When earnings calls emphasize balance sheet improvements (specifically leverage ratios and whether there’s ample free cash flow to support a dividend increase), it’s usually a sign that the rest of the business is performing as expected. There are a few things that are ticking up (like churn), and a few things we wish would grow a bit faster (Fios consumer and business net additions), but all in all, Verizon met expectations. That’s good enough to propel the stock back to September levels, but not even close to the $39.40/ share that they had to start 2023.

What’s missing? A catalyst. With AT&T demonstrating that they can execute a strategy (albeit capital intensive and costly), where does that leave Verizon? They don’t have the same “keep the current customer base even if it costs a little/lot more today” strategy as their blue peer. And T-Mobile has a substantial 5G network advantage (more on that in the upcoming Brief as we moved from T-Mobile to Spectrum Mobile/ Verizon last Friday) and it is going to take quarters if additional suburban and rural deployments to reach parity. Once T-Mobile figures out fiber (and they will figure it out – soon), Verizon is going to have additional headaches.

Fortunately, Verizon has cable. As the lead picture shows, consumer wireless service revenues (which includes MVNO) grew $446 million year-over-year and $170 million sequentially. Some of year-over-year service revenue revenue growth is coming from retail pricing actions taken in 2022 but there were no major pricing changes (except for Fixed Wireless Access which was a minor contributor) over the summer. We estimate that at least 80-85% of the sequential growth came from the cable MVNO relationship (we will be able to true that up when we see the cable net additions numbers later this week).

Verizon’s prepaid base is collapsing with an annualized churn in excess of 50%. That means that nearly 1 million Tracfone customers leave Verizon every month. Fortunately, many are reactivating on another Verizon prepaid or wholesale brand (some could be cable, but Straight Talk and Visible are stepping up their advertising). And there are probably 150-200K (maybe more) that get converted to My Plan (retail postpaid phone).

This presents a portfolio management challenge. Verizon’s strategy appears to be to slowly bleed the retail postpaid phone base (especially those who do not want fixed wireless services) to cable and Straight Talk. Keep the cash flow within the Verizon family and shareholders don’t get hurt.

Is this financial optimization exercise capable of generating full-throated conviction? It does if Verizon can show how it generates a long-term growth rate in excess of a retail-only strategy. The company still needs to make that case. Until then, there’s continued cash flow from retail, lower capital for 2024, and the growing cash flow from the cable MVNO relationship.

More on Sunday. Link to the Verizon quarterly results page is here.