Verizon Bounces Back in the Third Quarter

Verizon VZ gradually rebounded from the effects of the pandemic during the third quarter, and it expects that trend to continue. While reported revenue dropped 4% versus a year ago, most of the decline was the result of weak phone sales. The core wireless-services business returned to growth, albeit with revenue up only 0.3% year over year, but management said it expects further acceleration during the fourth quarter to at least 2%. At that pace, Verizon would be nearly back to what we consider a reasonable expectation for long-term wireless-services revenue growth (3%-4%). Free cash flow also remained solid during the quarter. The firm has generated $18.3 billion so far this year, more than it produced in all of 2019. Cash flow may come under some pressure during the fourth quarter, given heavy promotions around the iPhone 12 launch, but we expect the impact will be easily manageable. We don’t plan to materially change our $59 fair value estimate or narrow moat rating and consider Verizon shares fairly valued.

Wireless activity remained muted during the quarter. Relatively few customers upgraded phones or switched carriers, which helped boost margins and cash flow. Verizon has been pleased with its ability to manage delinquent accounts and said it expects only a modest increase in involuntary customer deactivations during the fourth quarter. About 3% of accounts are on its Stay Connected plan to help these customers, and 90% of those have made at least some payment. Despite the economic turbulence, Verizon again reported a net gain in wireless postpaid phone customers (283,000 versus 445,000 a year ago), leaving its base about 1% larger than a year ago at 91.1 million. Importantly, average revenue per postpaid account bounced back nicely, increasing 2.4% from the prior quarter and 0.2% year over year. International roaming revenue remains a headwind, but the firm has continued to successfully move customers to unlimited and higher-tier rate plans.

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