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Portfolio Update

Halfway There

By Roger S. Conrad, on May. 1, 2015

Excluding one-time items, Verizon Communications grew its first-quarter revenue by 3.8 percent and its earnings by 21.4 percent year over year.

The telecom giant’s operating income increased by 11.2 percent, driven in part by a 170 basis point improvement in margins. Recurring free cash flow climbed 40 percent to $4.2 billion after $3.7 billion in capital spending.

Wireless revenue ticked up 6.9 percent, fueled by the addition of 565,000 subscribers and an ultra-low churn rate of 1.03 percent.

Meanwhile, sales in the consumer wireline segment increased by 4 percent, as a 10.2 percent jump in FiOS revenue easily outpaced attrition in its shrinking legacy business lines. The absence of non-operational adjustments to the company’s wireline results demonstrates that this business has started to stabilize.

As usual, Verizon Communications’ strong results reflect its superior network, which continues to attract the US telecom industry’s most profitable and loyal customers. Subscribers with 4G-enabled smartphones represent 86 percent of its total wireless traffic and 70 percent of its connections.

The rapid adoption of “Edge” plans has increased equipment revenue and decreased wireless service sales. Nevertheless, cash flow margins in the wireless segment were flat year over year. And the churn rate among valuable post-paid customers sank to less than 0.9 percent.

Even the enormous debt that Verizon Communications assumed to finance its purchase of Vodafone’s (LSE: VOD, NYSE: VOD) stake in Verizon Wireless no longer presents a serious challenge, thanks to repayment and low-cost refinancing.

Weakness in the global enterprise and global wholesale segments stood at as the only real negative in Verizon Communications’ first-quarter results, but neither business line will prevent the company from meeting its guidance for the year or raising its dividend in November.

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