Zacks Small Cap Institutional Research



|Verizon Communications Inc. | |$47.84 |

| |(NYSE: VZ) | |

Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.

Reason for Report: 1Q18 Earnings Update

Prev. Ed.: Mar 2, 2018; 4Q17 Earnings Update

Brokers’ Recommendations: Positive: 52.4% (11 analysts); Neutral: 47.6% (10); Negative: 0.0% (0) Prev. Ed.: 8; 13; 0

Brokers’ Target Price: $55.91 (↑$1.14 from the last edition; 18 analysts) Brokers’ Avg. Expected Return: 16.9%

Executive Summary

Verizon Communications Inc. (VZ) is one of the largest telecommunication providers in the United States. The company provides local exchange, long distance, Internet and other related services to residential, business and government customers.

Of the 21 firms covering the stock, 11 conferred positive ratings, 10 provided neutral ratings, while no firm had negative stance on the stock. The target prices range from $50.00 to $63.00, with the average being $55.91.

The following is a summarized opinion of the diverse brokerage viewpoints:

Buy or equivalent outlook (11/21 firms): The firms expect Verizon to maintain its strong foothold in the U.S. market, given continued strength in the Wireless business from increased smartphone sales as well as stabilization of the Wireline business owing to strong enterprise strategic services and FiOS services. Consistent market share gains, strong LTE (Long Term Evolution) sales and the rollout of FiOS Internet are also expected to contribute to the company’s growth trajectory. Launch of FiOS Instant Internet services along with fiber-to-the-home (FTTH) in greater New York City/northern New Jersey, Philadelphia and Richmond should add to the company’s growth. The firms appreciate Verizon’s move to sweeten its SMB (small and medium-sized business) services with a new video service, Fios Current TV. Further, Verizon’s systematic diversification into the digital content and online advertising space with the formation of a new division called Oath to oversee assets of Yahoo and AOL, including more than 20 brands like Yahoo News, HuffPost, Engadget, TechCrunch, Yahoo Finance, Yahoo Sports and Tumblr, looks encouraging. Moreover, these firms applaud the company’s commitment toward improving long-term profitability in the Wireline business through product streamlining, process simplification as well as cost management.

Neutral or equivalent outlook (10/21 firms): Despite significant growth prospects in the wireless arena, the firms remain wary of Verizon’s weak enterprise customer premises equipment (CPE) business. Further, slow strategic services revenue improvement has also been impeding growth. Although the firms are hopeful about the spectrum deal, they apprehend that a saturated wireless market, competition, the impact of wireless handset subsidies on margins, heavy capital spending, regulatory risks, and pressure on earnings might pose near-term threats to Verizon. Nonetheless, they are positive on the company’s increased focus on online content delivery, mobile video and online advertising.

General Outlook

Verizon expects considerable business growth in both its Wireless and Wireline businesses in 2018. Verizon expects positive growth in 2018 on the back of the expected savings from tax reform. The firms believe Verizon’s revenues and earnings will grow, based on the introduction of smartphones, tablets and data devices in the Wireless segment as well as continued strong FiOS fiber-optic network and strategic services in the Wireline business. The company’s efforts to improve profitable growth include improving operating and capital efficiency. In the enterprise and the wholesale business, Verizon is changing its revenue mix toward newer growth services like cloud, security and professional services. Also, the company is looking forward to capitalize on the countless innovative technology solutions being developed in the Internet of Things and telematics ecosystem across multiple industries. Further, the company’s current focus on online content delivery, mobile video and online advertising should drive growth.

