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Verizon Gives Glimpse of Future as IoT Business Grows

Shares of Verizon (NYSE: VZ) have rebounded since the company in late July reported a solid second quarter with a strong showing in wireless due to the company's new unlimited plan. Also highlighted was the completion of the Yahoo! acquisition and its combination with AOL under the new Oath media business subsidiary. That business is generating $7 billion a year in revenue, and Verizon expects to reap $1 billion in operating expenses from Oath through 2020.

While Verizon investors rightfully focus their attention each quarter on wireless results, the company is doing exciting work on less noticeable IoT and 5G network business development.

Image source: Getty.

The IoT and telematics

Over the last couple of years, Verizon has made a number of Internet of Things (IoT) acquisitions -- smaller but important purchases that have mostly flown under the radar. You can read about those in more detail here.

The company offers little in the way of specifics on the performance of its spending spree, other than it has an IoT division. However, the company said in its recent quarterly earnings report and on the quarterly conference call with analysts that organic IoT revenue, including telematics, grew about 20% year-over-year. The recently acquired telematics business – which is comprised of connected vehicle and fleet tracking and management services – brought in $220 million in the second quarter.

No one really knows what the total market will eventually be for the IoT, but an estimate from Gartner says that the number of global connected devices will exceed 20 billion by the year 2020. That compares with an estimated 8.4 billion or so in operation this year. That's a big market, and someone will need to provide a network on which all of those devices communicate.

This offers an important avenue of growth for Verizon, which saw revenue drop 2% in the quarter, excluding divestitures and acquisitions. It reported total consolidated operating revenue of $30.5 billion. The IoT business could eventually be a catalyst for big growth.

Image source: Verizon.

5G: A network for a more connected world

Closely linked to the IoT business is the development of 5G, a next-generation wireless network that will boast faster speeds and less latency than the current 4G LTE. More importantly, though, 5G will be able to power advanced connected machines like autonomous vehicles and devices used in offering remote healthcare.

Verizon has been working to be the first to roll out the next-gen network, including outbidding AT&T (NYSE: T) for 5G technology and patent holding company Straight Path Communications for $3.1 billion. 2017 is a big year, as initial 5G testing in eight urban markets is underway.

On the conference call, management was short on details here and said to wait for more information later this year when results from the testing is released. Testing involves an initial batch of customers that Verizon is using as guinea pigs to learn how to roll out 5G for general commercial use.

What it means for investors

With Verizon's current 4G-centric wireless business making up about three-fourths of revenue, it will continue to be the driving force behind business and share price performance. However, the current iteration of telecom technology is mostly played out as far as growth goes, leaving telecom businesses fighting over the existing client base in the U.S.

While still small and in early development phase, Verizon's IoT and 5G units do little to impact quarterly results. However, as the world gets increasingly connected, these segments stand to grow and have the potential to pull Verizon out of its current fight for mobile phone subscribers.

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Nicholas Rossolillo owns shares of Verizon Communications. The Motley Fool owns shares of and recommends Gartner and Verizon Communications. The Motley Fool has a disclosure policy.