Gap between Verizon’s wireless and wireline arms widens

Verizon may have always been an RBOC with a major wireless business, but as its fourth quarter results released today show, it’s becoming a wireless company with a wireline company along for the ride. Once again, gains at Verizon Wireless (NYSE:VZ, NYSE: VOD) continued to shore up losses at Verizon Communications (NYSE:VZ), further broadening the gap between parent and daughter companies, but in the last quarter the chasm grew particularly wide.

“Verizon had already dropped plenty of hints that wireless subscriber growth would be strong, and that everything else would be weak,” Bernstein Research senior analyst Craig Moffet wrote in a research note. “Still, today's [fourth quarter] results were eye-opening, if only because of the magnitude of the divergence.”

VZW added 2.2 million net subscribers in the last three months of year, 1.2 million of which were postpaid and 1 million wholesale. Verizon remains the marker leader in size, quickly approaching the 100 million-sub mark with 91.2 million total mobile customers. Total wireless service revenues remained flat quarter-over-quarter at $13.5 billion and were up only 5% year-over-year, showing the continued pricing pressure US operators are seeing on voice. But VZW’s data revenues continued to balloon, increasing $200 million over the third quarter to $4.3 billion and 26.6% year-over-year. Data now accounts for 31.9% of all service revenues. Almost half of that revenue now comes from advanced data services such as web access and e-mail, rather than messaging, driven by higher penetration of smartphones (15% of total subscribers) and 3G multimedia handsets and devices (11% of total subscribers). Average revenue per user (ARPU) for data breached $16 in Q4, up 18% year-over-year. And with a $20 to $30 data plans now required on all 3G phones based on VZW’s revamped pricing structure, data revenues will likely spike further in 2010 even as voice revenues drop.

“But wireline results were at least as weak as wireless was strong, and wireline remains the company's center of gravity,” Moffet said. “Notable in the wireline results was a worsening of trends in the legacy copper business and – perhaps worse – a serious miss in the growth of their FiOSbusiness as well.”

Indeed, total wireline service revenues fell $100 million quarter over-quarter to $11.5 billion, representing a 3.9% drop year-over-year. On the residential side, access line loss showed no signs of improving with Verizon posting a further 12.3% decline, and Verizon continued to shed DSL customers, shedding 107,000 broadband lines. Its FiOS service didn’t do much to make up the difference, adding only 153,000 new customers for both video and broadband services in the fourth quarter.

That demonstrates a sizable slowdown in customer acquisition since last year even though it has expanded the FiOS footprint to cover nearly half of the homes in its footprint. FiOS now has 2.9 million TV subscribers (25% penetration) and 3.4 million Internet customers (28% penetration). The enterprise segment saw a 4.5% decline in revenues, which Verizon attributed to the weak economy, but it said its losses weren’t as bad as its competitors and is better positioned to recover when the unemployment rates drop.

VZW’s revenues surpassed wireline’s last year thanks in a large part to the acquisition of Alltel. But just as wireless continues to grow while wireline shrinks, their margins are also heading in the opposite direction, Moffet pointed out. Wireless maintained robust margins at 45% in Q4 while wireline fell a further 70 basis points between Q3 and Q4 to 23%.

Verizon posted a rare loss of $63 million in the fourth quarter, primarily due to a $3 billion charge from severance costs from thousands of job cuts last year. Verizon plans to continue to cost-cutting trend announcing a further 10,000 layoffs in 2010 to offset the deterioration in its wireline business.

On Verizon’s earnings call today, chief financial officer John Killian projected capital expenditures to be within the range of $16.8 billion and $17.2 billion, about level with 2009’s capex, but he did qualify where that capex will be spent. Killian said he expected wireline capex to decline significantly, giving Verizon flexibility to invest in other aspects of the business. A major source of that investment will be, not coincidentally, in its wireless business as Verizon pursues its next big growth initiative, 4G. Verizon plans to launch long-term evolution commercially in the latter half of the year, following an aggressive deployment timeline that will cover 100 million people by the end of 2010.
When asked about Verizon Wireless’ fierce competition with rival AT&T (NYSE:T), especially the latter’s success with the iPhone, Verizon Communications CEO and chairman Ivan Seidenberg said that LTE will level the playing field, creating not only greater capacity and more operational efficiencies for VZW, but also encouraging greater interest in VZW’s network as well new classes of smartphones. (VZW may still be in the running for a CDMA iPhone—Apple (NASDAQ:AAPL) has a big device unveiling event on Wednesday).

“As we move to LTE and we start to see a completely different dynamic … we’re confident that the smartphone market will move into more parity for us,” Seidenberg said.