Verizon Communications Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

A multinational telecommunications conglomerate, providing wireless and wireline services to consumers and businesses across the U.S.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Verizon Communications Inc. (VZ), a telecommunications giant, operates across two primary segments: Consumer and Business.

  • Verizon Consumer Group provides wireless and wireline communications services and products, such as mobile services, internet, and video, to consumers in the United States. Their services are generally provided on a monthly access-charge basis. They also sell devices and phone accessories.
  • Verizon Business Group offers a broad array of communications, networking, data, and professional services to businesses of all sizes. Their product lines span a vast area, including: data networking, cloud, security, voice, and internet services. They also provide managed services, which include ongoing support and consulting for their business clients.
  • Global Network and Technology (GNT): This is the technology development arm of Verizon which is involved in the creation, development and implementation of new technologies.

The telecommunications industry is intensely competitive and rapidly evolving, characterized by:

  • High Capital Expenditures: Telecommunication companies require huge investments in infrastructure for network upgrades, spectrum licenses, and technological advancements, all of which demand significant resources and capital.
  • Technological Disruptions: Rapid technological innovations are causing established players to reinvent their processes, or risk being rendered obsolete and replaced by the more adaptive and forward-thinking companies.
  • Intense Competition: Both large and small players compete fiercely on pricing, service quality, speed, and coverage. This means that it’s tough to maintain a pricing or margin advantage. New entrants, often backed by private equity and other institutional investors, pose a serious challenge.
  • Customer Churn: Customer preferences change quickly with changing market conditions and as technology improves, making customer retention difficult and driving the need to constantly upgrade and improve services.
  • Regulatory Pressures: Government regulations and licensing requirements place restrictions on how companies can operate and what services they can provide.

Verizon’s Strategic Response:

  • Verizon is attempting to reduce costs while increasing its operating efficiency, as can be seen in recent quarterly reports (see exhibit below).
  • The company is strategically deploying new network infrastructure, including 5G, to capture a greater share of the market.
  • They are trying to create a better consumer experience through personalized services and new products.

Financial Deep-Dive:

  • Revenue Analysis:
  • Verizon’s total operating revenue was $33.8 billion for the three months ended September 30, 2024.
  • Revenues decreased by $137 million during the three months ended September 30, 2024, compared to the three months ended September 30, 2023, mainly driven by decreases in Wireless service revenue and other revenue.
  • In the Consumer segment, revenues were $25.8 billion during the three months ended September 30, 2024, a decrease of $49 million or less than 1 percent compared to 2023, primarily due to decreased wireless service revenue and wireline revenue.
  • In the Business segment, revenues were $7.9 billion during the three months ended September 30, 2024, a decrease of $100 million or 1.3 percent compared to 2023, primarily due to decreases in wireline revenues.
  • Profitability Analysis:
  • Verizon’s Operating Income was $7.3 Billion for the three months ended September 30, 2024, and EBITDA was $11.9 billion.
  • Verizon’s net income was $4.9 billion for the nine months ended September 30, 2024.
  • Segment EBITDA margin were roughly 30% and 22% respectively for the Consumer and Business segments, reflecting the differing operational cost and pricing structures of these two business groups.

Operating expenses (excluding Depreciation and Amortization) was $24 billion, a reduction of 1.8% relative to Q3 2023 which was driven by a drop in cost of equipment. The other notable movement was with selling, general, and administrative costs. There has been a 2.3% increase from previous year. These costs might be increased on purpose to allow for greater adoption of new technology and for new products.

  • Balance Sheet Health:
    • Verizon’s total assets were $381 Billion at September 30, 2024.
  • The company has around $15 Billion in cash and cash equivalents and $130 billion in Long-Term Debt (including lease obligations).
    • The company has a fairly leveraged balance sheet with a debt to market cap of 0.95 as of September 2024.
    • Total liabilities are around $300 billion.
  • Cash Flow Analysis:
    • Free cash flow is $14.5 billion over the last nine months, and this shows a reduction relative to previous years.
  • Verizon’s cash position was impacted negatively by an overall decrease in revenues and high levels of debt as well as large expenditures made in network infrastructure in 5G and Fiber technologies.

