To The Moon

$Verizon(VZ)$ 2Q24 Report – New Branding, Continuous drop in the Business segment, and drop in EPS

Verizon's operations are divided into two segments: Consumer and Business. When conducting a balance sheet analysis, it is crucial to examine these segments separately before drawing any conclusions.

Business Segment:

There has been a significant decline in the Business segment, raising concerns about its future. In the year-to-date numbers, the operating income decreased by 17.1%, and when compared with the 2022 numbers, the decline was 33%. There hasn't been much explanation as to what is planned for the segment, and we can see that there has been a strong decrease in broadband revenue. It is important to remember that there was a $5.8 billion goodwill impairment in 2023 for the segment. This means that part of the business was worth less than originally thought, resulting in a write-down of the company's financials.

Generally, there are three major strategies for managing declining business segments: Divestment, Restructuring/Rebranding, and Shutdown. In Verizon’s case, it appears that they have opted for the Rebrand, along with the addition of a new Consumer plan called myHome (this service essentially offers a customizable bundle of home services). They are starting to focus more on their Consumer segment to offset the losses from the Business one. I see this as a good strategy because it indicates a continued investment in what has been somewhat still afloat, rather than trying to turn the Business segment around.

Consumer Segment:

Verizon's Consumer segment has shown sluggish growth, with only a 1.2% revenue increase in the year-to-date numbers. However, compared to the numbers from 2022, there has actually been a decline of 1.8%. This is not good news: Both divisions of the company have experienced long-term declines. However, the Consumer segment appears to have been recovering in the past year. We will need to keep an eye on those numbers to see if their strategy for the new home plans is working.

The total number of broadband consumers has decreased due to the shutdown of some of their plan programs. Despite this decline, the company achieved a 1.95% growth in service revenue. This growth can be attributed to the 4.7% increase in ARPA (average service revenue per account), indicating that the company raised its service prices to more than offset the losses in broadband subscriptions.

Consolidated:

Now, looking at the consolidated numbers, the company has had a decrease of 4% in Earnings Per Share (EPS) which seems to have been primarily impacted by the increase in interest expense on the current debt balance (even though their debt has been reduced). The biggest change was due to the lower capitalized interest costs, a reduction of 53%.

If you are wondering why the EPS dropped when the capitalized interest decreased significantly, here’s an example:

When a company is investing in a long-term asset, in this case it’s Verizon's C-Band spectrum licenses, the interest costs from borrowed funds are added to the asset's cost. This means that the interest becomes part of the overall cost of putting the asset to use, and these costs offset the total interest on debt balances. Once the construction or development is completed, the capitalized interest stops, and any remaining interest costs from the borrowed funds are recorded as expenses on the balance sheet, which results in fewer costs to offset the total interest debt balance.

The current interest rate on the total debt balance sheet is 5.1%. I believe that if the Fed drops the rates this year, Verizon will have a chance to report strong numbers. Additionally, if their new consumer plan takes off and brings in more customers, it could unlock even better numbers.