Verizon Earnings: Cash Flow Looks a Touch Weak Despite Solid Wireless Growth

Key Morningstar Metrics for Verizon Communications

• Fair Value Estimate: $53.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Verizon Communications’ Earnings

Verizon VZ shares are trading sharply lower on earnings for the second consecutive quarter, despite results generally in line with our forecast and management reiterating 2024 expectations. We suspect investors are focused on messy wireless customer numbers, a potential wave of costly phone upgrades later this year, and the pacing of free cash flow. We don’t believe these issues are cause for concern, but we’ve made a handful of small adjustments to our forecast, reducing our fair value estimate to $53 per share from $54.

Wireless service revenue increased 3.5% year over year, sitting at the high end of management’s 2.0%-3.5% target for the year. Verizon expects continued sequential revenue growth in the second half, but it will lap price increases taken last year. The firm lost 8,000 net consumer postpaid phone customers during the quarter, but it would have lost about 120,000 excluding low-revenue second phone numbers added to existing lines. Management reiterated that it expects to add consumer postpaid phone customers this year, excluding these second-number lines, which would be an improvement from 132,000 net losses in 2023. Despite the pledge to improve customer growth, wireless pricing remains solid. Revenue per consumer account was up an impressive 5% during the quarter versus a year ago, primarily thanks to price increases, with a small contribution from fixed-wireless broadband.

The pace of wireless customer phone upgrades continues to plummet, pressuring total revenue growth but boosting profitability. With Apple AAPL and others releasing AI-enabled smartphones later this year, we expect this trend to reverse. We also believe the carriers will maintain discipline with promotional offers, but higher volumes would require working capital to fund receivables. Free cash flow hit $8.5 billion during the first half, up from $8.0 billion last year, with higher cash taxes partially offsetting lower capital spending.