Verizon 2nd-Quarter Profit Up 13% on Wireless Growth
07/19/2012| 12:19pm US/Eastern
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--Verizon second-quarter net income rose 13%
--Wireless division drives growth as traditional wireline business declines
(Updates with detail and company comments beginning in the third paragraph.)
By Thomas Gryta
Verizon Communications Inc.'s (>> Verizon Communications Inc.) second-quarter net income rose 13% as the growth in the wireless business drove revenue and the telecom giant increased its overall subscriber base.
Verizon Wireless, a joint venture with Vodafone Group PLC (VOD, VOD.LN), reported strong customer additions as users continue to convert to more lucrative smartphones. The company announced new data plans last month that allow it to better capitalize on the increasing data usage of its customers.
Chief Financial Officer Fran Shammo said in an interview that customer adoption of the new plans is tracking above the company's expectations and he is confident of "double-digit earnings growth" in 2012.
Shares fell 2.2% to $44.89.
Macquarie Securities analyst Kevin Smithen said investors might be disappointed by the earnings not exceeding expectations, but that the company's cash flow strength will help the shares over the long term.
"This bodes well for future dividend increases, which is the key driver for the stock," he said.
Mr. Shammo implied that the Verizon Wireless venture may not be paying out a dividend to the partners anytime soon, noting that the issue isn't on the board's agenda for its upcoming meeting. The board is required to review the possible payment at its year-end meeting.
The company declared a $10 billion dividend about a year ago--the first since 2005--and those distributions give 55% to Verizon Communications and 45% to Vodafone. Wall Street has widely expected another dividend with some speculation that the growth in the business would warrant an increase.
Verizon controls the wireless venture and Mr. Shammo sits on its board. He declined to discuss his position or recommendation, only saying that the company "will be good stewards of cash."
Meanwhile, Verizon Wireless is trying to get regulatory clearance for its $3.9 billion deal to buy a chunk of airwave licenses from a group of cable companies. Despite reports of regulatory concerns, Mr. Shammo expects that deal to close later in the summer.
He said Verizon Communications has plenty of sources of cash to pay its own dividend and wouldn't consider buy backing stock until late 2013 or early 2014.
Verizon reported a profit of $1.83 billion, or 64 cents a share, up from $1.61 billion, or 57 cents, a year earlier. Revenue jumped 3.7% to $28.55 billion. Analysts polled by Thomson Reuters had forecast earnings of 64 cents a share on revenue of $28.55 billion.
Operating margin rose to 19.8% from 17.8%.
Verizon Wireless contributed 65% of the company's total revenue with topline growth of 7.4% to $18.58 billion, compared to a drop of 3.1% in the wireline operations.
The wireless business added 888,000 of the most profitable postpaid subscribers, down from 1.26 million additions a year earlier and up from 501,000 last quarter.
Including prepaid customers, Verizon Wireless added 1.2 million subscribers, pushing its base to 94.2 million connections, up 4.9% from a year ago.
Total churn, or customers who cancel services, was 0.84%--the lowest in four years, according to the company--compared with 0.89% a year earlier.
Mr. Smithen said the subscriber growth was impressive because of a generally tough environment where handset makers have cited slower demand in the quarter.
Overall, he expects the second quarter to be flat for customer additions across the U.S. wireless industry, meaning that Verizon is likely capturing market share from competitors.
Average revenue per user 3.7% from last quarter to $56.13, while data revenue per user surged 15.4% to $24.53 from a year ago.
The company expects customer migration to its more profitable next-generation network--called LTE or Long Term Evolution--to continue to help improve wireless operating margins. LTE devices are now 12.2% of retail postpaid connections, up from 9.1% last quarter.
Fewer customers upgraded their phones in the second quarter, something that helps margins because the company subsidizes new devices. Mr. Shammo said people may be waiting for new device launches in the fourth quarter--such as the newest edition of the iPhone--so they aren't upgrading now.
Aside from increased use of its LTE network, the company is benefiting from increased adoption of smartphones by customers. In the quarter, 73% of postpaid phone sales were smartphones, compared with 60% a year ago. Smartphone are now 50% of the postpaid base at Verizon Wireless, up from 47% three months ago.
Even with people waiting to upgrade, the company activated 2.7 million iPhones up from 2.3 million a year ago. Of those sales, 25% were to new subscribers. The company activated 2.9 million smartphones running Google Inc.'s (>> Google Inc) Android software.
In the wireline business, Verizon added 134,000 FiOS Internet and 120,000 FiOS Video subscribers during the quarter.
The company is expecting margins in the wireline business to be higher in the second half than in the first half. Last month, the company raised prices and increased the speeds for its FiOS Internet service, pegging the monthly bill to the speed chosen by customers.
Regardless, the company lowered its expectations for quarterly customer additions for its FiOS service, now expecting 150,000 to 170,000 down from a previous range of 180,000 to 200,000 customers.
Mr. Shammo conceded that the quarter's FiOS growth was less than expected. He said the company is shifting its focus to making the business more profitable, rather than chasing subscriber growth.
--Melodie Warner contributed to this story
Write to Thomas Gryta at thomas.gryta@dowjones.com
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