Verizon Tops Profit Estimates After Adding Wireless Users

Verizon Communications Inc. (VZ), the second-largest U.S. phone company, climbed the most in five months after its first-quarter profit beat estimates, bolstered by customers signing up for lucrative data contracts.

Earnings rose to 68 cents a share in the period, the New York-based company said today in a statement. Analysts had estimated about 65 cents on average, according to data compiled by Bloomberg.

More than 61 percent of Verizon’s wireless subscribers now own smartphones such as Apple Inc. (AAPL)’s iPhone, meaning they typically use more data -- and pay higher bills. Verizon Wireless, the company’s market-leading mobile-phone carrier, added 677,000 monthly contract users. Wall Street was projecting 629,000, according to a Bloomberg survey of nine analysts. Verizon also has the industry’s most extensive network using a technology called long-term evolution, or LTE.

“It’s a simple formula that’s hard to beat: Verizon sells itself as the best network at the best price,” Gerard Hallaren, an analyst with Janco Partners Inc., said in an interview before the earnings report.

Verizon shares rose 2.8 percent to $50.91 at the close in in New York, the biggest gain in five months. After an 18 percent increase this year, Verizon is hovering near a 12-year high.

Wireless Market

The U.S. wireless market remains an attractive field, underscored by the bidding war currently under way for Verizon’s rival Sprint Nextel Corp. (S) The Japanese wireless carrier Softbank Corp. (9984) and the U.S. satellite-TV company Dish Network Corp. (DISH) are both vying to acquire Sprint, which ranks third in the market after Verizon and AT&T Inc. (T) The activity speaks to the inherent growth prospects for wireless, Verizon Chief Financial Officer Fran Shammo said.

“We are very bullish on the industry’s growth that’s yet to come,” he said in an interview.

Verizon is exploring its own deals, meanwhile. The company has offered Clearwire Corp. (CLWR) $1 billion to $1.5 billion for airwaves in major cities, Shammo said. This confirms reports earlier this week that Verizon was the unnamed “strategic buyer” mentioned in a Clearwire filing on April 12.

The bid for Clearwire spectrum is part of Verizon’s plan to be “opportunistic” in buying airwaves to accommodate growing mobile network traffic, Shammo said. The airwaves “would be an enhancement of what we have,” he said.

Clearwire said in the filing that a special committee would review the proposal.

Vodafone Deal

Shammo also reiterated that the company is still interested in owning the 45 percent of Verizon Wireless held by Vodafone Group Plc (VOD), its partner in the venture. Vodafone wouldn’t have to bear a heavy tax burden if Verizon purchased its stake, he said.

“We are confident that such a transaction could be handled in a way that is tax-efficient and would not result in a tax on the gain,” Shammo said.

Verizon and Vodafone have discussed a range of options, including Verizon acquiring 100 percent of the wireless partnership, people familiar with the situation said last month. Verizon has said it would like to have full control of the business, the most profitable and fastest-growing major wireless carrier in the U.S.

Higher Bills

For now, Verizon is relying on a surge in smartphone users to generate more data revenue. Smartphone customers use the devices to surf the Web, watch videos and stream music, so their data consumption is higher and they pay bigger monthly bills than buyers of regular mobile phones. Verizon’s average monthly bill for contract users was $150.27 last quarter, topping the $149.01 analyst had predicted on average.

Even without the enticement of new models, many customers upgraded to smartphones in the period. Apple’s next iPhone won’t appear until later this year, and Samsung Electronics Co.’s Galaxy S4 won’t be released until the coming weeks.

“The mix of smartphones sold remains high, despite the lack of hot new products during the quarter,” said Walt Piecyk, an analyst with BTIG LLC.

Verizon sold 7.2 million smartphones in the period, with the iPhone accounting for about 56 percent.

While adding smartphone customers bolsters revenue in the long run, it can take a toll on short-term profit. That’s because carriers offer deep subsidies on the devices in return for a two-year contract. To mitigate the impact of the discounts, Verizon changed its eligibility requirements last week so that customers have to wait 24 months to get new subsidies, rather than 20.

Quarterly Sales

Verizon’s first-quarter sales climbed 4.2 percent to $29.4 billion, just shy of the $29.5 billion estimated by analysts. Net income attributable to Verizon rose 16 percent to $1.95 billion, or 68 cents a share, from $1.69 billion, or 59 cents, a year earlier.

Verizon Wireless is luring more smartphone users with its speedier LTE network. The company has LTE in more than 400 towns and cities and a one-year lead over AT&T Inc., its biggest rival, in network upgrades. Both AT&T and Verizon have targeted heavy wireless-Internet users with new data-share plans, introduced last year. Verizon Wireless lets customers share a data plan between as many as 10 devices.

The increase in wireless revenue helped compensate for a 1.2 percent decline in sales from landline customers. One of the relative bright spots of that business is Verizon’s FiOS fiber- optic service, which added 188,000 Internet customers and 169,000 TV customers.

“The wire-line side has always been weak, but FiOS is the saving grace,” Hallaren said.

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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