Verizon Shows Stability During Second Quarter

Verizon’s VZ second-quarter results looked a bit more like we had expected, given the pandemic, than AT&T’s (reported July 23), but we suspect the differences primarily come down to the treatment of customers struggling to pay their bills and taking advantage of the Keep Americans Connected pledge. Both firms produced broadly stable wireless results during the quarter, with the pandemic taking a small bite out of services revenue as customers roam less, especially internationally. Unlike AT&T, Verizon reported a huge jump in free cash flow (up nearly 75% to $13.7 billion in the first half), but the growth is primarily due to the timing of tax payments and working capital changes. Still, Verizon was able to repay a large chunk of debt during the quarter and has cut net borrowing by nearly $4 billion, or 4%, through the first six months of the year. Overall, Verizon is performing broadly in line with our expectations, and we don’t plan to change our $59 fair value estimate or narrow moat rating; we view shares as fairly valued.

Verizon reported a sharp drop in wireless customer defections during the quarter: 0.58% monthly postpaid phone customer churn versus 0.76% a year ago. AT&T’s reported churn metrics were roughly flat versus a year ago. However, it appears Verizon has kept customers behind on their payments in its customer count while AT&T has removed them. Verizon stated that about 1.5 million accounts (4% of the total) had taken advantage of Keep Americans Connected, but that a third of those were current by the end of quarter and the majority had made at least partial payments. Verizon reported a small gain in wireless postpaid phone customers (173,000) while AT&T reported a small loss (151,000), but we suspect the firms performed very similarly during the quarter. Both reported a small decline in wireless services revenue (1.7% at Verizon), tied primarily to lower revenue per customer resulting from lower roaming usage.

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