Verizon Posts Loss on Pension Cost as IPhone Boosts Expenses

Verizon Communications Inc. (VZ), the second-largest U.S. phone company, reported a fourth-quarter loss after booking a pension charge and having higher subsidy costs for rising iPhone sales.

The net loss was $2.02 billion, compared with a profit of $2.64 billion a year earlier, New York-based Verizon said today. Earnings, excluding some items, fell to 52 cents a share, matching the average of estimates compiled by Bloomberg. The pretax charge for a pension-plan revaluation was $3.4 billion.

Verizon and rivals such as AT&T Inc. sell the Apple Inc. (AAPL) iPhone and other smartphones at a loss as they compete to get customers to sign up for contracts that typically run for two years. While that strategy helped boost sales, it also weighed on margins. On a conference call, Verizon gave a 2012 earnings- forecast range whose bottom trailed analysts’ estimates.

“Nearly every metric was slightly soft and even the guidance leaves a little uncertainty,” Jonathan Chaplin, a Credit Suisse Group AG analyst in New York, said in an interview. “They needed something a little better to get an enthusiastic reaction.”

On the call, Chief Financial Officer Fran Shammo reiterated Verizon’s projection for 10 percent to 16 percent growth in adjusted earnings for 2012. That suggests earnings of $2.42 to $2.55 a share, compared with the average analyst estimate of $2.52.

Verizon, which co-owns its wireless unit with Vodafone Group Plc (VOD), fell 1.6 percent to $37.79 at the close in New York. It added 12 percent last year, compared with a 2.9 percent gain by AT&T.

Smartphone Payback

The strategy of subsidizing smartphones helped Verizon add 1.2 million subscribers on monthly contracts, meeting the average estimate from 10 analysts surveyed by Bloomberg. The carrier is banking that the initial subsidy cost pays off as the users spend on data and calling throughout the life of the contract.

“The question is -- will this drive greater profitability in the wireless business down the road?” James Ratcliffe, an analyst at Barclays Capital in New York, said before the report.

Total sales rose 7.7 percent to $28.4 billion, matching the average analyst estimate. The net loss per share was 71 cents, compared with a profit of 93 cents a year earlier. Year-earlier earnings excluding some items were 54 cents.

Wireless revenue rose 13 percent to $18.3 billion, led by a 19 percent increase in data sales. Earnings before interest, taxes, depreciation and amortization from providing wireless service, a measure of profitability, was 42.2 percent of sales, down 5.3 percentage points.

Smartphone Sales

While iPhone sales more than doubled from the third quarter to 4.3 million units, total smartphone sales fell short, signaling waning demand for handsets that run on Google Inc.’s Android operating system, said Walt Piecyk, an analyst with BTIG LLC in New York.

“This is a little surprising during a holiday period, especially given all the marketing around 4G phones,” he said. Total smartphone sales were 7.7 million units, 1.5 million fewer than Piecyk predicted.

The average monthly revenue per user among wireless contract customers fell to $54.80 from $54.89 in the third quarter. Analysts predicted $54.87 on average. Contract-customer churn, or the monthly defection rate, was 0.94 percent, compared with the 0.96 percent analysts estimated.

Video Growth

“The average smartphone customer will spend about $2,000 over the two-year contract, if the subsidy is $400, you’re still getting $1,600, and that’s very cash-flow positive,” Ratcliffe said.

Verizon is ahead of Dallas-based AT&T (T) in building out a faster next-generation wireless network, helping it outpace the rival in subscriber gains. AT&T is scheduled to report fourth- quarter results on Jan. 26.

At the wireline business, Verizon added 201,000 FiOS Internet customers and 194,000 FiOS TV subscribers. Michael Nelson, an analyst at Mizuho Securities USA Inc., estimated Verizon would add 200,000 Internet users and 200,000 TV customers.

To contact the reporter on this story: Scott Moritz at smoritz6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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