Verizon Communications Inc reported a better-than-expected quarterly profit on Monday driven by strong wireless subscriber growth, though analysts were unimpressed by its Internet subscription sales.
Depsite the threat of subscriber losses to Apple Inc's iPhone, which is only available on AT&T Inc, Verizon Wireless's customer growth exceeded Wall Street expectations and made up for slowdown in Verizon's landline, or wireline, business.
It's a story of tremendous strength in wireless and continued deterioration in wireline, said Sanford C. Bernstein analyst Craig Moffett.
Verizon Wireless, a joint venture with Vodafone, added 1.8 million net retail customers in the quarter, taking total subscribers to 63.7 million. It accounts for about half of Verizon Communications' revenue.
If I was AT&T I'd be a little disappointed I wasn't able to take more market share from Verizon Wireless, said Stifel Nicolaus analyst Chris King.
Verizon's third-quarter net income was $1.27 billion, or 44 cents per share, compared with $1.92 billion, or 66 cents a share, a year earlier.
Excluding items such as merger integration costs, access line spinoff-related charges and international taxes, profit was 63 cents per share, a cent above the analysts' average forecast of 62 cents, according to Reuters Estimates.
Operating revenue rose to $23.77 billion, slightly above the $23.6 billion forecast by Wall Street.
The company also said it would increase its 2007 share buyback target by 25 percent to $2.5 billion. Verizon repurchased nearly $800 million of its shares in the quarter.
Verizon shares rose 0.6 percent to $45.85 on the New York Stock Exchange. Analysts said the gains were muted since the shares had already risen around 10 percent in 3 months.
FIOS ON TRACK
In addition to the wireless venture, Verizon has been banking on growth in a high-speed Internet service called FiOS to make up for a slowdown in its traditional phone business.
The all-fiber network also allows it to offer video, enabling it to compete against cable operators' all-in-one packages of television, phone and Internet.
Verizon added 202,000 new FiOS TV subscribers in the third quarter, taking the total to 717,000. It added 229,000 FiOS Internet subscribers.
What's kind of changed in my view of Verizon is that they're putting up some real TV numbers. We're almost getting to a point where the revenue is almost going to offset consumer access line losses, said Patrick Comack at Zachary Investment Research.
Analysts, however, were unimpressed by sales in DSL, which offers high speed Internet over traditional phone lines. Including DSL and FiOS, Verizon said it added a net 285,000 new broadband connections, less than many expected.
If there was one weak spot in the numbers that's on the DSL side, said King at Stifel Nicolaus, although he added that growth in FiOS and Verizon Wirelesss was far more important.
Chief Financial Officer Doreen Toben said the shift showed consumers were favoring speed.
Clearly FiOS is certainly taking share from DSL, she said. I think you'll see us do more upgrades to speed in a larger piece of our footprint.
The cost of deploying FiOS hurt quarterly earnings by 9 cents per share, down from 10 cents in the previous quarter. Verizon said in September it expected to invest $18 billion from 2004 through 2010 to deploy the FiOS network.
Chief Operating Officer Denny Strigl told analysts on a conference call that Verizon was on track to post a 2008 profit for FiOS before interest, tax, depreciation and amortization.
Most analysts have said the investment, while costly, was necessary to offset a decline in home phone subscribers. But critics have said it was a risky bet, preferring AT&T's more cost-conscious approach that uses less fiber.
(Additional reporting by Sinead Carew)