Turns out Verizon customers may be more set in their ways than the carrier accounted for.
Verizon CFO Fran Shammo on Thursday shed some light on the carrier’s expectation of flat earnings this year, noting that a perfect storm of factors is temporarily holding the company back.
Shammo said the switch to a non-subsidy model and a stalled take rate for equipment installment plans (EIPs) are among the chief headwinds Verizon is facing.
According to Shammo, the shift away from a subsidy model provided an initial earnings bump to the company last year, but noted earnings are flattening out as the carrier approaches the mark of 50 percent of its base on unsubsidized pricing.
Shammo said the carrier is also battling an EIP take rate that appears to have stalled below expectations. Shammo said the EIP take rate through April remained at a standstill at 68 percent, slightly below the 70 percent Shammo guided to for the quarter. The figure is also well below the 75 percent Verizon said it was hoping to achieve by the end of this year, and that’s a problem, Shammo said.
“The EIP take rate has an impact on what the current-year earnings are,” Shammo said. “We had anticipated that we would get to around 75 percent, 76 percent by the end of the year. And what’s actually happening is we’re not getting there.”
Shammo said the problem has been compounded both by slow upgrade rates and a consumer preference for subsidies when they do upgrade. Perhaps surprisingly, Shammo said the vestige of its subsidy program has a tight grip on consumers.
“The pressure for us on the installment take rate (is that) we are still allowing our base to choose the subsidized model,” Shammo said. “On upgrades, believe it or not, a majority of the people are still upgrading and selecting the subsidized model. That’s why we’re having the pressure on the installment plan.”
Shammo said it’s hard to determine whether the longer upgrade cycles are a sign of satisfaction with their devices and the subsidy plans or if customers are just waiting for major product releases from Apple and other manufacturers in the fall. As Verizon comes up on the maturity of its first two-year installment plans, Shammo said the third and fourth quarters will likely provide the answer.
“Upgrades are very slow right now,” Shammo said. “I think what you’re seeing is consumers are waiting to see what’s potentially coming in the fourth quarter… (but) if there’s not a dynamic change what I think you’ll see is people will hold their phones.”