where it Matters, But Is Still In the Lead

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In what appears to be a disappointing quarter, Verizon Communications (NYSE: VZ) reported wider quarterly loss this week because of numerous charges, resulting from pensions and Hurricane Sandy.  However, beneath the surface, the company actually posted a decent improvement in key metrics.  The latest quarterly result is yet another testimony for the company miles ahead of AT&T Inc. (NYSE: T), Sprint Nextel Corporation (NYSE: S), Clearwire Corporation (NASDAQ: CLWR) and other competitors in nailing the LTE game.

The quarterly loss attributable to the company widened to $4.23 billion, up from $2.02 billion in the same period last year. Margins were primarily driven down on account of charges related to its pension liabilities, which amounted to $7.2 billion, and Hurricane Sandy during the quarter.

However, the top line continued its momentum and grew 5.7 percent to more than $30 billion during the quarter. There are no surprises as to what is driving the company’s revenue growth. Wireless and LTE continued to be the main growth drivers with Verizon, which is looking to further accentuate its advantage in 2013 in the face of fiercer competition.

Wireless revenues grew nearly 9.5 percent during the quarter from previous year. At the same time, wireline activities – now representing only one third of Verizon’s revenues – amounted to $10 billion, with a decline of 1.5 percent.  Actually, the market was not surprised by the drop in profits as the carrier earlier outlined the margin pressure from a higher iPhone mix and higher sales from indirect channels.  Beyond frontline metrics of revenues and earnings, Verizon actually delivered something of a power packed performance. Even in the wireline business, Verizon migrated 223,000 homes during the year, exceeding its target.

The real star was the wireless business with LTE as a cornerstone of the carrier's strategy. Verizon sold 7.3 million LTE devices during the quarter – the highest for any three month period so far. The carrier has been leading the market in terms of LTE, forcing others to accelerate their own plans.  Verizon’s push means that 34 percent of its smartphone base is LTE-enabled, while 58 percent of its internet devices base is LTE-enabled. Verizon's LTE sales are likely to continue in 2013 as the carrier leverages its network advantage by planning to use its AWS spectrum to improve capacity in denser areas.  This will help Verizon fight off fiercer competition. The company also hopes this improvement will give its network an advantage and will allow it to create a customer base robust enough once its rivals catch up.  Verizon expects that 30 percent of its sales will come from new customers, and upgrades will represent 42 percent.

The carrier will rationalize its spectrum portfolio, with agreements to sell 35 of its 77x700-MHz B licenses and four of its A licenses. Verizon foresees further consolidation with LTE as it looks to introduce better services, including video, connected environment, healthcare, and energy.  The monetization of new technologies is always key for operators, and Verizon will hope to build on the strong momentum it has experienced with its shared data plans.

Verizon’s advancements in LTE are further highlighted by some recent developments – one of which includes AT&T acquiring Atlantic Tele-Network's retail wireless operations, operated under the Alltel brand for $780 million in cash.  Sprint offered $2.97 per share for Clearwire, an offer that has been bested by DISH Network Corp., although it remains unclear as of now which company will be able to take full control of Clearwire.  Dish wants to launch an LTE-Advanced network as a viable alternative to AT&T and Verizon, but understands it needs to partner with a strong companion to pull this off.  While it remains unclear if DISH will manage to acquire Clearwire, the former’s desperation is just another example that Verizon is already sitting on a goldmine.  As for Verizon’s competitors, Sprint comes across as a potential challenger, but currently struggles from high debt and Clearwire’s integration challenges.

Verizon’s biggest competitor is of course AT&T, which is also a larger company. However, a side by side comparison of both carriers reveals that Verizon is outsmarting its larger peer on most performance metrics.

Verizon not only gets a larger share of its revenues from wireless services, but is also witnessing a much stronger growth in smartphone sales – thanks to the advantage it has gained with its LTE network.  In bottom-line terms, Verizon has leapfrogged AT&T where it is going to matter most over the next three to five years. Although AT&T has recognized the threat and is acting accordingly ,which is seen in its latest announcement of acquiring 700 MHz spectrum From Verizon for $1.9 billion, Verizon is clearly ahead in the game.

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