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UPDATE 2-Verizon says earnings may "plateau" in 2016
September 17, 2015 / 2:19 PM / in 2 years

UPDATE 2-Verizon says earnings may "plateau" in 2016

(Adds analyst comment, details; updates shares)

By Devika Krishna Kumar

Sept 17 (Reuters) - Verizon Communications Inc said earnings may “plateau” next year as evolving consumer habits drive changes to its wireless business model and as the telecom company forays into new markets such as mobile video amid stiff competition.

Verizon, the largest U.S. wireless service provider, said the results would also be hit by the planned sale of some wireline assets and a focus on new business models for wireless video and “Internet of Things”.

Analysts on average were expecting Verizon’s net profit to grow about 2 percent in 2016. The company said it would return to growth in 2017, but still investors sent the company’s shares down as much as 3.6 percent on Thursday.

Customers are increasingly moving away from traditional two-year contracts for subsidized mobile devices to monthly installment plans that have lower service fees.

“The goal is future growth based on delivering what customers want and need in the new digital world,” Verizon Chief Executive Lowell McAdam said at an investor conference.

But Jefferies analyst Mike McCormack said Verizon had been a “laggard” in adapting to changing needs. Smaller players such as T-Mobile US Inc lured away customers offering heavy promotions and discounts on subscription plans.

“ ... And that’s where I think you’re going to see at least a good 4-6 quarters of really sluggish ARPA growth (at Verizon) which is obviously going to be an impact the EPS,” McCormack said. ARPA is average revenue per account.

McCormack said AT&T Inc, the No. 2 U.S. carrier, had moved customers to new plans last year ahead of Apple Inc’s iPhone upgrade. AT&T shares fell as much 1.6 percent.

Apple’s own financing plan for the new iPhones is expected to pile more pressure on U.S. carriers. But, Wells Fargo analyst Jennifer Fritzsche said Apple’s move was not a near-term threat and could even help Verizon’s cash flow.

Verizon’s 2016 results will also be affected by the sale of some wireline assets to Frontier Communications Corp, a expected to close in the first half of 2016.

These assets generate good margin and cash flow for Verizon, said Morningstar analyst Michael Hodel.

The company has also been betting on “Internet of Things”, the concept of connecting household devices to the Internet, to drive revenue and profit.

“Ultimately, we don’t believe Verizon’s long-term potential and competitive position has changed much despite the changes taking place across the company and across the industry,” Hodel said. (Reporting by Devika Krishna Kumar in Bengaluru, Additional reporting by Malathi Nayak in New York; Editing by Don Sebastian and Savio D‘Souza)

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