The largest U.S. mobile service provider Verizon
Communications (VZ) reported first quarter 2011 results on
April 21. Adjusted earnings of 51 cents beat the Zacks Consensus
Estimate by a penny and were 32 cents above the year-ago
earnings.
First Quarter Review
Continued strength in wireless, FiOS and strategic business
services led to higher-than-expected earnings in the quarter.
Further, Verizon started selling Apple Inc.'s
(AAPL) iPhonefrom February 10, ending the exclusivity that its
largest competitor AT&T Inc. (T) enjoyed since
2007. Verizon’siPhone is gaining traction and is being well adopted
by customers. The company sold 2.2 million iPhones in two
months.
Total revenue improved from the year-ago quarter and surpassed
the Zacks Consensus Estimate. Revenues from the wireless segment
increased on higher subscribers and lower churn. Wireline revenue,
however, remained the dampener with persistent declines in access
lines.
Verizon added 1.78 million wireless subscribers in the first
quarter to reach 104 million. The increase was attributable to
rapid adoption of smartphones, strong post-paid subscribers and
growth in wholesale and other connections.
On the wireline front, FiOS fiber-optic network and broadband
connections remained healthy while total voice connections remained
depressed.
(Read our full coverage on this earnings report: Verizon Beats
by a Whisker)
Agreement of Analysts
Following the first quarter earnings, the analysts are skewed
more toward the negative side in estimate revisions for the
upcoming quarter and fiscal year. This trend was noticed over both
the last 7 and 30 days.
For the upcoming quarter, out of 26 analysts, 8 and 1 revised
their estimates downward over the last 30 days and 7 days,
respectively. 7 analysts made upward revisions in the same time
span.
For fiscal 2011, 10 and 1 analysts out of 31 made downward
revisions over the last 30 days and 7 days, respectively, while 7
and 1 analysts moved opposite.
The analysts are concerned about persistent erosion in access
line, high promotional expenses, maturation of the wireless
industry, iPhone near-term dilution and several challenges in
wireline business,which may drag near-term earnings.
Verizon may spend to promote the iPhone over the year, which
might hurt short-term margins.The company might have to spend $3
billion to $5 billion to subsidize the device in 2011 based on the
expected $400 per iPhone subsidy that Verizon will absorb. These
handset subsidies are expected to hurt the profitability of the
company. Further, AT&T threatens customer retention initiatives
across all the segments of Verizon. Thus, in order to retain
customers, Verizon is involved in a costly promotional war with
AT&T.
For fiscal 2012, the analysts showed positive revisions with 12
and 1 moving north over the last 30 and 7 days, respectively, while
6 and 1 analysts moved in the opposite direction.
These analysts believe the iPhone has strengthened Verizon’s
competitive position in the highly coveted smartphone market.
Verizon’s iPhone is expected to add 2.1 million net new subscribers
in 2011 outpacing AT&T for the first time since 2008. Verizon
continues to expand both its 3G and fourth-generation Long-Term
Evolution (4G LTE) mobile broadband network.
Following the launch of the 4G network in 38 markets covering
110 million people at the end of 2010, Verizon expects its LTE
network to expand to more than 75 markets covering 185 million
people by the end of 2011. Additionally, the company plans to
expand its 4G network to its entire nationwide 3G footprint by the
end of 2013.
Moreover, Verizon has significantly improved its competitive
position in the rapidly evolving managed hosting and cloud services
business. Verizon recently acquired the information technology
service company Terremark Worldwide Inc. (TMRK).
Verizon seeks to expand its cloud business to offset declining
revenues from traditional fixed lines.
All these developments along with increased smartphone adoption
will make Verizon more competitive against Sprint Nextel
Corp. (S) and AT&T.
Magnitude –– Consensus Estimate Trend
The Zacks Consensus Estimate for the second quarter remained
fixed at 55 cents over the last 7 days but rose by a penny over the
last 30 days. The estimate represents a 5.9% decline year over
year.
For fiscal 2011, the Zacks Consensus Estimate remained static at
$2.22 over the last 7 and 30 days, representing a substantial
growth of 21.14% year over year. The Zacks Consensus Estimate for
fiscal 2012 is $2.61, unchanged over the last 7 days and 2 cents
above the last 30 days.
Earning Surprises
With respect to earnings surprises, the company’s fairly good
track record is expected to continue in the coming quarters.
Verizon produced a positive average earnings surprise of 1.86% over
the last four quarters, which suggests that it outpaced the Zacks
Consensus Estimate by that amount over the last year.
Neutral Recommendation
We believe Verizon’s continued investments in its broadband
network,strong wireless and FiOS services, cloud computing
business, share gain in the retail post-paid market along with
increasing smartphones penetration and other data devices will make
the stock attractive for the long term. Further, 4GLTE services and
iPhone sales will boost the company’s growth prospects.
Although Verizon continues to expand its 3G wireless and
wireline FiOS network footprints, returns from investments in these
businesses are uncertain. Additionally,persistent erosion in access
lines, high promotional expenses and intense competition from cable
companies and other alternative services providers may provide
downside risk to the stock.
Hence, we are maintaining our long-term Neutral recommendation
with the Zacks #3 (Hold) Rank.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years
ago that earnings estimate revisions are the most powerful force
impacting stock prices. He turned this ground breaking discovery
into two of the most celebrating stock rating systems in use today.
The Zacks Rank for stock trading in a 1 to 3 month time horizon and
the Zacks Recommendation for long-term investing (6+ months). These
“Earnings Estimate Scorecard” articles help analyze the important
aspects of estimate revisions for each stock after their quarterly
earnings announcements. Learn more about earnings estimates and our
proven stock ratings at:
http://www.zacks.com/education/
APPLE INC (AAPL): Free Stock Analysis Report
SPRINT NEXTEL (S): Free Stock Analysis Report
AT&T INC (T): Free Stock Analysis Report
VERIZON COMM (VZ): Free Stock Analysis Report
Zacks Investment Research
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