Thanks to strong growth at its wireless and broadband businesses and the acquisition of MCI customers in January, 2006, Verizon Communications (VZ) reported better-than-expected third-quarter results on Oct. 30. The phone operator posted a third-quarter profit of $1.92 billion, amounting to earnings per share of 66 cents, vs. 67 cents a year ago. This included a 2 cents per share charge for special items, including pension settlement charges, a Verizon Center relocation, and merger integration costs. Revenue in the quarter rose 26% from a year ago to $23.25 billion.
Among the highlights of the report: Verizon Wireless (a joint venture between Verizon and Vodaphone (VOD)) has become the largest U.S. wireless company based on revenues, the company says. Revenues for Verizon Wireless were $9.87 billion, up 18.2% from a year ago. Operating profit margin for its cellular business was 26.2% in the quarter, the highest ever, the company says. Verizon Wireless added 1.9 million net customers in the quarter, bringing the total to 56.7 million customers nationwide, up 15.1% from a year ago.
In broadband services, the company added 448,000 new broadband connections, including 147,000 customers signing up for its "FiOS" fiber-optic Internet service. It had a total of 6.6 million broadband connections, up 45.1% from the third quarter 2005. It also noted that it had 118,000 FiOS TV customers at the end of the third quarter.
As for its traditional phone business, total wireline operating revenues, including Verizon Business, were $12.8 billion in the third quarter 2006, up 35.5% from a year ago. On a pro-forma basis, wireline operating revenues fell 4.7% from a year ago, driven in part by a continuation of the expected declines in former MCI operations serving mass market (residential and small business) customers, the company said.
"Verizon continues to win customers and market share for wireless, broadband and enterprise services," said Ivan Seidenberg, Verizon chairman and CEO, in a press release. "These organic growth initiatives gained momentum in the third quarter, and we are confident this growth is sustainable. We are building long-term shareholder value on a foundation of infrastructure and technology investment, supported by innovative marketing and customer service initiatives."
Shares of Verizon fell about 1.5% to $37.32 on the New York Stock Exchange.
Analysts had a mixed reaction to the company's report. JP Morgan analyst Jonathan Chaplin, who kept a neutral recommendation on the stock, says in a research note that he thinks expectations were high going into the third quarter and that results barely met forecasts. After normalizing for discontinued operations, he figures Verizon's third-quarter EPS of 64 cents came in a penny below his 65 cents estimate and 2 cents below the 66 cents consensus forecast. This compares with AT&T (T)/BellSouth (BLS) results that beat expectations by a wide margin last week, he says.
In addition, Chaplin notes that third-quarter revenues beat estimates due to higher revenues at Verizon Wireless (higher net subscriber adds and ARPU) and Verizon Business (1.7% sequential growth). However, margins in both segments were below forecasts, driving weaker-than-expected EBITDA, he says.
Todd Rosenbluth, who follows the stock for Standard & Poor's Equity Research, says Verizon's EPS of 66 cents was 4 cents ahead of his estimate. He says in a research note that Verizon's revenues were stronger than expected, driven largely by wireless, though wireline was more stable than he had projected. Margins on an EBITDA basis were wider, he says, even with dilution from the fiber buildout, aided by merger integration benefits. "We see access line losses being offset by broadband growth and business gains," Rosenbluth wrote.
Rosenbluth kept a hold opinion on the shares, but raised his 12-month target price by $2 to $38, based on relative price-earnings and enterprise value/EBITDA analyses that reflects his increasing confidence. He also noted that Verizon also provides a 4.2% dividend yield.