Verizon profit rises, but wireline disappoints

NEW YORK (Reuters) - Verizon Communications Inc (VZ.N) posted a higher quarterly profit on strong wireless sales, but its shares fell on worries about its declining landlines and weaker-than-expected growth in its FiOS Internet and video service.

FiOS, delivered over a high-speed, all-fiber network, is a key part of Verizon's strategy to bolster its landline business and compete with cable companies' all-in-one phone, video and Internet offerings.

Second-quarter profit rose to $1.88 billion, or 66 cents a share, from $1.68 billion, or 58 cents a share, a year earlier. Excluding items such as merger integration costs, earnings per share were 67 cents, beating the average analyst forecast for 64 cents a share, according to Reuters Estimates.

Revenue rose 3.7 percent to $24.12 billion, in line with analysts' forecasts.

But residential switched access lines fell 11.4 percent in the second quarter from a year earlier, while total lines fell 8.5 percent, Verizon said on Monday.

Analysts said the results showed the company's massive investment in FiOS was failing to stem a loss in traditional phone subscribers amid a weak economy.

"It's no surprise Verizon is losing access lines, but the rate at which they're losing them is enough to make you blanch," said Bernstein analyst Craig Moffett, adding the rate of access line losses was the "worst in history."

Verizon shares fell 2 percent to $33.77 by mid-afternoon.

Verizon said it added 176,000 new FiOS television customers in the quarter, bringing the total to nearly 1.4 million. It added 187,000 FiOS Internet customers, to a total of 2 million.

Both UBS analyst John Hodulik and Goldman Sachs' Jason Armstrong had expected a gain of 230,000 FiOS TV customers.

Verizon Chief Operating Officer Denny Strigl said FiOS growth slowed after a promotion giving free flat-screen TVs to new customers ended, but as a result, the costs of acquiring subscribers also fell.

Some analysts said FiOS could gain momentum as it expands into new areas later this year. On Monday, it launched FiOS TV in New York City, where it will compete with cable service providers such as Time Warner Cable Inc (TWC.N) and Cablevision Systems Corp (CVC.N).

WIRELESS STRONG

Despite the disappointment over FiOS, Verizon's wireless growth was solid and its wireless profit margin of 45.6 percent was ahead of expectations. Stifel Nicolaus analyst Chris King and Bank of America analyst David Barden both had expected a wireless margin of 44.9 percent.

King said Verizon's territory, which includes New York and New Jersey, has helped it weather the economic downturn more easily than industry leader AT&T Inc (T.N), which serves areas such as Florida, hit hard by the housing crisis.

"You are clearly seeing some geographic differences in the areas they operate in with regards to economic pressures," King said, even as he noted that Verizon's FiOS growth was weaker than he had expected.

Verizon Wireless, owned by Verizon and Vodafone Group Plc (VOD.L), said last week it added 1.5 million subscribers in the quarter, taking its total subscriber base to 68.7 million.

Verizon plans to buy rural wireless provider Alltel, a move that would replace AT&T as the top U.S. wireless provider. It reaffirmed plans to close the deal by the end of the year.

Strigl said the weaker U.S. economy is not hurting Verizon's business so far. Sales to clients in the financial sector could soften, but the impact would be small.

"Although we may see some softening in some of our volumes, we do not expect any significant economic impact on our financial results in the second half of the year," he said, adding the company would be "comfortable" considering a dividend increase in the fall.

Verizon also said it was positive it could resolve a dispute with union workers over a labor contract that is set to expire on August 2, thereby avoiding a strike.

A strike would be a blow as the company is ramping up its expansion of FiOS and beginning its New York City roll-out

.

"I know that our employees know FiOS is creating new jobs and, also, plenty of work for our existing employees," Strigl said.

Verizon said it would offer 100 high-definition channels in New York City, although its main "triple-play" offer of video, Internet and phone would be a $95-a-month plan which comes with 54 HD channels and Internet download speeds of 20 megabits per second and upload speeds of 5 megabits per second.

(Editing by Gerald E. McCormick and Andre Grenon)