Analyzing Verizon's 4Q14 Wireline Segment Results (Part 5 of 7)
Increase in segment’s operating income in 4Q14
In the earlier parts of this series, we learned about the year-over-year decline in Verizon’s (VZ) wireline segment revenue, which was driven by the wholesale and enterprise segments. Now, we’ll look at the segment’s profitability.
In 4Q14, the operating income of the company’s wireline division grew significantly—owing to the smaller base—to reach ~$416 million. It reached ~$114 million in 4Q13. Higher year-over-year margins due to reduced operating costs across the board led to the segment’s operating income growth during the quarter.
Wireline division margins expanded in 4Q14
As you can see in the above chart, Verizon’s wireline EBITDA (earnings before interest, tax, depreciation, and amortization) increased ~4.3% year-over-year to reach ~$2.3 billion in 4Q14.
This increase was due in large part to the wireline segment’s margin expansion during the quarter. Verizon’s EBITDA margin increased from ~22.5% in 4Q13 to ~23.9% in 4Q14.
The margin expansion came from a ~4.7% year-over-year decline in the segment’s operating costs. One of the reasons for this decline was likely the higher efficiency of Verizon’s fiber network compared to the legacy copper network.
In 2014, the company upgraded 255,000 customers on its copper network to its fiber network. According to Fran Shammo, Verizon’s chief financial officer and executive vice president, upgrading the existing copper network to fiber has helped the company reduce costs. Shammo spoke about this effect in Verizon’s 4Q14 earnings conference call.
If you want to take on diversified exposure to Verizon, you can invest in the Technology Select Sector SPDR Fund (XLK). The ETF held ~5% in the company on March 19, 2015. You should also consider that this ETF held ~4.2% in AT&T and ~0.9% in the wireline telecommunication companies CenturyLink (CTL), Frontier Communications (FTR), and Windstream (WIN) on the same date.
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