iPhone helps Verizon, but not enough for some

NEW YORK Fri Apr 22, 2011 8:52am EDT

Verizon CEO Ivan Seidenberg at the Consumer Electronics Show in Las Vegas, January 6, 2011. REUTERS/Rick Wilking

Verizon CEO Ivan Seidenberg at the Consumer Electronics Show in Las Vegas, January 6, 2011.

Credit: Reuters/Rick Wilking

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NEW YORK (Reuters) - Verizon Communications Inc (VZ.N) gained wireless subscribers with Apple Inc's (AAPL.O) iPhone, but the effect on its financials failed to impress investors, who sent its shares down 2.3 percent.

With subscriber growth only meeting Wall Street estimates, some analysts complained about profit margins and others said revenue growth was lower than they hoped at Verizon Wireless, the mobile venture of Verizon and Vodafone Group Plc (VOD.L).

Since Verizon's shares had increased 18 percent in the five months ahead of the quarter, its merely "solid" results were not remarkable enough, said Mizuho analyst Michael Nelson.

"I'm not sure if there's anything in today's report that gives investors reason to believe Verizon should continue to expand its premium valuation," Nelson said.

Even Verizon's announcement on its conference call that it would sell a new version of the iPhone later this year, failed to excite investors. It said that unlike its current iPhone, the next one would work globally.

Verizon Wireless, the top U.S. mobile provider, posted 906,000 net new subscribers, roughly in line with expectations for over 888,000 from seven analysts contacted by Reuters.

This was much better than AT&T Inc (T.N), which added only 62,000 net subscribers in the quarter as it lost iPhone exclusivity in the quarter.

But a key sticking point for investors when comparing the two operators was the fact that AT&T won more new iPhone customers in the quarter than Verizon.

The expectation had been for hordes of customers to flee AT&T when the Verizon iPhone arrived, since popular phones typically see a big spike in sales in the launch quarter.

"It was a stronger new customer driver for AT&T," Pacific Crest analyst Steve Clement said.

Verizon, which put the iPhone on store shelves February 10, said it sold 2.2 million iPhones by the end of the quarter, much lower than the 3.6 million iPhone sales at AT&T, which had the phone for the entire quarter.

About 22 percent of Verizon's iPhone customers switched from rival carriers but, about 23 percent of AT&T's were also new to that company. This implies that Verizon won fewer than 500,000 new customers through iPhone, whereas AT&T added more than 800,00 iPhone customers for other carriers.

USAGE AND COSTS

As well as attracting new customers, advanced devices like the iPhone are meant to boost monthly average revenue per user (ARPU) as smartphone customers spend more on services like mobile web surfing.

But Verizon's 2.2 percent ARPU increase was lower than some analysts had expected.

"It calls into question the longer term growth outlook," said Nomura analyst Michael McCormack who had expected 2.5 percent growth. The cost of selling iPhone was also an issue.

Sales of all advanced phones, and particularly the iPhone, come at a high cost. As a result, Verizon's profit margin dipped under its usual levels and below some analyst estimates.

Its margin was 43.7 percent, well below the 46 percent it posted a year earlier, based on earnings before interest tax depreciation and amortization. This was below the 44.2 percent margin Citadel Securities analyst Shing Yin had expected.

The carrier subsidy required for iPhone is about $400 while carriers typically pay a subsidy of $250 to $300 for other smartphones, Nomura analyst Michael McCormack estimated.

Verizon earnings rose to $1.44 billion, or 51 cents per share, from $443 million, or 16 cents per share, in the same quarter a year before when it shouldered hefty one time charges.

Revenue rose to $26.99 billion from $26.86 billion in the year-ago quarter and compared with the average analyst expectation for $26.86 bln, according to Thomson Reuters I/B/E/S.

Verizon shares ended Thursday down 2.3 percent at $36.91, while AT&T shares rose 1.8 percent, both on the New York Stock Exchange.

(Reporting by Sinead Carew; Editing by Derek Caney and Tim Dobbyn)

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