Verizon wireline disappoints, shares off 2.9 percent

Thu Jul 19, 2012 7:33pm EDT

Customers purchase the iPhone 4 shortly after the phone went on sale with the Verizon Wireless network in Boca Raton, Florida February 10, 2011. REUTERS/Joe Skipper

Customers purchase the iPhone 4 shortly after the phone went on sale with the Verizon Wireless network in Boca Raton, Florida February 10, 2011.

Credit: Reuters/Joe Skipper

(Reuters) - Weakness in Verizon Communications Inc's enterprise business offset a better-than-expected wireless quarter, sending the telephone company's shares down 2.9 percent.

After pushing Verizon's shares up 14 percent so far this year, investors focused in on the wireline miss on Thursday even as Verizon handily beat Wall Street estimates for wireless subscriber growth and profitability.

While earnings per share (EPS) met Wall Street expectations for the quarter, analyst said that wasn't enough.

"The view by investors is that wireline stole the EPS benefit of a great wireless quarter," Nomura analyst Michael McCormack said.

Chief Financial Officer Fran Shammo told analysts on a conference call that Verizon's enterprise business was hurt by foreign exchange rates and a decision to stop selling some customer equipment and, to a lesser extent, by macroeconomic challenges in Europe.

But McCormack said the world economy's impact may have been understated.

"The global economy may be more sluggish than people believe at this point. It seems (for) anything outside large multinationals, you're seeing very sluggish buying behavior," he said.

Verizon's wireline revenue fell 3.4 percent in the quarter to $9.93 billion compared with Wall Street expectations of $10.03 billion, according to the company.

PRICE INCREASES

While Verizon saw strong revenue growth in its consumer wireline business, Shammo said its addition of 120,000 net new FiOS television customers was weaker than it expected as an unusually high number of people moved from the FiOS region.

Shammo said Verizon was reducing its target estimate for future FiOS TV growth to 150,000 to 170,000 from its previous estimate of 180,000 to 200,000 as the company is increasing its prices to focus more on the profitability of the service.

The executive told Reuters that he expects Verizon's wireline revenue growth rate from consumer services to rise to 5 percent by the end of the year from 2.5 percent in the second quarter as the company plans more price increases.

The company raised prices in the second quarter with service packages that include higher Internet speeds, but Shammo warned there would be more price increases for TV bundles.

"We started in the second quarter but there's more on the plate for the third and fourth quarter," Shammo said.

Guggenheim Securities analyst Sing Yin said consumers may have no choice but to pay higher fees for TV as programmers increase their rates. He also expects them to embrace pricier Internet services.

"They're counting on consumers being willing to pay more for better speed. So far, there is evidence there is demand for higher speeds at higher prices," Yin said.

WIRELESS BEATS ESTIMATES

In response to rumors about a dividend payment, Shammo said that the board of the company's Verizon Wireless venture with Vodafone Group Plc does not plan to discuss a distribution at its next quarterly board meeting.

Vodafone shares fell 1.7 percent in London trading after the comment.

Verizon Wireless added 888,000 net new subscribers in the quarter, compared with the average expectation of about 666,000 of seven analysts.

"That's a terrific number," Roe Equity Research analyst Kevin Roe said, noting that Wall Street does not expect No. 2 mobile provider AT&T Inc to add even half as many customers in the quarter.

The growth at the No. 1 U.S. mobile provider probably came at the expense of smaller rivals Sprint Nextel and T-Mobile USA in particular, as those companies have been struggling to stem customer losses, Roe said.

The company said that 50 percent of its wireless customers were using smartphones by the end of the second quarter, up from 47 percent at the end of the first quarter. Since smartphone customers spend more than customers with basic phones, Verizon has been pushing to increase its smartphone penetration.

Verizon Wireless launched new shared data service plans June 28 that raised its data fees in exchange for letting customers connect multiple devices under one plan. The plan is aimed at getting consumers to more devices to its network[ID:nL1E8HC3EE].

While the shared data launch was too late in the quarter to have an effect on the company's results, Shammo said that early consumer feedback had been "great."

Verizon's wireless service margin based on earnings before interest, tax, depreciation and amortization was 49 percent, ahead of average estimates of five analysts for just above 47 percent.

Verizon's second-quarter profit rose to $1.83 billion, or 64 cents per share, from $1.61 billion, or 57 cents per share, a year earlier. The results were in line with analysts' estimates, according to Thomson Reuters I/B/E/S.

Revenue rose to $28.552 billion from $27.54 billion, while analysts were expecting $28.558 billion.

Verizon said on Thursday that its 2012 capital spending would be little changed or lower than its 2011 budget of $16.2 billion. During the company's last earnings call, Shammo had expected 2012 spending to be about the same as in 2011.

The company said it was on track for growth in full-year earnings in the double-digit percentage range, implying a rise of at least 10 percent.

It expected profit margins in its wireline business to continue to improve in the second half of the year after increasing in the second quarter from the first quarter.

Verizon hopes to improve earnings by reducing costs in negotiations for new terms for a labor contract covering 45,000 workers but the company appeared to be nowhere nearer to an agreement on Thursday almost a year after its workers went on strike to protest the cuts Verizon wants to make.

On Thursday afternoon, Verizon's unions said they had requested mediation services for the talks because they had gone on too long. Verizon rejected the request.

Verizon's shares closed down $1.35, or 2.9 percent, at $44.54 on New York Stock Exchange, which was still up 11 percent from the end of 2011.

(Reporting by Sinead Carew; Editing by Lisa Von Ahn, Maureen Bavdek, David Gregorio and M.D. Golan)

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