Verizon Earnings: Lead Uncertainty Overshadows Solid Results

While Verizon Communications VZ delivered solid second-quarter results, investors remain focused on its exposure to lead-sheathed cabling. The firm didn’t provide much additional information or answer questions on the matter, saying it will share details as its own investigation proceeds. We still don’t expect Verizon will face significant lead liabilities, but we have increased our capital spending estimates modestly beyond this year. We suspect Verizon and its peers will ultimately remove some lead-sheathed cabling that otherwise would have remained in place. This change and other adjustments to our forecasts reduce our fair value estimate to $54 per share from $57. We continue to believe the shares are very attractive.

Two metrics stand out from the second quarter: average revenue per postpaid account and the phone upgrade rate. Consumer wireless ARPA increased about 4% versus a year ago (excluding an accounting change; 6% growth as reported) and 1.5% versus the prior quarter, primarily reflecting price increases with a small contribution from fixed-wireless broadband adoption. Despite the price increases, Verizon is attracting more new customers than a year ago, and the pace of customer defections (churn) increased only slightly year over year, leaving the firm with 8,000 net postpaid phone customer additions during the quarter. Wireless service revenue growth accelerated to 3.8% year over year from 3.0% last quarter.

Only 3.3% of wireless customers upgraded their phones during the quarter, easily the lowest level of the smartphone era. While lower phone sales pressured reported revenue growth, lower associated costs enabled Verizon to increase adjusted EBITDA for the first time since 2021 (0.8% year over year). Capital spending is also starting to decline as forecast, boosting free cash flow to $8 billion year to date. Management doesn’t usually forecast free cash flow, but it said it expects at least $17 billion in 2023 versus $14 billion in 2022.