There's a Silver Lining for Verizon Stock

Telecom giant Verizon Communications (NYSE: VZ) disappointed investors this week with a second-quarter earnings report that didn't quite live up to expectations. While adjusted earnings per share matched the consensus analyst estimate, revenue fell short.

Verizon stock slumped on the news, erasing most of its year-to-date gain. The revenue miss was primarily driven by a steep decline in customers upgrading their phones. Total upgrades were down about 13% year over year, which drove down the revenue Verizon collects from selling new smartphones. Equipment revenue dropped 5.3% from the year-ago period, accounting for the entirety of the company's revenue shortfall relative to analyst expectations.

Empty revenue

While Verizon generates around $5 billion in sales each quarter from selling equipment like smartphones, that revenue isn't worth much. Verizon and other wireless providers use subsidized and discounted smartphones as a lure to snag new customers and retain existing customers. The net result is that Verizon generally turns a loss on equipment sales.

The $5 billion in equipment revenue generated during Verizon's second quarter was paired with $5.6 billion in equipment costs, meaning that the gross margin of Verizon's equipment business is negative. The more smartphones Verizon sells, the more money it loses.

Even with customers holding back on upgrading, Verizon managed to gain postpaid subscribers while growing wireless service revenue. The company tacked on 148,000 net postpaid phone subscribers during the second quarter, with a slight decline on the consumer side more than offset by strong growth on the business side. This drove wireless service revenue up 3.5% year over year.

Rock-bottom churn

One result of customers holding onto their smartphones for longer is that Verizon and other wireless providers are seeing low rates of customers jumping ship. Verizon's retail postpaid churn rate was just 0.85% in the second quarter.

Upgrading to a new phone represents an opportunity for wireless customers to potentially switch providers. Wireless providers generally advertise attractive offers for new customers, often including free or inexpensive phones. Verizon, for example, currently offers new customers a free iPhone 15 with a three-year commitment on certain plans.

Customers are increasingly not biting, instead delaying upgrades and sticking with their current plans. While this gives Verizon fewer opportunities to win new subscribers from competitors, it also gives competitors fewer opportunities to steal away Verizon's customers.

The story hasn't changed

If you liked Verizon stock before the second-quarter report, a revenue miss driven by lower equipment sales shouldn't change your mind. Verizon has been gaining wireless subscribers more slowly than AT&T and T-Mobile , and it's still struggling a bit on the consumer side. However, wireless service revenue is nonetheless marching higher.

Verizon stock currently sports a forward dividend yield of about 6.8%. For investors looking for income, the post-earnings dip has made the telecom giant a bit more attractive.

Timothy Green has positions in AT&T. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy .