Verizon Communications (VZ), created through the 2000 merger of Bell Atlantic and GTE, is the largest U.S. wireless carrier, with postpaid wireless phone service to 88 million customers and prepaid service to another 5 million, plus another 23 million data devices. Verizon’s wireless business accounts for 70% of revenue and almost all its operating income.
Local fixed line networks reach about 25 million homes and businesses in the northeast and mid-Atlantic U.S., providing 12% of revenue. Nationwide enterprise services provide another 10%. The remaining revenue comes from Verizon Media (formerly Oath), an online media and advertising firm formed through Verizon’s AOL and Yahoo acquisitions.
Verizon was the 9th most valuable brand in the 2019 BrandFinance Global rankings. Verizon covers 98% of the U.S. The company’s fixed wire network is 100% fiber optic. Verizon operates 200 data centers in 24 countries.
A Verizon strength is its leading position as a wireless carrier with 34.91% of the market, just ahead of AT&T (T) at 34.07%. VZ has a strong customer base with an infrastructure that would be difficult to replicate. The company’s various business segments operated as relatively independent “silos,” but VZ now markets products and services “horizontally” across its various segments.
A potential strength is its new senior leadership team, which blends experienced company veterans with fresh energy imported from–literally–all across the world. Sweden native and former Ericsson CEO Hans Vestberg joined VZ in 2017 as Chief Technology Officer and was named CEO in 2018. A February, 2019 Investor Meeting is available by video webcast and transcript. This was Verizon’s first such meeting in seven years. Vestberg outlined his vision for the company and introduced his senior management team.
CFO Matthew Ellis joined VZ in 2013 after 15 years with Tyson Foods. Tami Erwin, President of Verizon Business Group, began with a VZ legacy company in 1987. She has led several of Verizon’s major divisions. Chief Technology Officer Kyle Malady has been with a legacy company since 1989.
Verizon is a U.S. company, but with a global “feel.” The company exudes European-style, customer-centric themes like “humanability,” diversity, and “delivering the promise of a digital world.”
Ireland native Ronan Dunne, President of Verizon Consumer Group, arrived in 2016 after serving as CEO of Telefonica UK (O2). Verizon’s Chief Strategy Officer is Pakistan native Rima Qureshi, who came from Ericsson in 2017. After three years as a Alibaba’s Global Managing Director, Guru Gowrappan joined VZ in 2018 and is CEO of Verizon Media Group. Chief Marketing Officer, Argentina native Diego Scotti, joined Verizon in 2014 after marketing careers with J. Crew, Conde Nast and American Express.
The company’s wireline business has been a drag on profits. Some high-maintenance legacy systems operate in low-growth or declining businesses with limited fee growth potential through service enhancements.
Verizon’s BBB+ Standard & Poor’s credit rating is one notch above AT&T’s BBB. S&P lowered Verizon’s rating from A+ to A in 2006, from A to A- in 2010, and from A- to BBB+ in 2013, when VZ borrowed $67 billion to acquire Vodafone’s 45% stake in Verizon Wireless. Management wants a “pre-Vodafone” rating of A-. Thus, at a time of rapid technological innovation, Verizon is limited to “bolt-on” acquisitions.
Anytime a company goes through a management shakeup, a potential weakness is resistance and low morale among those considering or taking early retirement or who face or fear layoffs.
Vestberg’s team is implementing “Verizon 2.0,” built on four pillars. (1) Four vertical networks have been combined into one horizontal, “Intelligent Edge Network” based on 5G. (2) A renewed customer-driven focus aims to provide the best solutions from within VZ assets or through partnerships. (3) The company’s marketing seeks to maximize the value of the Verizon brand, which management believes is trusted and innovative. (4) Financial discipline focuses on reduction of debt and pension liability, effective capital expenditures, appropriate bolt-on acquisitions, and dividend growth.
Verizon’s engineer CEO sees 5G as the “fourth industrial revolution” and the engine for Verizon 2.0. VZ is building 5G for multiple, yet-to-be-imagined applications that will enhance customers’ connectivity. The focus of the horizontal network is “build it once” but apply it in many expanding ways.
In this new environment, marketing means collaboration with customers to take advantage of 5G’s ability to enhance the Internet of Things. For example, autonomous vehicles will use 5G to monitor, and instantaneously react to, multiple data, including communication with other vehicles and traffic signals.
Verizon has the opportunity to use artificial intelligence to mine customers’ data (and to help business customers mine their customers’ data), to more effectively target advertising. The new, largely global management team may open the door for expansion beyond Verizon’s U.S. footprint.
Verizon’s new, energetic management team is moving fast to implement the emerging 5G technology. Management has promised rapid deployment of 5G, but not all the component parts are within their control. With so much of the company’s future depending on 5G, any delay in implementation could be costly and could potentially slow momentum.
The commoditization of all things digital narrows the “moat” and makes it easier for customers to choose among competing carriers. Will VZ be able to continue its market leadership and its ability to resist customer “churn?”
VZ has “line of sight” to greater financial strength and less reliance on debt, but it comes at a time when the industry is consolidating with the possible dominance some combination of several big players, such as AT&T, Apple (AAPL), Amazon (AMZN), Alphabet (GOOG), Disney (DIS) and Netflix (NFLX).
Long Term Outlook
Verizon has been a steady performer in a rapidly changing and highly competitive industry. VZ has been relatively successful in retaining its customer base, but customer loyalty is declining across the board in the industry. Success requires consistent, excellent execution. I encourage you to watch the audio webcast of the February 21, 2019 Investors’ Meeting, as well as listen to the audio webcast of the Q4 2018 earnings call. An investment decision about Verizon today depends on one’s level of confidence in this new management team.
Two key questions: (1) Will 5G provide the expected exponential expansion of opportunity; and (2) Will Verizon’s new management team effectively execute its ambitious goals?