On Thursday, Verizon (NYSE: VZ) announced earnings and there were some surprises. And by surprises I mean some not good things. The stock opened down close to 2% and has been struggling to turn positive as investors try to digest the earnings from the telecom giant.
If you are an investor in Verizon or you are thinking of jumping in with your investment dollars, you need to make sure you understand what happened in the latest earnings release as well as where the company is headed. I outline all of this below.
Verizon Earnings Report
In the earnings report released Thursday, Verizon said its earnings per share for the first quarter of 2017 was $0.95 versus the estimate of $0.96. Revenues also missed, coming in at $29.8 billion versus the estimate of $30.5 billion.
The company lost 13,000 Fios video customers but gained 35,000 Fios internet customers. However even with this increase in internet subscribers, the company still missed estimates on this one as well.
But the most shocking news is that Verizon lost wireless customers for the first quarter of 2017. This has never happened before and is what is really spooking investors. And what really is concerning is that this loss of customers comes on the heels of the company re-introducing its unlimited plans.
Where Does Verizon Go From Here?
The news that Verizon lost cellular customers should come as a surprise. After all, Verizon brought back their unlimited phone plans as a response to other major carriers pushing them as well as phone resellers in the secondary market offering these plans as well.
So where does the company go from here? They are basically standing pat. They expect full year 2017 numbers to be in line with 2016. In 2018, they expect cellular subscriber growth to return.
The reason they are not worried is multi-faceted.
- Fios internet remains profitable. They continue to add new subscribers and with the merger of XO Communications, they can continue to expand into new markets.
- Solid margins. Despite missing estimates, a deeper look at the numbers shows that the company has slowly been improving its margins. This means each new customer going forward will be more profitable for the company.
- Strong dividend. The company has a long history of increasing its dividend on a regular basis and it currently is yielding close to 5%. That is a nice income for investors looking for a dividend play.
But even with these positives, there are some hurdles that Verizon still faces. Here are the biggest ones at the moment.
- Loss of cellular customers. Verizon was hoping to increase subscribers when it brought back its unlimited plans, but lost subscribers instead. Going forward, they need to make certain this past quarter of losses is just an anomaly and not a sign of things to come.
- Yahoo merger. The potential merger with Yahoo is still pending. While outsiders might think it is a sure bet the merger will happen, there are rumblings of some issues. Namely, a reduced price thanks to the cyber attacks and security breaches that Yahoo recently faced.
- Pricing structure. Going forward, Verizon needs to ensure it gets pricing right for its products. Consumers are more cost conscious these days and no longer stick with a brand simply out of loyalty. At the same time, Verizon needs to make sure they are getting the highest price possible to continue to grow revenues.
- Video Subscribers. Related to the above point is video subscribers. The company needs to find a way to limit the defectors of the Fios video brand. As more and more consumers cut the cord, Verizon needs to find a way to keep subscribers without eroding the value of the brand. It is a tight rope to walk but is important in the near term.
Time To Bail On Verizon?
So with the above points and the missed earnings, should you bail on Verizon? The answer is no. I would take this pullback as an opportunity to load up on more shares. The company has a solid past and will be able to right the ship in the near term.
While you wait for this, and the stock price to return to glory, you can collect a healthy dividend.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.