May 3, 2018

Overview

The firms have identified the following factors for evaluating the investment merits of Verizon:

|Key Positive Arguments |Key Negative Arguments |

|Compelling Fundamentals: Verizon offers the most efficient wireless network in the |Competitive Threats: Verizon continues to struggle in a highly competitive|

|United States. It has a strong portfolio of wireless spectrums of which a little |U.S. wireless market. The industry is likely to witness more competition in|

|more than half is currently used to support 4G LTE networks. The telecom behemoth is|2018 with the entry of cable operators like Comcast and Charter. |

|continuously investing in its wireless and wireline fiber-optic networks. | |

| |Spectrum: Spectrum crunch has become a major issue in the U.S. telecom |

|Improved Competitive Position: The rollout of 4G LTE services along with the new |industry that has a saturated wireless market. Most of the carriers are |

|devices will provide substantial potential for future growth. Further, Verizon plans|finding it increasingly difficult to manage mobile data traffic, which is |

|to launch 5G wireless residential broadband services in several U.S. markets in |growing by leaps and bounds. |

|2018. | |

| |Wireless Impact: The company’s wireline division is struggling with |

|Digital Content: Verizon is systematically diversifying itself as a major player in |persistent losses in access lines owing to competitive pressure from |

|the digital content and online advertising space. The company has formed a new |voice-over-Internet protocol (VoIP) service providers and aggressive |

|division called Oath to oversee assets of Yahoo and AOL, including more than 20 |triple-play (voice, data, video) offerings by cable companies. |

|brands like Yahoo News, HuffPost, Engadget, TechCrunch, Yahoo Finance, Yahoo Sports | |

|and Tumblr. Verizon included its Go90 content across some of its Oath brands. |Macroeconomic Environment: Telecom companies are highly vulnerable to the |

| |macroeconomic environment, and are subject to risks from changes in |

|Online TV Streaming: Verizon is planning to launch a theme-based online streaming TV|technology, government regulation, exposure to economic cycles, risk of |

|service in 2018, backed by the digital streaming deal with the National Football |slow wireless growth and competitive pressure in the wireline industry. |

|League (NFL). |Verizon’s streaming TV services’ launch has been delayed due to several |

| |factors including technological hurdles, problematic negotiations with |

|Fiber-Optics: Verizon is strengthening its fiber-optic network assets with multiple |broadcasters and programmers and media chief Marni Walden’s imminent exit |

|buyouts to support 4G LTE and upcoming 5G wireless standards as well as wireline |from the company. |

|connections. Accumulation of dark fiber will bolster Verizon’s cell network density | |

|and boost mobile backhaul network. |Technology: If Verizon is unable to sustain its current level of |

| |innovation in technology, it will likely lose customers to its competitors.|

|Wireline Profitability: Verizon’s FiOS technology is likely to witness considerable |Hence, substantial investment is required to continuously upgrade its |

|demand from residential customers once 4K video technology and Internet of things |technology. |

|(IoT) technology gain popularity. Verizon has launched FiOS Instant Internet | |

|services along with fiber-to-the-home (FTTH) in greater New York City/northern New | |

|Jersey, Philadelphia and Richmond. Verizon has sweetened its SMB (small and | |

|medium-sized business) services with a new video service, Fios Current TV. | |

Based in Lower Manhattan, New York City, Verizon Communication Inc. (VZ) was formed out of the merger between Bell Atlantic Corporation and GTE Corporation on Jun 30, 2000. The company provides communication services in the United States and globally. Verizon operates in two segments, Wireline and Wireless. The Wireline segment provides voice, Internet access, broadband video and data, next generation Internet protocol (IP) network services, network access and long distance services to consumers, carriers, businesses and government customers. The Wireless segment offers wireless voice and data products, and other value-added services, as well as sale of equipment. It operates primarily in the heavily populated north east region of the United States, which includes New York and Washington DC. With the acquisition of Alltel Wireless Corp. in early 2009, Verizon surpassed AT&T as the largest wireless carrier in the North America, serving more than 105 million customers. Verizon provides wireless service to its subscribers through Verizon Wireless, a wholly owned subsidiary. For more information about the company, please visit its website at: .

Note: Verizon’s fiscal year ends on Dec 31.

