This morning Verizon Communications Inc. (NYSE:VZ) reported disappointing Q1 results, driven by steeper wireless phone subscriber losses and weaker associated revenue. FiOS operating metrics were also weaker than expected. Given recent comments, M&A has become a central investor focus, with the company focused on best ways to advance its 5G network plans organically or inorganically. Baird views a content acquisition as less likely, though all doors appear to remain open. Overall, the firm remains cautious given its continued exposure to wireless pressures.
Verizon lost 289,000 postpay phone subscribers, though the company noted that trends improved after the unlimited introduction. The company had apparently lost 398,000 phone subscribers prior to its unlimited launch, but gained 109,000 following its mid-quarter launch. That momentum should benefit Q2. Verizon lost 13,000 FiOS video subscribers, reflecting competitive intensity, with enterprise revenue down 3.7% organically on a constant currency basis.
On a positive note, wireline margins of 22.7% beat the firm’s 21.5% estimate, and the company guided to 2017 YOY improvement. Verizon noted that it is open to organic and inorganic paths to expanding its fiber presence to enhance the 5G footprint and opportunity. However, it seemed to downplay interest in content assets, though didn't close the door either. Verizon expects to close the Yahoo acquisition in Q2, which is not yet in Baird’s numbers, but will provide a modest boost to revenue and complement the AOL assets. Total IoT revenue, including telematics, grew 17% organically.
Verizon reiterated plans to trial 5G in 11 markets in Q2'17 utilizing its 28 GHz spectrum from the XO acquisition, with further commercialization in 2018. The company maintained expectations for 2017 revenue to be similar to 2016 on an organic basis, while acknowledging wireless equipment (handsets) uncertainty. It also expects flattish EPS YOY on the same basis. Lowering 2017 consolidated revenue from $124.12 billion to $122.36 billion, with adjusted EPS of $3.70 vs. $3.64 previously.
Verizon is currently trading at 6.8x the firm’s 2017E EBITDA and 6.6x 2018E, vs. T at 6.9x and 6.7x.