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Analyzing Verizon's growth opportunities and important risks

Analyzing Verizon's growth opportunities and important risks (Part 1 of 6)

Analyzing Verizon’s growth opportunities and important risks

Verizon continues to gain subscribers amid a low churn rate

Verizon (VZ) is the biggest telecom company in the U.S. in terms of its market cap, which currently stands at above $200 billion. Verizon has two main businesses—Wireless and Wireline. The Wireless business provides voice and data services as well as the sales of devices (mobile phones and tablets) to consumers. The Wireline business provides broadband Internet service, called “FiOS,” to consumers, and networking solutions and cloud services to enterprises.

The Verizon network is perceived as high-quality and can also be judged by the low churn rate compared to competitors. As the chart below shows, Verizon and AT&T (T) have low churn rates, at around 1.07%, while Sprint (S) and T-Mobile US (TMUS) have high churn rates. Verizon also continues to gain subscribers as well as average revenue per account (or ARPA), the key metrics for a telecom company. Verizon’s retail subscribers increased from 98.9 million in Q1 2013 to 103.3 million in Q1 2014, while its ARPA increased from about $150 in Q1 2013 to about $160 in Q1 2014.

Churn RateEnlarge Graph

4G adoption and new plans are helping wireless revenue growth at Verizon

Verizon continues to benefit from the faster adoption of high-speed 4G networks by customers, such that about 73% of the total data traffic of the Verizon network is carried through its 4G LTE network. Plus, 64% of the smartphones on the Verizon network were on 4G as of Q1 2014. Also, Verizon has come up with new plans to reduce its churn rate even further. It introduced the EDGE plan last year, which is an installment plan for customers who want to upgrade their devices faster or who don’t want to pay the upfront cost of their devices. “More Everything” is another plan wherein customers can get double the data on select plans, which helps them save money.

FiOS is driving Verizon’s growth in Wireline segment

FiOS is the high-speed broadband connection based on a fiber optic network. Verizon recently introduced its FiOS Quantum service, which can provide Internet download speeds ranging from 50 Mbps to 500 Mbps. FiOS achieved a year-over-year revenue growth of 15.5% in Q1 2014, which was driven by customer additions and FiOS Quantum penetration.

High net debt is a risk for Verizon

Until September 2013, Vodafone (VOD) owned a 45% stake in Verizon’s Wireless segment. Verizon then entered into a stock purchase agreement with Vodafone to acquire the complete 45% stake in Verizon Wireless for a valuation of approximately $130 billion, so that Verizon could have 100% ownership of Verizon Wireless. Though this transaction was mostly financed through cash and Verizon’s common stock, Verizon still carries a long-term debt of $108 billion on its balance sheet. This huge debt is the main risk to Verizon despite otherwise strong fundamentals.

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