May 3, 2018

Long-Term Growth

Verizon believes that steady and consistent investments in networks and platforms will drive innovative products and services and fuel the company’s growth. Verizon’s Wireless and Wireline networks will continue to be the hallmark of its brand and provide the fundamental strength upon which the company builds its competitive advantage. In addition to top-line growth, the company continues to focus on driving process improvements and cost efficiencies through its Verizon Lean Six Sigma program. The firms believe that focus on increasing efficiency has enabled the company to maintain a strong earnings profile.

The firms believe that Verizon has an attractive fundamental outlook based on increasingly favorable growth prospects for its Wireless business and the possibility of improved performance from its Wireline operations. Verizon will continue to achieve growth and profitability with a focus on gaining share in the retail post-paid market, increasing penetration of smartphones, and selling more Internet devices such as tablets. Management is bullish on the industry's ability to grow revenues from smartphones, tablets and cloud computing. The firms see strong demand for all these three services, going forward.

Verizon continues to lead the wireless industry with the expansion of 4G LTE mobile broadband network. Mobile broadband services are currently the industry’s most powerful growth drivers. The wireless giant, which was the first to deploy the 4G LTE (Long-Term Evolution) network nationwide, plans to be the first-to-market with 5G services. 5G will enable even faster speeds and much less network delay, enabling new applications such as autonomous vehicles, smart cities, and industrial Internet of Things (IoT) capabilities.

Verizon plans to launch next-generation 5G wireless residential broadband services in three to five U.S. markets in 2018. The first commercial launch is scheduled in Sacramento, CA, in the second half of 2018. Additional details of this launch and the announcement of other markets will be unveiled later. During the first application of 5G wireless network, Verizon will be using millimeter-wave spectrum (radio signals) instead of copper or fiber cables, to provide customers with unmatched wireless speeds for Internet access.

Verizon and AT&T have inked a joint deal with Tillman Infrastructure to build cell towers in the United States. Privately held, Tillman is the owner and operator of towers, small cells and smart cities infrastructures. Per the deal, Tillman will construct customized towers and lease it to Verizon and AT&T. These new structures will add to the overall communications infrastructure in the country and will fulfill the availability of towers in newer locations. The build-outs will also help the wireless carriers relocate equipment from their current towers. The partnership implies that the wireless carriers are willing to strike deals with other vendors to secure prices for towers. Moreover, carriers are always looking for alternative partners to reduce their dependence on specific customer base, thanks to the already saturated domestic wireless market. Domestic telcos are moving away from traditional tower leasing model, in order to cut down spending as data consumption continues to rise. Moreover, the U.S. cell tower market is currently dominated by three companies — American Tower Corp, SBA Communications Corp and Crown Castle International Corp. In such a scenario, the joint venture move is sure to pose severe competitive threat to established tower companies. The companies are focusing on technology innovation, with further investment in the updated software platforms to provide the best customer experience in their network.

Verizon has also introduced FiOS Instant Internet service which has been offering 750 Mbps of speed from Jan 14, 2017. The service is available to nearly 7 million homes and businesses under the company’s FTTH (fiber-to-the-home) footprint in greater New York City/northern New Jersey, Philadelphia and Richmond. We expect this technology may also witness considerable demand from residential customers once 4K video and IoT technology gain popularity.

Verizon is systematically diversifying itself as a major player in the digital content and online advertising space. The company has formed a new division called Oath to oversee assets of Yahoo and AOL, including more than 20 brands like Yahoo News, HuffPost, Engadget, TechCrunch, Yahoo Finance, Yahoo Sports and Tumblr. Verizon included its Go90 content across some of its Oath brands. Verizon has inked a five-year digital streaming deal with National Football League (NFL). The telco paid approximately $2.25 billion to stream NFL’s content on its digital and mobile media platforms. Additionally, Verizon signed an extended carriage deal with A+E Networks, to broadcast the latter’s programming in its digital media suite. Other than A+E cable networks, games like National Women’s Soccer League will also be streamed on Yahoo Sports and Go90 platforms. The respective contents will be broadcast under Verizon’s Oath brand. Backed by these latest initiatives to boost digital media portfolio, Verizon is planning to launch a theme-based online streaming TV service in 2018. The telecom service provider will offer channels based on themes like news, sports and entertainment. All these channels will be offered as a standalone application. The content is likely to come from Oath properties like TechCrunch, Engadget, Huffington Post and premium content from third-party sources.

