Verizon income up, wireline sagging

Verizon isn’t seeing the ill effects of a slowing economy, Verizon officials said today in their first quarter earnings call. Verizon Wireless business continues to grow, deadbeat accounts actually fell and FiOS customers are actually spending more money with Verizon, CFO Doreen Toben reported. Verizon is actually planning to increase prices in the second quarter, Toben added.

The loss of a couple key high-margin accounts did impact Verizon Business; Global Enterprise Revenue, which was down from $4.1 billion in the fourth quarter of 2007 to $3.9 billion in the first quarter of 2008. Those accounts were actually lost right around the time of the Verizon-MCI merger, according to Denny Strigl, Verizon president and COO, but the shift of traffic off the Verizon Business network hit in the first quarter of this year.

But the overall positive news of a 10% increase in net income to $1.64 billion, or 57 cents a share, on revenue of $23.8 billion, up 5.5 percent from a year ago, met Wall Street’s expectations. Excluding charges related to the MCI merger and the spinoff of its Maine, Vermont and New Hampshire properties to FairPoint Communications, Verizon’s earnings were 61 cents a share.

Craig Moffett, analyst and senior vice president at Sanford C. Bernstein & Co., warned, however, that Verizon’s wireline numbers appear to be weakening.

“Residential access line losses of 10.9% were the worst ever [down 2.9 million to just 24.1 million remaining],” Moffett wrote in his assessment of Verizon’s numbers. “Whether the loss owes to competitive or macro-economic stresses remains to be seen. Taken together with a 16% loss of Wholesale lines and a 3.8% loss of business lines, and the total access line loss was a staggering 9.0%.”

While the FiOS broadband results were solid, Moffett said, “FiOS covers less than half of their footprint, and in the rest of their markets, DSL fell to a paltry 4K net additions. Just a year ago, Verizon added 239K DSL net additions in Q1.”

Toben said the trends she saw were not the result of an economic downturn but part of ongoing industry shifts.

“I look at daily, weekly and monthly metrics, and I don’t see a problem with uncollectibles, I don’t see it at all,” Toben said. “ I am not seeing changes in the trends. Our wireline uncollectible number is down, wireless has stabilized, access line trends have remained the same. Our ARPU is up in consumer and business, wireline and wireless, data revenues are up, broadband and video have increased. As I am looking at this I am not seeing any change in the trends.”

FiOS, Verizon’s fiber-to-the-premises initiative, is on track to become EBITDA positive, this year, Toben added. The growth in sales of FiOS TV is accelerating, with 263,000 new customers this quarter, up 16% sequentially from the fourth quarter of 2007. Verizon’s 1.2 million FiOS TV customers represent 19% market penetration, Toben said.

Those TV customers contributed mightily to a FiOS Average revenue per customer number of $129, as well as a 56% increase in revenue from broadband and video products, Toben said.

“We have noticed a strong correlation between TV availability and line retention,” Toben added. “We are currently able to offer TV to 82% of FiOS homes.”

Strigl told analysts that by offering higher-speed DSL services and making a marketing push, the company was working to reverse the recent decline in DSL sales. “We can expect to continue migrations [off DSL] to FiOS Internet and those might accelerate,” Strigl said. “What’s important is that total broadband is expanding. FiOS is up 1.7 million and DSL up 170,000.”

Verizon Business saw “strong demand for strategic services focused on IP and data,” Toben said. The first quarter is expected to be a low point in the year for Verizon Business because of the major customer loss, but the company said revenues in strategic services – private IP networks, managed services and security – was up 23.5% and now represents 27% of revenues. Increasingly, businesses transitioning to IP are looking to companies like Verizon to manage their networks, Toben said.

Analyst Moffett pointed out, however, that Verizon Business might not be keeping up with AT&T in the enterprise space.

“Enterprise was something of a disappointment at just 0.4% revenue growth,” Moffett wrote. “Verizon is now growing more slowly than AT&T, marking a significant reversal of the recent trend [although one-time adjustments shaved approximately 1% from overall Enterprise revenue growth, according to the Company]. Despite the advantage of smaller relative scale in a near-perfect duopoly business, Verizon's Business unit is losing share to larger peer/competitor AT&T.”