By Emily Bary
Verizon Communications Inc.’s third-quarter earnings may end up being the last hurrah for an era of low customer churn rates.
The telecommunications giant reported third-quarter results Wednesday that once again showed how Verizon /zigman2/quotes/204980236/composite VZ -0.33% subscribers have been staying put with the carrier. Verizon posted a retail postpaid phone churn rate of 0.63% for the quarter, down from 0.79% a year earlier, as well as a retail postpaid churn are of 0.8%, down from 1.05% last year.
“It simply can’t be overstated how unprecedentedly significant these kinds of declines are, nor how important they are, and have been, for margins,” wrote MoffettNathanson analyst Craig Moffett, who has a neutral rating and $59 price target on Verizon’s stock.
The fourth-quarter and beyond are likely to look a lot different for Verizon, however, as a new chapter begins in the wireless industry. After years of more muted promotions, carriers took a more aggressive approach to the launch of Apple Inc.’s /zigman2/quotes/202934861/composite AAPL +0.74% iPhone 12 line, containing the company’s first 5G phones. Heavy wireless promotions can help carriers gain new subscribers—or compensate for subscribers lost to rival operators—but this discounting can also come at the expense of free-cash flow.
Verizon Chief Financial Officer Matthew Ellis defended the promotions on the company’s earnings call, saying that “we think those are value creative for us.” In addition, under the revenue-recognition rules for accounting, “a large part of those promo costs will be amortized over the next 2.5 years or so rather than hitting the income statement upfront,” he said.
Verizon shares are off 0.2% in Wednesday afternoon trading and on track to decline for the seventh straight trading session. If the losses hold through the close, Verizon will notch its longest losing streak since the period that ended Sept. 8, 2017.
It remains to be seen how Verizon will fare in the world of 5G. Rival T-Mobile US Inc. /zigman2/quotes/204659678/composite TMUS +0.36% is likely to have a more competitive wireless network than in years past, thanks to spectrum gained through its recent Sprint acquisition, and that could mean that Verizon loses subscribers to T-Mobile, Moffett wrote. On the flip side, AT&T Inc. /zigman2/quotes/203165245/composite T -1.04% has been the most aggressive with its iPhone 12 promotions, but its broader business pressures could prevent it from being able to spend up adequately on the spectrum needed to bolster its network.
Read: Apple’s iPhone 12 has 5G — what is it and is it worth the upgrade?
Taken together, that might not mean much for Verizon, wrote Moffett, who doesn’t see much path to growth for the company. At the same time, he expects that it will take “take lots of money,” as well as time, for Verizon to acquire the mid-band spectrum required to build out its own 5G network, given that the company bet big on millimeter-wave spectrum, another flavor of 5G, in its earlier efforts.
“Most expect that 5G will mean higher capital intensity, and therefore lower [return on investment],” he wrote.
Bernstein analyst Peter Supino also expressed concern that Verizon’s future may not be as rosy. “We see signs that segment saturation, competition and economic stress threaten several virtuous trends in Verizon’s mobile business,” he wrote. Supino cited “key growth initiatives still on the come and economic stress pressuring volume and mix” as he maintained a market-perform rating and $63 price target on Verizon’s stock, despite what he referred to as “premium” results for the latest quarter.
Verizon’s report kicked off earnings season for the big telecommunications players, with AT&T set to follow Thursday morning .
Shares of Verizon have gained 2.4% over the past three months as the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.60% has risen 5.6%.