Verizon has been aggressively forging ahead to expand its fiber optics networks to support 4G LTE and upcoming 5G wireless standards as well as wireline connections. Accumulation of dark fiber will bolster Verizon’s cell network density consequently boosting its mobile backhaul network. The densification of cell network will help the company install and build its upcoming 5G network. Adoption of small cells has increased due to the inconvenience of installing large towers in inaccessible areas. To this end, Veriozn is also planning to retire copper networks in eight northeast markets, effective on or after Feb 28, 2018, to migrate its customer base in these regions to high-speed fiber-optic networks

Coming to the Wireline business, the company is committed to improve long-term profitability through product streamlining and process simplification as well as cost management. Verizon expects the enterprise business to contribute more to Wireline revenues and profits. This can be achieved by rationalizing the enterprise solutions product portfolio, eliminating old products, reducing merchandise complexity, streamlining services and consolidating networks to enhance efficiency.

However, some firms apprehend that spectrum crunch has become a major issue in the U.S. telecom industry that has a saturated wireless market. Most of the carriers are finding it increasingly difficult to manage mobile data traffic, which is growing by leaps and bounds. The situation has become even more acute with the growing popularity of iPhone and Android smartphones as well as rising online mobile video streaming, cloud computing and video conferencing services. Intensifying competition in the U.S. wireless market is also a major concern for Verizon. Additionally, the company’s wireline division is struggling with persistent losses in access lines owing to competitive pressure from voice-over-Internet protocol (VoIP) service providers and aggressive triple-play (voice, data, video) offerings by cable companies.

May 3, 2018

Target Price/Valuation

Provided below is a summary of target price/valuation:

|Rating Distribution |

|Positive |52.38%( |

|Neutral |47.62%↓ |

|Negative |0.0%↔ |

|Max. Target Price |$63.00↔ |

|Min. Target Price |$50.00↓ |

|Avg. Target Price |$55.91( |

|No. of Analysts with Target Price/Total |18/21 |

Risks to the target price include a weak global economy, lack of improvement in the wireline business, slowing growth in the wireless market, intensifying price competition, heavy capital spending, accelerating access line losses, delay in cost-reduction initiatives execution risk on fiber to the premises deployment, higher-than-expected costs associated with new initiatives, large pension and retirement obligations, regulatory risks, and labor-related issues.

Recent Events

On Apr 24, 2018, Verizon announced 1Q18 financial results. Highlights are as follows:

▪ Adjusted earnings per share of $1.17 beat the Zacks Consensus Estimate of $1.11 in the reported quarter.

▪ Quarterly GAAP revenues were $31,772 million, beating the Zacks Consensus Estimate of $31,157 million.

▪ Operating income improved 5.6% year over year to $7,349 million.

On Apr 19, 2018, Verizon announced that it has closed the acquisition of Moment, a New York-based design and strategy firm founded in 2002. The acquisition will facilitate the company to focus on personalized digital experiences such as the My Verizon app, and in the development of new services and experiences across its businesses.

On Mar 15, 2018, Verizon announced the launch of TechSure to give Fios and High Speed Internet customers both the digital and physical protection they need for their increasingly digital lives.

On Jan 12, 2018, Verizon announced its plans to launch a theme-based online streaming TV service in 2018. The telecom service provider will offer channels based on themes like news, sports and entertainment. All these channels will be offered as a standalone application. The content is likely to come from Oath properties like TechCrunch, Engadget, Huffington Post and premium content from third-party sources.

