Wireless growth propels Verizon

Verizon earnings fell in the fourth quarter but the company still exceeded Wall Street expectations slightly, based primarily on spectacular growth at Verizon Wireless. Adjusted earnings were up to 62 cents per share, a penny more than expected.

The wireless unit, a joint venture of Verizon and Vodafone, added 2.3 million net customers in the fourth quarter of 2006, considerably exceeding industry estimates in the 1.7 million range, while churn was reduced to 1.1% for retail customers and .9% for retail post-paid customers.

“We note the 2.1 million retail post-pay subscriber additions compares extremely favorably with the 861,000 total tallied by Cingular Wireless in the quarter,” said Christopher King, financial analyst with Stifel Nicolaus, in a report.

Overall, Verizon earnings fell to $1 billion or 35 cents a share, from $1.7 billion or 59 cents a share a year ago, but those results include a number of extraordinary items including taxes associated with the sale of Verizon’s Dominican Republic assets, as well as costs of the spin-off of its directory business and the MCI merger.

As King noted, the costs of Verizon’s FiOS network buildout continue to put a “drag” on Verizon’s earnings, and service penetration rates were below expectation, primarily because the company added a large number of homes in New Jersey to the available customer base in the last two weeks of December. Verizon warned analysts that FiOS dilution will peak in the first quarter of 2007 at 11 cents per share.

Doreen Toben, chief financial officer at Verizon, described 2006 as a “strong” year for Verizon, “gained market share and expanded our customer relationship.” She pointed to major “organic initiatives” including the FiOS buildout, expansion of wireless data through the EVDO Rev A buildout, and Verizon Business’s Global IP initiatives as strong platforms for future growth. Verizon expects to “break in to the top 10 of video providers,” in 2007, Toben said.

Verizon added 3 million homes passed to FiOS, doubling its base of homes passed, while increasing to 2.4 million the homes “open for sale” of FiOS services. FiOS now has 687,000 high-speed Internet subscribers and 204,999 FiOS TV subscribers for a penetration rate of 9%. Toben declined to provide penetration rates for specific markets which FiOS has been available for a year or more.

Both Toben and Dennis Strigl, Verizon’s new president and COO, insisted to analysts that FiOS is on track and performing up to expectations. In response to an analyst question, Strigl said “FiOS did not miss any targets,” for earnings or sales in 2006.

“We are focused on eliminating unnecessary time inside the home,” on FiOS installations, Strigl said. The company is also working to streamline all installation processes and costs, he added.

Verizon Business, meanwhile, is exceeding expectations and will achieve greater synergies from the MCI merger than originally predicted, Toben said. Those synergies should hit $900 million, up from $825 million for 207, as the merger process has gone more quickly than expected.

“Verizon business continues to see improvements on the demand side,” Toben said, saying 2006 represented “a meaningful turnaround in the business.”

Verizon Business revenues were up 4.7% sequentially to $3.7 billion in the fourth quarter. Strategic service revenues on the Global IP backbone, including Ethernet and managed services, grew 27% to $1.1 billion, and are expected to continue growing, Toben said.

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