At first glance, the recent earnings release from Verizon Communications Inc. (NYSE:VZ) was hardly awe-inspiring. In fact, for Verizon shareholders, it was downright depressing. Earnings, even after stripping out pension costs, the impact of Hurricane Sandy, and a few other one-time charges, took it on the chin compared to Q4 of 2011.
Not all the news is bad for Verizon. Yes, the wireless carrier fell short of analyst estimates by a wide margin, but there were a few positives sprinkled in among the dreariness. The number of new data plan activations, along with Verizon’s improved operating revenues for both the recent quarter and the year, were bright spots. But for investors, there’s more to Verizon as an investment opportunity than its most recent quarter. A lot more.
Admittedly, Verizon’s recent quarter was going to be a tough one for analysts to nail down. Uncertainties surrounding pension expenses and costs associated with Sandy made predictions difficult. With that said, Verizon’s adjusted earnings of $0.38 a share were well off analysts’ expectations of $0.50. The biggest culprit was a $1.55-a-share non-operational expense tied to Verizon’s pension. Add another $0.07-per-share deduction for Sandy, and it’s easy to see how Verizon’s quarter turned upside down in a hurry.
Verizon, like its competitors AT&T Inc. (NYSE:T) and Sprint Nextel Corporation (NYSE:S) , is punished in the near term when it brings on new subscribers. Those smartphone subsidies consumers have come to expect are significant, to say the least, and Verizon’s solid quarter for new activations hit it hard. The 2.1 million new, postpaid device contracts Verizon gleaned in Q4 rounded out a solid year of subscriber growth, up 6.6% vs. the prior year, to nearly 100 million wireless connections in 2012.
The silver lining
Just shy of 10 million new smartphones were activated by Verizon in Q4, which is certainly nothing to sneeze at. But what really jumps out from the announcement were the 7.3 million 4G device sales in the quarter. Why? Because 4G isn’t some nebulous, high-speed data service mobile users aspire to. Its future is now, and Verizon is perfectly positioned to take advantage of what one study suggests will be a mammoth shift to the upgraded network.
Nearly half of all Verizon’s data traffic is on its industry-leading 4G network. And with 476 markets now primed for 4G, nearly 90% of the domestic wireless market has access to the higher speeds, and greater bandwidth, of Verizon’s network. With just over 100 4G markets, AT&T is a distant second in this critical area, and Sprint is barely in the discussion, though it is working desperately to expand its smallish 4G footprint.
This is where things begin to get interesting for all carriers, but for Verizon, in particular, because of its huge lead in 4G coverage. According to a recent study conducted by IHS, the number of 4G LTE (Long-Term Evolution) users will continue to grow exponentially over the next several years.
As per IHS, in 2010 when 4G was initially introduced, there were a mere 612,000 4G guinea pigs. By 2012, about 100 million consumers accessed their mobile devices using the faster network, and that number’s expected to grow to 1 billion by 2016.