On Jan 8, 2018, Verizon enriched its portfolio of managed security detection and response services for enterprise customers with the acquisition of privately held Niddel Corp., a specialized provider of machine-learning-based automated threat hunting. However, the financial terms of the deal have not been disclosed.

On Jan 5, 2018, Verizon’s pay-TV customers have reportedly lost access to Bloomberg TV. Per sources, Verizon has declined Bloomberg’s proposal to pay for content, which is easily accessible online for free. Verizon has advised customers to subscribe to Bloomberg's website and app to access Bloomberg TV.

On Jan 3, 2018, Verizon and A+E Networks have signed an extended carriage deal, which will broadcast A+E Networks programming in the company’s digital and mobile media platforms.

Revenue

Consolidated GAAP revenues increased 6.6% year over year to $31,772 million on the back of a solid performance in the wireless business, and exceeded the Zacks Consensus Estimate of $31,157 million. Excluding revenues from divested businesses, non-GAAP consolidated revenues were $29.9 billion.

The details of revenue segments are as follows:

Wireline (23.8% of total revenue in 1Q18)

Total revenues in the segment were $7,557 million, down 1.6% year over year owing to lower Consumer retail revenues (down 1.6% to $3,150 million) and Enterprise Solutions (down 3.1% to $2,240 million). Partner Solutions revenues also decreased 0.1% to $1,228 million, while Business Markets revenues declined 0.9% to $871 million. Other revenues improved 9.7% to $68 million.

Wireless (68.9%)

Total revenues from this segment were $21,900 million, up 4.9% year over year. While service revenues declined 2.4% to $15,402 million, that from equipment increased 33.9% to $5,040 million. Other revenues totaled $1,458 million, up 9.1% year over year.

Verizon reported a net increase of 260,000 retail postpaid connections in first-quarter 2018. Quarterly retail postpaid churn rate improved to 1.04% compared with 1.15% in the year-ago quarter. Retail postpaid ARPA (average revenue per account) was $131.71 compared with $136.98 in the year-ago quarter.

Outlook

For FY18, Verizon expects GAAP revenues to increase by low single-digit percentage rates driven by expected savings from tax reform and higher cash flow from operations.

Margins

Operating income improved 5.6% year over year to $7,349 million. EBITDA for the reported quarter were $11.7 billion, resulting in EBITDA margin of 36.7%.

Operating income for Wireless improved 13.8% to $8,049 million due to higher retail postpaid connections. Quarterly operating income margin was 36.8% compared with 33.9% in the year-ago quarter. Segment EBITDA increased 11.3% to $10,477 million, resulting in EBITDA margin of 47.8% compared with 45.1% in the prior-year quarter.

Quarterly operating income for Wireline was $69 million, down 66.5% year over year. Quarterly operating margin was 0.9% compared with 2.7% in the year-ago quarter. Segment EBITDA fell 4.6% to $1,603 million, resulting in EBITDA margin of 21.2% compared with 21.9% in the year-ago quarter.

Earnings per Share

GAAP earnings for the reported quarter were $4,666 million or $1.11 per share compared with $3,553 million or 84 cents per share in the year-ago quarter. Excluding non-recurring items, adjusted earnings were $1.17 per share compared with 95 cents in the year-earlier quarter and comfortably exceeded the Zacks Consensus Estimate of $1.11.

Outlook

For FY18, Verizon expects adjusted earnings per share to increase by low single-digit percentage rates driven by expected savings from tax reform and higher cash flow from operations.

May 3, 2018

|Research Analyst |Supriyo Bose |

|Copy Editor | |

|Content Ed. | |

|QCA | Supriyo Bose |

|No. of brokers reported/Total brokers |18/21 |

|Reason for Update |1Q18 Earnings |

-----------------------

[pic]

Zacks Investment Research Page 7

May 3, 2018

© Copyright 2018, Zacks Investment Research. All Rights Reserved.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download