Jan. 29 (Bloomberg) -- Verizon Communications Inc., the second-largest U.S. telephone company, said fourth-quarter profit declined 38 percent because of costs to build a fiber-optic network and shed assets.

Net income fell to $1.03 billion, or 35 cents a share, from $1.66 billion, or 59 cents, a year earlier, the New York-based company said today in a statement. Sales rose 26 percent to $22.6 billion. Taxes on the sale of assets in the Dominican Republic and costs to spin off a directories unit cut profit by 22 cents.

Chief Executive Officer Ivan Seidenberg sacrificed profit from the wireless unit to expand Verizon's faster network for Internet and TV service. The $23 billion investment is designed to compete with cable companies such as Comcast Corp., which have attracted more subscribers by offering phone service.

``You have to believe that the money that they're spending is working,'' said Richard Sichel, who helps manage $1.5 billion, including Verizon shares, as chief investment officer of Philadelphia Trust Co. ``It looks as though it is.''

Shares of Verizon advanced 20 cents to $38.03 at 4:01 p.m. in New York Stock Exchange composite trading. They have gained 23 percent in the past 12 months.

Severance pay, costs for a New Jersey facility and integration expenses tied to the January 2005 purchase of MCI Inc. lowered earnings by an additional 5 cents a share. Excluding those items, profit was 62 cents, exceeding the 61-cent average estimate of 21 analysts in a Bloomberg survey.

Sales in the fourth quarter compared with an average analyst estimate of $23 billion.

Video Expansion

Verizon's fiber-optic network added 165,000 Internet customers and 89,000 TV customers in the quarter. The network, called FiOS, sells TV service in about 200 cities.

``We saw them do very well on the video side,'' said Thomas Watts, a New York-based analyst at Cowen & Co., in an interview. He has an ``outperform'' rating on Verizon shares. In 2007, ``we could see as many as a million new FiOS TV subscribers.''

Costs to expand the service drained 10 cents a share from fourth-quarter earnings. Investment will reach a peak this quarter, reducing profit by 11 cents, Verizon said.

The company also recruited 2.3 million new wireless subscribers, helping to replace 366,000 customers who shut off their home phones during the fourth quarter.

No Slowdown

Additions at the mobile-phone unit beat the 1.9 million new users predicted by Robert W. Baird analyst William Power. By customers, Verizon Wireless, jointly owned by Verizon and Vodafone Group Plc, is the second-largest U.S. wireless service provider behind Cingular Wireless LLC, which recruited 2.4 million new subscribers in the fourth quarter.

Verizon Wireless' new customers included 2.1 million contract subscribers, who are considered more valuable than customers who pay for calling time in advance. Cingular signed 861,000 contract customers in the quarter, and Sprint Nextel Corp., the third-biggest wireless provider, lost 306,000.

``We have no intentions of slowing down growth,'' Verizon Chief Operating Officer Dennis Strigl said on a conference call today. ``Our goal is to continue to take share.''

Verizon will announce a plan tomorrow to sell wireless and landline service together in a package, Strigl said. Verizon spokesman Eric Rabe declined to provide additional details.

Cingular, owned by AT&T Inc., will begin selling Apple Inc.'s iPhone in June, and Verizon is ``happy'' it's not first with to market with the device, Strigl said. He confirmed a USA Today report that Apple approached Verizon Wireless two years ago and wanted financial terms Verizon found unacceptable.

Asset Sales

Verizon sold its Dominican Republic unit in December. It is awaiting word on the fate of its 28.5 percent stake in CA Nacional Telefonos de Venezuela, the nation's largest phone company. President Hugo Chavez plans to nationalize the company, known as Cantv, though hasn't said how much he will pay for it.

FairPoint Communications Inc. agreed in January to buy Verizon's phone lines in Maine, New Hampshire and Vermont. While Verizon is considering other deals to sell phone lines in areas with large rural populations, it is no rush to make another transaction, said Chief Financial Officer Doreen Toben.

``At the moment, we're pretty happy with where we are,'' she said in an interview.

A buyer would have to be another operator that knew how to run the business, not a private equity firm, she said.

Verizon's 5.55 percent notes maturing in February 2016 fell 0.11 cent on the dollar to 98.64 cents on the dollar today, according to Trace, the bond price reporting system of the NASD. The yield widened to 5.75 percent.

To contact the reporter on this story: Crayton Harrison in Dallas at tharrison5@bloomberg.net

Last Updated: January 29, 2007 16:27 EST