Verizon Earnings Miss Estimates as Subsidies Crimp Profit

Verizon Communications Inc. (VZ), the second-largest U.S. phone company, missed earnings estimates after a record number of new wireless subscribers led to a surge in profit-squeezing smartphone subsidies.

Fourth-quarter earnings fell to 45 cents a share, excluding one-time costs such as 7 cents in expenses from Superstorm Sandy, the New York-based company said today in a statement. Analysts had estimated 50 cents on average for the period, according to data compiled by Bloomberg.

Verizon Wireless, the company’s mobile-phone business, added 2.1 million monthly contract users, with 87 percent signing up for smartphones such as Apple Inc. (AAPL)’s iPhone. Verizon had warned this month that subsidies on the phones would cut into profit. The company relies on the payouts to make high-end models more affordable and entice customers into signing up for two-year contracts.

“We made a concerted effort to go after more business in wireless,” Chief Financial Officer Fran Shammo said in an interview. “As a result, we posted historical net subscriber additions.”

Because smartphones make it easier to watch video, stream music and surf the Web, those customers tend to use more data -- and pay higher monthly bills -- than users of regular phones. The growth of data use contributed to a 6.6 percent increase in Verizon’s average monthly bill for contract users, to $146.80. Analysts had predicted $147.01 on average.

‘Short-Term Hit’

“It’s a big upfront cost on smartphones and a short-term hit,” said Avi Greengart, an analyst with Current Analysis. “They have to offer enormously expensive phones at affordable prices to move customers onto higher-priced plans.”

Verizon’s subsidy costs should drop as more smartphones hit the market and manufacturers have to compete harder to get customers, forcing them to cut prices, Shammo said. New models running Microsoft Corp.’s Windows Phone software are available, and Research In Motion’s (RIMM) BlackBerry 10 phones are coming soon.

“It’s the same thing we saw with basic phones: The more competition there is, the more prices come down,” he said.

Verizon shares rose less than 1 percent to $42.94 in New York today. The stock climbed 7.9 percent last year, marking its third straight year of gains.

Pension Expenses

Verizon’s fourth-quarter sales climbed 5.7 percent to $30 billion, in line with the $29.8 billion predicted by analysts. The company posted a net loss of $4.23 billion, largely because of a pretax charge of $7.19 billion to cover severance and benefit expenses and adjust the value of pension liabilities.

The company sold 6.2 million iPhones in the quarter, double the amount in the previous quarter, and about 3.6 million Android phones.

Verizon Wireless, co-owned by Vodafone Group Plc (VOD), is luring more smartphone users with a speedier network based on a technology called long-term evolution, or LTE. The company has a one-year lead over AT&T Inc. (T), its biggest rival, in rolling out LTE. Verizon also has targeted heavy wireless-Internet users with its Share Everything plan, introduced in June. It lets customers share a data plan between as many as 10 devices.

The increase in wireless revenue helped compensate for slower sales to business and landline customers. Verizon added 134,000 FiOS TV customers, fewer than the 194,000 gained a year ago. Total operating revenue for the landline division, including business services and FiOS, were $9.99 billion, compared with $10.1 billion a year ago.

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

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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