Verizon executives started out their second-quarter earnings call with a much different tact than they usually do. They were unusually apologetic, as they had just released numbers showing they had a worse-than-expected second quarter.
Total net income was $5.3 billion, a decrease of 10.7% from the second quarter of 2021. Adjusted EBITDA was $11.9 billion, down 2.6% year over year.
In the wireless segment, postpaid phone net additions were 12,000 – and that’s largely because the business segment did so well. The consumer segment reported 215,000 wireless postpaid phone net losses, whereas the business segment reported 430,000 net additions, including 227,000 phone net adds. “Our second quarter was not a good barometer of where Verizon has been, or where we’re going,” said Verizon CEO and Chairman Hans Vestberg in kicking off Friday’s earnings conference call. “We’re not satisfied with our performance. We know what the issues are,” he said, suggesting they’re already executing to right the ship in the second half of this year.
The inflationary environment is clearly impacting consumer behavior, and there was intensified competition for consumer attention, he said. The result was a significant impact on gross adds, which left the company with the paltry postpaid phone net additions of 12,000. The day prior, AT&T reported 813,000 phone net adds for the quarter.
In the high-end priced plans, Verizon continues to do well, Vestberg said. As for the lower end, he said they’ve already responded, having launched the $30 Unlimited Welcome plan last week, which should start seeing results in the third quarter. It’s designed to meet the needs of budget-conscious consumers without a lot of bells and whistles. But Verizon also recently raised prices on some plans, so the math doesn’t necessarily make sense to the casual observer.
What’s going on?
What’s on a lot of minds is Verizon’s response to what is widely seen as T-Mobile’s 5G network superiority and continued aggressiveness in the price-conscious segment. Verizon continues to value its high-priced segment; Vestberg reiterated during the call that: “We want high-quality customers.”
JP Morgan analyst Phil Cusick summed it up thusly during the Q&A portion of the call: “On the one hand, you’re raising prices with fees. On the other hand, you’re bringing in lower-priced discounted offers, and I know you’re offering loyalty offers to customers who call in and complain about pricing. It seems like you’re out of the market. So do you think that your network is going to return to its dominance and you can sort of get through this period, or do you think you really need to re-address your competitive position in order to maintain share?”
Vestberg reiterated that “we feel really good about our network,” adding that it’s actually “better than ever.” Verizon is in the midst of its C-band rollout, which has passed over 130+ million people and by year end, will reach at least 175 million POPs.
“We’re going to have many more customers getting the benefit of the C-band,” Vestberg said, noting recent Root Metrics and J.D. Power reports that give Verizon high network and customer service ratings.
What they’re doing now is “segmenting the market,” Vestberg said. The Unlimited Welcome plan is one segment on the lower end and on the higher end, it sees continued step-ups. “We will continue to be very focused on the cash flow and getting the right type of customers,” he said. “We believe high-quality customers are important and that means loyalty.”
CFO Matt Ellis said they haven’t seen any notable difference in customers’ payment patterns, which is something AT&T noted during its call with investors on Thursday, saying they’re noticing some lag.
“At this point in time, we’re continuing to see the type of strong payment patterns that you would expect from the high quality customer base that we have,” Ellis said.
Looking for growth from 5G
Looking toward some of the opportunities that 5G offers, Verizon executives were asked about fixed wireless access (FWA), mobile edge compute (MEC) and other opportunities to raise revenues.
Vestberg said the FWA portion is “definitely happening” the way they expected, even though they were met with a lot of early skepticism. The network capacity is there, and the C-band deployment is going to go a long way toward meeting needs there.
With 5G mobility, “short-term is a little bit more challenging,” Vestberg said, referencing the economic challenges in the market, but long-term, stepping customers up to higher-end plans is a great opportunity. Some 47% of Verizon customers have a 5G phone, and by year-end, that will probably be near 60%, he said.
On the MEC and IoT fronts, “we also have a really good trend on that,” he said. Starting with private 5G networks, more customers will then move over to MEC and customers see the advantages of that over Wi-Fi, he said, suggesting that in the next couple of years, there will be a lot more devices for this segment, including those beyond smartphones.
The FWA segment was a bright-ish spot in the second quarter, increasing 62,000 from the first quarter of 2022. In FWA, the consumer segment reported 168,000 net additions for the second quarter. The business segment reported 88,000 FWA net adds for the same period.
Verizon updated its financial guidance for the rest of the year, and it now expects wireless service revenue growth of 8.5% to 9.5%, versus the prior estimate of 9% to 10%.
For the full year 2022, Verizon expects capital spending, excluding C-band, in the range of $16.5 billion to $17.5 billion. Additional expenses related to the deployment of its C-band 5G network are expected to be in the range of $5 billion to $6 billion.
What analysts are saying
Management had warned that the consumer business is facing headwinds with both subscriber trends and costs, and expectations were low as a result, said New Street Research (NSR) analysts.
“Subscriber trends and EBITDA were much worse than feared. The competitive environment will only get more difficult over the course of the next few quarters as Sprint churn goes away, T-Mobile’s discount becomes more salient to households and cable continues to lean into its wireless offers,” the NSR analysts said in a report Friday.
“At root, the problem is Verizon’s value proposition,” said Wall Street analyst Craig Moffett of MoffettNathanson in a report, also released after Friday's earnings. “For years, their better network allowed for higher prices. They don’t have a better network anymore. They still have higher prices. To be sure, the same could be said of AT&T. But AT&T’s customers didn’t choose AT&T because it had the best network. Verizon’s did.”
Unless something changes for 5G revenues that still seem rather intangible, such as IoT, MEC or private networks, the growth runway for Verizon continues to look quite weak, he said.
Even Verizon’s attempts to cater to the lower end of the pendulum with offers in the TracFone line are not really working, according to industry analyst Roger Entner, founder of Recon Analytics. Verizon reported prepaid net losses of 229,000 in the second quarter.
“They are Verizon, and they can’t help it to be premium,” Entner said. “They even make prepaid premium.”
Pressed to describe Verizon’s quarter versus AT&T’s “monster” quarter, he admitted to being hard-pressed to come up with the appropriate word. “It’s like bone-chilling,” he said. “They typically executed on every quarter. Then they got this first quarter, and ‘we’re losing people.’ Now that contagion has spread to the second quarter… In Q4, I’m not sure,” and when industry-wide net adds drop, right now it’s looking like “it’s Verizon who gets slaughtered.”