U.S. telco results expected to prove video growth

NEW YORK Fri Jul 20, 2007 4:26pm EDT

Traffic passes Verizon Communications Inc. headquarters in New York, February 14, 2005. When AT&T Inc. and Verizon Communications Inc. report quarterly results later this month, investors will be looking for proof that their expensive video strategies are starting to pay off. REUTERS/Peter Morgan

Traffic passes Verizon Communications Inc. headquarters in New York, February 14, 2005. When AT&T Inc. and Verizon Communications Inc. report quarterly results later this month, investors will be looking for proof that their expensive video strategies are starting to pay off.

Credit: Reuters/Peter Morgan

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NEW YORK (Reuters) - When AT&T Inc. and Verizon Communications Inc. report quarterly results later this month, investors will be looking for proof that their expensive video strategies are starting to pay off.

The top two U.S. phone companies had worried Wall Street by investing billions of dollars in building advanced high-speed networks to compete with cable companies' all-in-one packages of video, Internet and phone services.

But if Verizon can show that subscriber growth to its FiOS video service is picking up, and if AT&T can report the same for its U-Verse service, that would help remove overhang on their share prices, analysts said.

"As they begin delivering on the metrics and people can see the product out there in the market, there will be less of a concern about the spending," said Atlantic Equity analyst Chris Watts, adding that positive consumer reaction to FiOS over the past year was already helping Verizon shares.

AT&T shares have risen less than 1 percent in the past 3 months to trade on Friday around $39.30. Verizon shares have risen 13 percent over the same period to around $42.45.

Investors on average expect AT&T to report on July 24 second-quarter earnings excluding special items of 66 cents per share, compared to 58 cents in the year-ago quarter, according to Reuters Estimates.

Verizon is expected to report on July 30 adjusted earnings per share of 58 cents, compared to 64 cents a year earlier. Spending in the FiOS network, due to total $18 billion from 2004 through 2010, hurt earnings by 11 cents in the first quarter and the company has said this dilution will decrease in coming quarters.

Investors are also likely to focus on any details from AT&T on how it expects to benefit from being the sole service provider for Apple Inc.'s iPhone.

Some also said they look forward to any comments by Verizon on its mobile partnership with Vodafone. Verizon has said it wants full ownership of their joint venture, Verizon Wireless.

SUBSCRIBER GROWTH

While wireless service is seen as the key growth engine for both companies in the near term, analysts said expansion of their new video businesses is crucial for the longer term.

Both AT&T and Verizon face declining fixed-line phone sales and increasing competition from cable and online services, a trend likely to be underscored in the quarterly reports.

Raymond James analyst Todd Koffman, who has been monitoring Verizon's FiOS roll-out, expects video subscribers to total 500,000 in the second quarter, up from 348,000 in the previous quarter.

Analysts said they were looking forward to AT&T's update of its expansion plans for U-Verse. The company is expected to give an outlook including the territory of BellSouth, which it acquired late last year.

For the traditional 13-state territory of AT&T, the company has said it plans to connect the network to around 18 million homes by the end of 2008.

Analysts also said they would particularly focus on any change in spending plans, which would affect equipment vendors like Cisco Systems, Alcatel-Lucent, and Tellabs, which supply equipment for the services.

Although investors are likely to be wary of any increased spending, some analysts said a higher-than-planned dilution by Verizon's FiOS would not necessarily be bad news.

"Even if it trends up, that's not necessarily bad, because it could indicate subscriber growth is ahead of schedule," said A.G. Edwards analyst Kent Custer.

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