Economy spares FiOS, hits Verizon Business

Verizon was able to report better-than-expected results, based in part on the continued success of consumer services on its FiOS network and its wireless results but admitted that the global economy caused problems for Verizon Business, with revenues falling 3.4%.

Verizon’s new chief financial officer, John Killian, in his first quarterly conference call since taking over for the retiring Doreen Toben, told analysts that Verizon is very focused on stringent cost controls to maintain shareholder value in the face of cyclical problems with Verizon Business, adding that Verizon believes it is well positioned to recover once the global economy bounces back. Almost 2% of the 3.4% decline in Verizon Business revenues was attributable to foreign currency exchange issues, Killian said, with the rest coming from cutbacks made by businesses in long-distance minutes and voice services as they reduced jobs.

“Our customer relationships are very much intact, and that is very important as the economy comes back,” Killian said. “We’ve had no losses of customers and we’ve actually picked up some new ones.” 

Both Killian and Chief Operating Officer Denny Strigl stressed Verizon’s spending discipline, which included a conservative $3.7 billion in capital expenditures for the first quarter.

“The economy has slowed down buying decisions overall,” Strigl said. “We are not necessarily seeing things slow down – we are being very disciplined on pricing and very focused on eliminating costs. We are looking very closely at capital expenses.”

Killian added that the capex spending for the first quarter “isn’t necessarily representative of the full year” but said Verizon will weather the economic storm in both its wireless and FiOS businesses by maintaining fiscal discipline.

Sanford Bernstein analyst Craig Moffett called Verizon’s cost reductions “impressive.”

“In the face of weakening enterprise trends, overall wireline margins at 25.1% (and 26.1% ex-incremental pension expense) could have been much worse (we had projected 24.4%, including pension),” Moffett wrote in a research note. “Yes, margins are down from a year ago (27.0%), but they are actually better than the 25.4% in Q4, suggesting an appropriately strong management response to macrotrends.”

On the brighter side, consumer broadband and video revenues were up 36%, driven by growing FiOS penetration and consumer average revenue per user was up just over 13%, Killian said.  “The consumer market is holding up very well,” he said.

Verizon added 299,000 new FiOS subscribers to hit 2.2 million, a penetration rate of 23%, Killian said. “We added 1 million subscribers in the past 12 months and expanded availability by almost 50% from 6.5 million homes a year ago to 9.7 million homes now,” he said. Verizon now has 2.8 million FiOS Internet customers, a 27% penetration rate, and is poised to enter the Washington, DC, and Philadelphia markets this year, Killian noted.

With wholesale revenues also falling, however, Strigl told analysts that Verizon is steadily downsizing its wireline business as it integrates the Verizon Telecom and Verizon Business organizations.

“We continue to re-size the business, reducing our force in areas that are not growing.” Strigl said. “In our traditional telecom business, non-FiOS, our work force is down by nearly 13,000 from end of ‘07 through first quarter. We are in the process of consolidating our network organizations across Telecom and Business  for greater efficiency in network planning, engineering and network functions. We look for new technologies and training of our force to save us time and gain efficiencies.”