Verizon revenue up, income down

Revenue was up but income was down at Verizon in the first quarter, due in part to the costs in integrating MCI Communications.

Verizon also said it is exceeding its expectation in penetration for its new video services, hitting 12% penetration in Texas, where the service has been available since last fall, and 10% in Florida and in Herndon, Virginia, where the service was launched about four months ago. In Massapequa Park, N.Y., where FiOS video was launched four months ago, video penetration is six percent, according to Doreen Toben, executive vice president and CFO.

Those figures challenge what cable operator Cablevision has been saying. The New York cable company had claimed that Verizon's video penetration was only about two percent.

"Early penetration rates indicate we are well on our way to achieving our goal of 35% penetration in five years," Toben said. "Sixty percent of these customers choose higher cost set-top options such as DVR. Virtually all of our video customers choose digital packages. Eighty percent of our video subscribers are triple play customers. We see great pull-through on FiOS data – one of every two new customers to FiOS video make a decision to get all three services for less. We also see very low churn with these customers, so we will benchmark well in terms of ARPU."

About one-third of FiOS customers are DSL conversions, she said. FiOS costs represent a six cents per share earnings dilution for the firat quarter. FiOS now passed 3.6 million homes.

"We will probably beat the number we put out to the street there," Toben said. "We are confident that the wireline margins will expand as we go through the year."

Earnings per share were $1.63 billion or 56 cents per share, down from $1.76 billion or 63 cents a share in the first quarter of 2005. Excluding one-time items, earnings per share were 60 cents per share, the company said. Revenue was up to $22.74 billion, or 25 percent, from $18.18 billion in the year-previous quarter, before Verizon acquired MCI.

“The results are just what was expected,” said industry analyst Jeffrey Kagan in an email post. “Traditional phone service is down, but broadband and wireless are very strong. What is interesting is much of the loss of traditional phone service is to VoIP providers. That will likely continue during the next year or two. However as competition between the phone companies and the cable television companies heat up with their big bundles of telephone, television, internet and wireless, that is where the battle will be for 80% of the customers. The remaining 20% will cover a variety of other, stand alone competitors.”

Verizon Wireless continues to power much of Verizon’s growth with 1.7 million net customer additions, up 2.9 percent from first quarter of 2005. With churhn at 1.18 percent, the company totally 53.0 million customers, up 16.7 percent from first quarter of 2005. Total revenues for Verizon Wireless were up 18.8 percent from the year-previous quarter, and average revenue per user for data service was up 79 percent.

Acording to Verizon, this was the 15th consecutive quarter of double-digit, year-over-year revenue growth for Verizon Wireless and the eighth consecutive quarter in which the company added more than 1.5 million customers, as well as the fifth consecutive quarter with EBITDA margins above 40 percent and the 13th consecutive quarter of year-over-year growth in gross customer additions.

"We had record new adds and profitability," Toben said. "And we posted the lowest churn ever recorded in the industry."

Verizon Chairman and CEO Ivan Seidenberg said Verizon remains interested in buying Vodafone's 45% share of Verizon Wireless, but said the next step belongs to Vodafone.

Verizon added 541,000 net new broadband connections, combining its DSL and FiOS fiber-to-the-premises network to reach 5.7 million total broadband connections, up 47 percent from the first quarter of 2005. The company said it sold 1.6 million additional service bundles, or a total of 6.3 million, in the first quarter of 2006 over the similar quarter of 2005.

Data revenues were up 89.7 percent, when MCI revenues are factored in, and Verizon reported faster integration of MCI than originally planned.

"We got off to a fast operational start for Verizon Business," Toben said. "We saw $50 million in synergies in the first quarter. We expect to see a rapid ramp in synergies in 2006" particularly as more MCI traffic is moved onto Verizon’s network, and vice-versa.

Toben said the company is "aggressively" interconnected the two netweorks and make headcount reductions, although those came off the books in March, which means the savings will show up in future quarters. Most of integration costs have occurred from re-branding, and from systems integration, she said.

"We feel very comfortable that we have a good path on the $550 million synergy that we expect this year," Seidenberg said. "As we move into '07, we will talk about that later in the year."

There has been some loss of revenue, particularly on the small business side, as Verizon declines to pursue retention of MCI local customers outside its local service region, she said.

Special earnings factored into the first quarter of 2006 include four cents per share for employee relocations and merger integration costs, the early extinguishment of debt, and the cumulative effect of an accounting change.