Can Solid Wireless Traction Buoy Verizon (VZ) Q4 Earnings?

Verizon Communications Inc. (NYSE:VZ) is scheduled to release fourth-quarter 2018 results before the opening bell on Jan 29. The company is poised to witness solid traction from the impending 5G boom and is likely to record higher year-over-year revenues from the Wireless segment, which accounts for the lion’s share of total revenues.

Whether this will benefit the bottom line of the company remains to be seen.

Top-Line Expansion

Verizon offers one of the most efficient wireless networks in the United States. The telecom behemoth continues to deploy the latest 4G LTE advanced technologies to deliver faster peak data speeds and capacity for customers, driven by customer-focused planning, disciplined engineering and constant strategic investments. Backed by these initiatives, the company has reportedly generated 1.2 million retail postpaid net additions in the quarter with phone churn rate of 0.82%, indicating continued strong customer loyalty.

During the quarter, Verizon launched the world’s first commercial 5G broadband Internet service in select markets. Dubbed Verizon 5G Home, the service was initially made available in select regions in Houston, Indianapolis, Los Angeles and Sacramento. Verizon 5G Home service is built on the world’s first and only 5G Ultra Wideband Network, offering typical network speeds around 300 Mbps and peak speeds of nearly 1 Gbps with no data caps. It combines end-to-end fiber network with a large deployment of small cells for improved connectivity and millimeter wave bandwidth to realize the full 5G potential for capacity, throughput and latency.

Verizon is using millimeter-wave spectrum (radio signals) instead of copper or fiber cables to provide customers with unmatched wireless speeds for Internet access. The company has started conducting field trials for its upcoming 5G wireless network with partners. It is looking at mobile hotspot and home-based fixed wireless for initial deployment of the next-generation 5G wireless networks in the United States. A full phased 5G wireless network is likely to be offered in 2020 while the company is aiming to launch commercial 5G smartphones in first-half 2019, in collaboration with electronics firm Samsung (KS:005930).

Verizon expects considerable growth in both its Wireless and Wireline businesses, going forward. The company anticipates healthy improvement in margins on the back of continued strong FiOS fiber-optic network and strategic services in the Wireline business. Also, it is looking forward to capitalize on the countless innovative technology solutions being developed in the Internet of Things and telematics ecosystem across multiple industries. Further, the company’s current focus on online content delivery, mobile video and online advertising should drive growth.

Buoyed by such tailwinds, the Zacks Consensus Estimate for operating revenues in the Wireless segment in the to-be-reported quarter is currently pegged at $24,614 million, which is relatively higher than the year-ago reported figure of $23,771 million. The higher revenue expectations can be attributed to an uptick in demand and an upgrade to state-of-the-art infrastructure.

Total revenues for the company are expected to be $34,321 million. It generated revenues of $33,955 million in the prior-year quarter.

Other Key Factors

Verizon will write off a majority of its media business — Oath — which includes Yahoo (NASDAQ:AABA) and AOL, due to lower-than-expected performance from the combination of businesses that make up Oath. The telecom giant decided to take $4.6 billion ($4.5 billion after-tax) charge of the $4.8 billion of Oath’s remaining goodwill balance, related to its media assets in the fourth quarter.

In an effort to expand its customer base, Verizon is spending heavily on promotion and is also offering lucrative discounts. These strategies are likely to have affected the company’s EBITDA and EBITDA service margins in the quarter. Revenues from the Wireline segment are likely to be $7,355 million, down from $7,617 million owing to competitive pressure from voice-over-Internet protocol service providers and aggressive triple-play (voice, data, and video) offerings by cable companies. In order to make Wireline profitable, Verizon is making significant investments and is streamlining its cost structure. These are likely to weigh on the company’s margins.

Our proven model does not conclusively show that Verizon is likely to beat earnings in the fourth quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -2.09% with the former and latter pegged at $1.07 and $1.09. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Verizon has a Zacks Rank #2. Although this increases the predictive power of our model, we need to have a positive ESP to make us reasonably confident of an earnings beat.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

AT&T Inc. (NYSE:T) is slated to release quarterly numbers on Jan 30. It has an Earnings ESP of +1.39% and a Zacks Rank #3.

Motorola Solutions, Inc. (NYSE:MSI) is scheduled to release results on Feb 7. The company has an Earnings ESP of +1.73% and has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for Arista Networks, Inc. (NYSE:ANET) is +2.72% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Feb 14.

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