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This article is part of a series tracking the effects of the COVID-19 pandemic on major businesses, and will be updated. It was originally published April 10.
Verizon Communications Inc.’s relatively simple business puts it in a safer spot than more media-exposed telecom players during the COVID-19 crisis, though Verizon isn’t completely immune to the pandemic’s effects.
The company remains largely focused on providing telecommunicatons services like wireless plans and broadband at a time when rivals have made big bets on media. AT&T Inc. T, -0.29% acquired Time Warner two years ago, while Comcast Corp. CMCSA, houses NBCUniversal. Media businesses are especially feeling the pain from COVID-19 amid weakness in the ad market, the postponement of film releases and a shortage of live sports.
AT&T and Comcast have greater media exposure than Verizon, which got about 5% of its revenue last quarter from its media unit, which includes brands such as Yahoo and AOL.
Still, Verizon isn’t completely in the clear. As anyone who’s ever looked at a wireless bill knows, all of those miscellaneous fees add up, and Verizon VZ, -0.16% may not be able to rack up quite as many with the COVID-19 outbreak keeping many people close to home. Consumers might not be ditching their phone plans outright, but they’re amassing fewer overage and roaming fees now that people are staying indoors more and largely avoiding international travel.
Verizon told investors on its last earnings call that a reduction in such fees and usage-based charges could pressure June-quarter services revenue growth by 3 to 5 percentage points.
The company also increased its bad debt reserve by $228 million due to the Keep Americans Connected pledge, a Federal Communications Commission effort that asked telecommunications companies to waive late fees and avoid service termination for small businesses and residential customers who couldn’t pay their bills due to the pandemic. The program ran through June 30.
Then there’s the issue of smartphone upgrades, a mixed bag for Verizon. The company saw “sharp reductions in equipment revenue” in the first quarter as store closures limited new device purchases, a trend that could continue as long as social-distancing efforts impact foot traffic to stores. But the pullback in handset purchases wound up helping Verizon’s margins since the company could cut limit its promotional costs and reduce customer churn.
Read: Smartphone sales are in a ‘massive’ slowdown—here’s who could benefit
Though wireless carriers in general had been aggressive with their promotional deals in the lead-up to the pandemic, such activity could take a breather now that economic uncertainty and stay-home trends have curbed new device purchases. “As a net share loser, that stasis impact actually helps Verizon” and hurts T-Mobile U.S. Inc. TMUS, -0.61%, MoffettNathanson analyst Craig Moffett wrote after Verizon’s last earnings report.
As with AT&T, Verizon should give some commentary on how smartphone-buying patterns have evolved during the crisis when it reports results before the opening bell on July 24. That could offer clues about what to expect if Apple Inc. AAPL, +0.28% launches its first 5G-enabled iPhones in the fall, as expected.
Even amid strange times for the wireless industry, that area of Verizon’s business should remain a source of stability. The company faces bigger challenges in its media business, warning on its last earnings call that digital media revenue could drop 20% to 30%.
Don’t miss: Verizon shows it’s better off than peers but that might not mean much
The financial effects
Revenue: Verizon is expected to post $29.9 billion in revenue for the June period, according to FactSet, down from $32.1 billion a year prior and below the $32.2 billion that analysts were projecting as of late March.
Earnings: The FactSet consensus calls for an adjusted $1.15 in June-quarter earnings per share, below the $1.24 that analysts had been modeling as of late March. The company recorded $1.23 in adjusted EPS in the comparable period a year ago.
Stock movement: Shares have fallen about 9% so far in 2020 as the Dow Jones Industrial Average, of which Verizon is a component, has lost about 6%. Shares of T-Mobile, which recently merged with Sprint, are up 33% so far this year while shares of AT&T have dropped 23%.
Of the 26 analysts tracked by FactSet who cover Verizon’s stock, eight have buy ratings and 18 have hold ratings, with an average price target of $60.41.
See also: How companies are becoming creative with accounting during the COVID-19 pandemic
What the company is saying
July 16: Verizon and IBM announced a partnership through which the companies will collaborate on using 5G to develop new offerings for the industrial sector.
July 14: Verizon’s BlueJeans, a videoconferencing platform that the company recently acquired, announced new features for hosts looking to hold virtual events. These include support for up to 50,000 attendees, up from 15,000 previously, and partner integrations focused on payments and marketing.
May 28: Speaking at a Bernstein investor conference, Verizon’s group chief executive for the consumer business Ronan Dunne said the pandemic has allowed the company to accelerate elements of its digital strategy. “We’ve seen strong demand for our in-store pickup,” Dunne said. With half of stores closed, Verizon witnessed more in-store pickups among the stores that were still open than the company saw prior to COVID-19.
April 24: Verizon posted March-quarter adjusted EPS of $1.26, up from $1.20 a year earlier, while revenue dropped to $31.6 billion from $32.1 billion. “We experienced a significant drop in customer activity and device volumes” during the period from March 15 to April 15, Chief Financial Officer Matt Ellis said on Verizon’s earnings call, as gross additions for the consumer wireless business fell nearly 50% from a year earlier and upgrades dropped by more than 40%. “As expected, lower customer switching across the entire industry has led to a significant improvement in phone churn,” he said.
Ellis said that for much of the March quarter, Verizon’s media business had been “continuing the steady improvement seen in 2019” but that total revenue for the unit dropped 4%, “driven almost entirely by COVID impacts.”
What analysts are saying
“We are raising our Q2/20 estimates heading into earnings on a more favorable outlook than we had previously modeled. Specifically, we expect to see fewer consumer retail net losses as well as greater business phone net adds as more customers have kept their phone and internet on the payroll and churn has remained minimal,” Raymond James analyst Frank Louthan wrote in a July 14 note to clients. He has an outperform rating and $61 price target on the stock.
“With much of the industry’s retail channels closed throughout the majority of 2Q20, we expect record-low postpaid phone churn for the quarter,” wrote Cowen & Co.’s Colby Synesael. He predicted postpaid churn of 0.6% in a July 1 note, while maintaining an outperform rating and $60 price target on Verizon’s shares. Synesael sees limited opportunity for upside this year but said that Verizon is “one of the most defensive names within our coverage” and one worth highlighting to investors looking for protection from a potential market sell-off.
“Verizon’s overreliance on millimeter wave spectrum as the basis of their 5G deployment strategy leaves them well positioned only in dense urban settings, and indeed, only in dense urbangathering places. No one is in dense urban gathering places right now. Verizon is therefore earning no return at all on its early 5G investments.” MoffettNathanson analyst Craig Moffett said in an April 24 recap of Verizon’s March-quarter results. He has a neutral rating and $58 target on the stock.
Read: AT&T’s cord-cutting problem is accelerating and the worst may be yet to come
“We believe wireless postpaid volumes for the category are recovering faster than we previously expected and Verizon seems well positioned to benefit,” wrote Citi’s Michael Rollins in a June 30 note that followed virtual meetings with Verizon’s management team. He rates Verizon shares at neutral with a $60 target.
