Verizon Customer Gains Fall Short as Market Saturates

A Verizon Wireless store
A file photo of a Verizon Wireless store in New York. Photographer: Andrew Harrer/Bloomberg

Verizon Communications Inc., the second-biggest U.S. phone company, reported wireless-customer gains that missed analysts’ estimates, following rival AT&T Inc. in posting slowing growth as most people already have handsets.

Verizon said today it added 423,000 contract customers in the first quarter, missing the 724,000 estimate of Craig Moffett, an analyst at Sanford C. Bernstein & Co. in New York. Profit for the period matched analysts’ projections.

The pool of new U.S. subscribers is shrinking, forcing carriers to poach customers to sustain growth. Verizon and larger rival AT&T are also looking for ways to squeeze more out of existing clients. Smartphones like the Droid, which can surf the Web and download video, helped Verizon boost data revenue.

“The lack of growth in the postpaid market is shocking,” said Moffett, referring to customers who are typically locked in a two-year contract. Moffett rates New York-based Verizon’s shares “market perform” and doesn’t own any. “We are in the midst of the first contraction of the postpaid wireless market since the 1980s. The market is saturated.”

Verizon dropped 28 cents to $29.28 at 4 p.m. in New York Stock Exchange composite trading. The shares have declined 12 percent this year.

Jennifer Fritzsche, an analyst at Wells Fargo & Co., estimated 563,000 contract-subscriber additions.

Expanding Beyond Phones

Chief Executive Officer Ivan Seidenberg has built the wireless business into Verizon’s largest unit, with almost 60 percent of sales. The division has helped spur growth as demand for land-line connections wanes, with customers switching to mobile service or plans offered by cable operators.

That growth is ebbing now as there are enough wireless devices to cover 91 percent of the U.S. population, according to the CTIA mobile industry association. That has prompted Verizon and other carriers to start offering service for other types of devices, like scaled-down netbook computers or e-readers.

The challenge for Verizon will be “how to get more wallet share out of the customers they have at this point,” Fritzsche, based in Chicago, said before Verizon’s announcement. She rates Verizon shares “outperform.”

Verizon can attract more “high-value” customers by strengthening its smartphone lineup and offering services such as National Football League broadcasts and Skype Web-calling for wireless handsets, Chief Financial Officer John Killian said on a conference call.

Still ‘Bullish’

“We are not ready to throw the towel in to say that postpaid growth is going to be substantially lower,” he said. “We are still very bullish about growth opportunities in the retail postpaid market.”

Verizon became the largest mobile carrier last year after acquiring Alltel Corp. AT&T added 512,000 contract customers last quarter. That was the smallest increase in at least 12 quarters for the Dallas-based company.

Verizon co-owns its mobile business with Vodafone Group Plc. The wireless company’s profit is tied up in the partnership while the parent companies use it to pay down debt from the Alltel acquisition. The two have discussed sharing the cash through a dividend payment or buying each other out of the partnership, people familiar with the arrangement have said.

Killian said on the call today that Verizon’s dividend is “safe and strong” and that paying it to shareholders is “highly, highly important.”

Falling Profit

Profit amounted to 56 cents a share, excluding costs tied to new U.S. health-care legislation, Verizon said. That matched the average of analyst’s estimates compiled by Bloomberg.

Verizon had 34 cents a share in expenses after losing a tax benefit for retiree plans. AT&T, Deere & Co., Caterpillar Inc. and other companies have also disclosed expenses tied to the new legislation.

Net income fell 75 percent to $409 million, or 14 cents a share, from $1.65 billion, or 58 cents, a year earlier. Sales advanced 1.2 percent to $26.9 billion, also meeting the average analyst projection. Sales growth is slowing after 10 percent last year.


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