Moat Assessment (2 / 5):

Verizon’s moat is assessed as narrow, with a rating of 2 out of 5, due to:

  • Network Economics and Switching Costs: While the scale of its network is large and provides a natural advantage, increased competition, changes in consumer preference, and disruptive technologies like 5G create significant vulnerabilities. Switching costs exist on the consumer side, as customers might be hesitant to switch providers due to the potential for disruption in existing services and the need to learn a new infrastructure, but on the business side it is harder to measure and is constantly evolving as a function of contract, so it’s hard to rely on as a long-term factor.
  • Brand Recognition: Verizon does command strong brand awareness and loyalty but it’s not enough to create a deep moat, because consumers are often willing to switch providers based on service quality or price.
  • Regulatory Approval and Spectrum Licenses: Although spectrum licenses and government regulations act as barriers to entry, those alone don’t create a wide moat as they often are subject to changes and reviews.

Overall the factors that protect its position are not long lasting enough and a few of them face headwinds due to market changes, new technologies, and changing consumer preferences.

Risks to Moat and Business Resilience:

  1. Increased Competition: A key risk comes from intense competition in the telecommunications industry, leading to increased marketing costs, price pressure, and higher churn. Increased competition also leads to over reliance on aggressive acquisition strategies.
  2. Technological Change: Verizon’s revenue from older technologies is under threat due to rapid technology advancements. This requires continuous upgrades and innovation, while it also increases the likelihood of being displaced by a new technology.
  3. Declining Margins: While profitability remains reasonably robust, Verizon’s operating and profit margins are under continuous pressure due to increasing competitive activity, and they need to continuously adapt to changing preferences and trends in the market.
  4. Economic Sensitivity: The revenue is somewhat correlated to economic activity which means downturns can affect demand.
  5. High Debt: While manageable, the debt is still very high and puts pressure on cash flows.

Understandability Rating (3/5)

Verizon’s operations are easily understood from a high-level perspective, however the underlying operations and contracts can be incredibly complex. The technical aspects of communication and regulatory environment adds a layer of complexity. So its rating is 3.

Balance Sheet Health (2/5)

Verizon’s balance sheet is highly leveraged and hence gets a 2 rating. Although most of its long-term debt is secured, high debt leads to risks associated with interest rate changes. While having liquidity is always great, Verizon does have a large portion of its assets invested into long-term assets.

Additional Observations from latest Earnings Calls:

  • In the Q3 2024 earning calls, the management highlighted their focus on growth through network build-out and innovative solutions with a focus on customer satisfaction and improved subscriber base.
  • There has been a strong emphasis on the importance of 5G and Fiber optic network which they see as integral for the future revenue streams. The CFO discussed the company’s commitment towards maximizing profitability while deploying this new infrastructure.
  • The management has recognized potential economic headwinds in the consumer market and has noted their focus on improving their business operations, with a focus on efficiency and disciplined capital allocation.
  • There has been management discussion about increased competition in the market and they recognize they will need to continue to invest more to compete in it, and they seem aware of these facts and are not ignoring it.
  • Management acknowledged their commitment to shareholder return through dividends and reducing debt levels.
  • Management also noted a decline in earnings as a result of the one-time charges associated with business changes which was an intentional decision to clean up the financial statements.

Recent controversies and problems

  • A large debt load that can be problematic and needs to be resolved, which they are trying to by increasing cash flows and improving their operating efficiency.
  • Intense competition that requires increased investment and has been negatively impacting the margins.
  • Changing consumer preferences that the company is forced to adapt to continuously.
  • Negative sentiment around the market and analysts about profitability of the companies stock.

Overall, while Verizon is a big company with a reliable history and brand, the risks facing it in the telecommunications industry make its future less predictable and the moat isn’t as wide as it could be. They are trying to adapt to the market with innovation but it’s very unclear at this moment how successful that may be. The most important factor in the short run seems to be increasing operating efficiency and reducing the debt as these are the areas that are currently under most scrutiny by the market.