Verizon profit rises, but wireline disappoints

By Ritsuko Ando and Sinead Carew

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.