Verizon Communications Inc. Earnings Preview: Tax Reform Takes Center Stage

Verizon Communications Inc. (NYSE:VZ) is slated to release its Q4 earnings results before opening bell on Tuesday. Consensus calls for Verizon earnings to come in at 88 cents per share on an adjusted basis on $33.3 billion in revenue for the fourth quarter. The mobile carrier’s stock climbed higher on Monday as analysts continued to talk up the benefits the company expects from the tax reform bill this year.

What to expect from Verizon earnings

In a note to investors last week, Deutsche Bank analyst Matthew Niknam said he favors Verizon as a “top idea” going into the Q4 earnings release. He recently raised his price target for Verizon stock from $48 to $56 per share, but he maintains his Hold rating on the stock to “balance a positive near-term view with a tempered stance on strategic positioning longer-term.”

He sees the potential for Wireless upside in the Verizon earnings release this week because he believes that the decline in service revenues “will inflect more positively.” He’s looking for a year-over-year decline of 2.9%, versus the consensus of a 3.1% decline and management’s guidance for a decline “inside of -4%.”

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He also believes that Verizon will beat consensus for wireless EBITDA because of the company’s “much more disciplined promotional activity this season.” Specifically, he said the mobile carrier was “fairly rational” in its promotion of the iPhone 8 and iPhone X during Q4, although he also said that the first quarter may be marked by more competition.

Return to growth in 2018 gets more complicated

On the Verizon earnings call, he will be listening for commentary on the expected trajectory of the company’s wireless service revenue. He pointed out that the mobile carrier has said it expects to return to growth this year, but Niknam warned that the recent change in accounting standards could cause complications. The changes mean that subsidized contracts, which account for about 20% of Verizon’s wireless base and sales, will cause more revenue to be recognized as equipment revenue rather than service revenue. He expects to hear more color about these changes on the Verizon earnings call.

Additionally, he expects the company’s postpaid phone net adds to beat expectations, coming in at 299,000, compared to the consensus of 282,000. KeyBanc analysts are looking for a miss on postpaid phone adds, however, at 265,000.

Verizon expected to benefit from tax reform

Verizon earnings will receive a boost of $16.8 billion thanks to the tax reform bill, which slashed the firm’s corporate tax rate. Before the bill was passed, the mobile carrier’s deferred tax liabilities stood at $48.3 billion, most of which is from purchasing airwaves licenses and from capital expenditures on its network infrastructure. The company said last week that it will record a one-time gain of $4.10 per share in connection with the tax reform.

Of all the telcos, Niknam believes that Verizon will be the biggest beneficiary from tax reform, and he looks forward to hearing about what the mobile carrier will do with all the cash it expects to save on taxes. Among the possibilities, he sees increased investments in Verizon’s wireless network, although he also said that management said recently that they’re unlikely to raise capital expenditures much beyond the $17 billion they already discussed. He sees acquisitions and accelerated returns for shareholders as other possibilities.

KeyBanc analysts said they believe the tax reform bill “could make quite an impact for Verizon. They see the potential of a 42% boost to 2018 earnings per share from “bonus depreciation” of capital expenditures.

Verizon stock surged by nearly 2% in intraday trading on Monday, climbing as high as $53.10.