UPDATE 4-Verizon beats estimates and raises Vodafone pressure

Thu Apr 18, 2013 1:06pm EDT

(Adds analyst comments, background details on Vodafone, share
price update)
    By Sinead Carew
    April 18 (Reuters) - Verizon Communications Inc 
posted a higher-than-expected quarterly profit on the
performance of its wireless business, which reined in costs
without slowing growth.
    Verizon also ramped up the pressure on Vodafone Group Plc
, which owns 45 percent of the Verizon Wireless unit.
Verizon has been seeking to buy that stake and take full control
of the top U.S. mobile company.
    During the quarter Verizon Wireless was helped by lower
costs and the popularity of its data share plans, under which
subscribers can more easily add cellular service to devices like
tablets. That represent lower costs for Verizon than smartphones
such as Apple Inc's iPhone.
    "It just feels like they're tightening the circle around
their customers," Evercore analyst Jonathan Schildkraut said,
referring to Verizon's ability to retain customers and add more
devices through its data share plans.
    Schildkraut said investors were equally excited about 
Verizon's comment that it was "extremely confident" it could buy
Vodafone's stake in the wireless unit without major tax
implications for Vodafone shareholders.
    The tax question is seen by some analysts as one of the
biggest barriers to a deal. Vodafone declined to comment.
    "We actually are confident that in such a transaction we've
a structure that could be created in a very tax efficient
manner," Verizon Chief Financial Officer Fran Shammo told
    Guggenheim analyst Shing Yin said Shammo did not appear to
be indicating a deal was imminent but making a public plea to
Vodafone to sell the stake by contradicting the tax worries. 
    "I see that as putting a little bit of pressure on Vodafone
to do something," Yin said. 
    Shammo said that Verizon's long-stated desire to buy the
rest of the wireless venture had not changed. Earlier this
month, Verizon denied it had any intention of buying Vodafone
outright as a way to gain control of the wireless business.
    Verizon Wireless added 677,000 retail subscribers in the
first quarter, slightly higher than Wall Street expectations for
about 634,000, according to eight analysts contacted by Reuters.
    The operator said its wireless service margin of 50.4
percent based on earnings before interest, taxes, depreciation
and amortization was a record high. Expectations had ranged from
48.5 percent to 49.9 percent, according to four analysts polled
by Reuters.
    In comparison, its biggest rival AT&T Inc, which
reports first-quarter 2013 results on April 23, posted a
wireless margin of 41.6 percent in the year-ago quarter.
    Verizon also stuck by its previous forecast for a full-year
2013 wireless margin of 49 percent to 50 percent.
    "They clearly had very good cost control on wireless. The
lower upgrades helped but it looked like they were also able to
get cost out of the network," said Guggenheim's Yin.
    While Verizon activated 4 million iPhones in the quarter, up
from 3.2 million in the year-ago quarter, it said that half of
those activations were for older, cheaper iPhones. Apple shares
have been sliding on fears of weakening demand for the iPhone.
    On the plus side for Apple, though, its share of Verizon's
smartphone activations rose to 56 percent from about 51 percent
in the year-ago quarter, according to Guggenheim's Yin.
    "To Apple's credit the iPhone continues to gain share" at
Verizon Wireless, Yin said. 
    Aside from the wireless business, Verizon Communications
also saw improved growth in its FiOS home Internet and
television service 188,000 net new FiOS Internet customers and
169,000 FiOS television subscribers in the quarter. Hudson
Square analyst Todd Rethemeier had expected 150,000 Internet
customers and 125,000 FiOS TV customers.  
    "Across the board subscriber numbers in both wireline and
wireless looked pretty good," said Rethemeier.
    Verizon's Shammo also confirmed that Verizon had put in an
offer to Clearwire Corp to buy wireless airwaves in a
bid to expand capacity. 
    Verizon's earnings rose to $1.95 billion, or 68 cents per
share, compared with $1.69 billion or 59 cents per share in the
year-earlier quarter. Analysts expected earnings of 66 cents per
share, according to Thomson Reuters I/B/E/S.
    Revenue rose to $29.42 billion from $28.24 billion and
compared with Wall Street estimates of $29.55 billion.
    Verizon shares were up $1.63 at $51.14 in early afternoon
trade, after rising as high as $51.67 percent earlier on the New
York Stock Exchange.
    AT&T shares rose 6 cents to $37.84. Apple shares were down
about 2 percent, or $8, at $394.80 on Nasdaq. 

 (Additional reporting by Kate Holton in London; Editing by
Gerald E. McCormick, Sofina Mirza-Reid and Richard Chang)