Verizon (VZ) Down 6.1% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Verizon Communications (VZ). Shares have lost about 6.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Verizon due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Verizon Trumps on Q1 Earnings Despite Lower Revenues

Despite worldwide mayhem induced by the coronavirus pandemic, Verizon started 2020 on a positive note, reporting relatively healthy first-quarter 2020 results primarily led by the wireless business. With industry-leading wireless products and services, the company remains well poised to benefit from increased 5G deployment across the country under the new operational framework.

The Headlines

GAAP earnings for the reported quarter were $4,287 million or $1.00 per share compared with $5,160 million or $1.22 per share in the year-ago quarter. The year-over-year decrease in GAAP earnings was largely driven by top-line contraction and higher operating expenses. Excluding non-recurring items, adjusted earnings were $1.26 per share compared with $1.20 in the year-earlier quarter and beat the Zacks Consensus Estimate by 4 cents. The adjusted earnings for the reported quarter included an adverse impact of 4 cent per share related to the virus outbreak, primarily driven by higher bad debt reserves.          

Consolidated GAAP operating revenues for the quarter declined 1.6% year over year to $31,610 million as wireless service revenue growth was more than offset by lower wireless equipment revenues. The top line missed the consensus mark of $32,347 million. Operating income fell 14.7% year over year to $6,579 million. Adjusted EBITDA remained flat at $11.9 billion with corresponding margin of 37.7%.                     

Segment Performance

Consumer: Total revenues from this segment were down 1.7% year over year to $21,765 million. Service revenues improved 0.5% to $16,341 million due to shift to higher-priced plans, incremental contributions from retail postpaid net additions and an increase in connections per account. Equipment revenues decreased 18.9% to $3,377 million due to limited in-store customer engagement owing to store closures amid social distancing measures, while Other revenues totaled $2,047 million, up 18.8% year over year. Notably, Verizon closed nearly 70% of company-operated retail locations and reduced in-store service hours to prevent exposure to the deadly virus, leading to lower sales volume.

Operating income improved 0.4% to $7,282 million, while operating income margin was up to 33.5% from 32.7% a year ago. Segment EBITDA was $10,102 million, resulting in EBITDA margin of 46.4% compared with respective tallies of $10,144 million and 45.8% in the prior-year quarter.

Verizon reported 525,000 wireless retail postpaid net losses in first-quarter 2020. Quarterly retail postpaid churn rate decreased to 1.01% from 1.08% in the year-ago quarter. Wireless retail postpaid ARPA (average revenue per account) was $118.86 compared with $117.45 in the year-ago quarter.

Business: Total revenues in the segment were $7,681 million, down 0.5% year over year as lower Wholesale revenues (down 9.1% to $772 million) and Global Enterprise (down 2.2% to $2,631 million) were offset by higher Small and Medium revenues (up 3.5% to $2,804 million) and Public Sector and Other revenues (up 0.2% to $1,474 million). Despite growth in high-quality mobility products, VPN services and high-speed circuit capacity to support front line crisis responders and work-from-home arrangements, Verizon continued to face pricing pressures on legacy products and technology shifts. The segment recorded 475,000 wireless retail postpaid net additions in the quarter, up 79.9% year over year with total retail postpaid churn of 1.30%.

Operating income from the segment was $954 million compared with $1,048 million in the year-ago quarter for respective margins of 12.4% and 13.6%. Segment EBITDA fell 5.8% to $1,968 million for EBITDA margin of 25.6% compared with 27.1% in the year-ago quarter.

Cash Flow and Liquidity

Verizon generated $8,824 million of cash from operating activities in the quarter compared with $7,081 million in the year-ago period. The year-over-year increase was driven by operational improvements in the reported quarter and cash payments related to the Voluntary Separation Program made in first-quarter 2019. At quarter-end, Verizon had $7,047 million of cash and cash equivalents and $117,736 million in long-term debt. Bad debt reserves were up by $228 million as the company expects higher number of customers would seek payment relief under the Keep Americans Connected pledge owing to the adverse economic impact from the virus outbreak.

The company remains focused on making necessary capital expenditures in order to support increased demand for network traffic. At the same time, Verizon is focusing on continued build-out of its 5G Ultra Wideband network, deployment of significant fiber assets across the country and upgradation to Intelligent Edge Network architecture. Till date, Verizon has achieved $6.3 billion of cumulative cash savings and remains on track to achieve cumulative cost savings of $10 billion by 2021.

Guidance  

For full-year 2020, Verizon tweaked its earlier guidance amid the coronavirus-led turmoil. Adjusted earnings per share are currently anticipated to remain within -2% and 2%, compared with earlier expectations of 2-4% increase year over year. The company, however, withdrew its revenues guidance. Capital expenditures for 2020 are likely to be in the range of $17.5 billion to $18.5 billion.

Moving Forward

With one of the most efficient wireless networks in the United States, Verizon is likely to benefit immensely from the increase in 5G footprint with the launch of the 5G Ultra Wideband network in more markets across the country. The company is taking pro-active steps for the overall benefit of its employees and users while implementing efficient cost measures to tide over the storm.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.92% due to these changes.

VGM Scores

Currently, Verizon has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Verizon has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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