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Verizon Communications Inc. (NYSE:VZ) Charts Different Path Than AT&T

Verizon Wireless (NYSE:VZ)

Verizon Communications Inc. in spite of being in a financially similar position to AT&T has quite a different strategy to face the growing competition in the telecom sector. This had happened earlier as well. The firm will pay its next quarterly dividend on 2nd May. The ex-dividend date for the same was yesterday, 6th April. This dividend is expected to be $0.565. David Small, executive vice president of wireless operations, Verizon, spoke about the road ahead at the Jefferies Media & Communications Conference on February 24.

Verizon Wireless (VZ)

Verizon Communications Inc. is Betting Big on XO’s Assets

Verizon Communications Inc. wants to make the best of XO Communications’ fiber assets which it brought out for $1.8 bn. The whole transaction is expected to complete in the first half of 2017. Small stressed on the need for robust fiber assets in order to increase the fiber density in a given area.

Apart from fiber, Verizon also sees a big room for Ethernet and IP networks in order to attract bulk users. It is expecting a minimum of $1.5 bn of synergies as a result of the transaction.

As for wireless, Verizon will take XO’s spectrum on lease. A buy-out option is also available that can be used till the end of 2018. A report from Fierce Telecom indicates that XO has 102 LMDS licenses in the 28 GHz and 39 GHz bands.

Verizon Communications Inc. has also tried bundling the wireless and Fios (Fiber-based voice, Internet and video) services. Small said that Verizon has seen partial success in terms of bundling services. He added that users who avail of bundled services generally want to have a ‘bottom of the bill’ discount. Some users want a single bill for all services. Small went on to add that Verizon hasn’t had great success in doing such discount plays (in areas where both services are offered for bundling). At the end of 2015, Verizon had about 7 mn, 5.8 mn and 4.8 mn Fios connections for Internet, video and voice respectively. In principle, Fios is similar to AT&T’s U-verse and other such offerings from Comcast and Time Warner Cable.

Driving Up Average Revenue Per Account (ARPA)

Small outlined the strategy that Verizon follows in order to raise the ARPA: Get new accounts, drive connections to that account and then drive usage on those connections on that account. Small is looking forward to connected tablets as he sees plenty of room for an upside there. He said that Verizon is trying to delve into the family base with kid-friendly tablets.

Cisco’s VNI (Visual Networking Index) predicts that in the medium term (2015-2020), mobile-connected tablets will continue to grow at a faster pace (at about 12.9%) than smartphones (at about 9.2%) in the United States on an annual average basis. In order to bring some stability to the ARPA, Small is placing his bets on device payment or installment plans. Small said that he sees a trend of revenue shifting from service revenue to equipment revenue.

Of late, many analysts have recommended to hold on to the stock. Many institutional owners of the stock have also changed their positions during the last quarter. There have also been a lot of changes in ownership by the executives themselves. The last earnings report was out on January 21. For the next earnings report, analysts are predicting a yearly EPS of $3.99. The previous quarter’s EPS was $0.01 better than the analysts’ estimates. During the next 1 year, the average target price is said to be $51.65.

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