Verizon Profit Grows as It Adds More Users Than Estimated

Verizon Communications Inc., the second-largest U.S. phone company, reported a 19 percent gain in profit after heftier mobile-phone bills helped make up for sluggish growth of its land-line businesses.

Second-quarter net income rose to $4.29 billion from $3.6 billion a year earlier, the New York-based company said today in a statement. Earnings per share attributable to Verizon was 64 cents. That matched the average estimate of analysts, according to data compiled by Bloomberg. Sales grew 3.7 percent to $28.6 billion, also in line with estimates.

The shift to smartphones, which let users surf the Web and watch videos, has helped boost the size of subscribers’ phone bills. Still, Verizon’s corporate sales and its FiOS business, which provides television and Internet access over fiber-optic lines, didn’t fare as well, said Mike McCormack, an analyst with Nomura Securities in New York.

“The wireless side looks really good,” said McCormack, who has the equivalent of a buy rating on Verizon. “FiOS TV and Internet numbers were far below our expectations. And there was significant weakness in global enterprise.”

Verizon’s stock fell 2.9 percent to close at $44.54 at in New York. The shares have climbed 11 percent this year.

Wireless Users

Verizon Wireless added 888,000 contract customers in the quarter, compared with 1.3 million a year ago. While that reflects an industrywide slowdown in growth, the number beat the 724,000 estimated by analysts. The profit margin on those customers, excluding some items, climbed to a record 49 percent.

The average revenue per contract user rose 3.7 percent to a record $56.13. Analysts predicted that the so-called postpaid ARPU figure would be $55.82.

Verizon Wireless sold 5.9 million smartphones in the second quarter, according to a company presentation today, down 6.3 percent from the first quarter. The decline in part is due to a slowdown in the upgrade rate to 7 percent from 8 percent in the first quarter as fewer subscribers traded in old phones for new phones.

Of the smartphone total, Google Inc. Android-operated devices accounted for 49 percent or 2.9 million, and Apple Inc. iPhones were 46 percent of the total, or 2.7 million. Most of the 300,000 remaining smartphones were Research In Motion BlackBerries.

Speedier Phones

Verizon Wireless said 50 percent of its monthly contract customers have smartphones, up from 47 percent in the first quarter. Verizon also expanded the availability of long-term evolution, or LTE, a network standard that allows for speedier phones.

Verizon Wireless has LTE service in 337 cities and plans to cover more than 400 markets by year-end, according to a statement yesterday. LTE devices increased to 12.2 percent of total phones, plug-in wireless modems and tablets from 9.1 percent in the first quarter.

Last month, Verizon Wireless introduced a shared-data plan offering customers various prices for data allocations to use on as many as 10 smartphones and tablets. The push is to get people to buy more devices and ultimately pay for more expensive data plans.

As Verizon Wireless tries to capitalize on heavier data users, it also has started to extract more money from renewing customers. Starting April 22, it imposed a $30 upgrade fee on all customers buying new smartphones. AT&T Inc., its biggest rival, charges $36 for upgrades, and Sprint Nextel Corp. has an $18 fee plus an additional $10 monthly smartphone charge.

Subsidy Expenses

These moves will help defray the phone subsidy costs that cut into the carriers’ profit margins. For example, telephone companies pay Apple an estimated $600 per iPhone and then offer it to customers for $199.

Verizon co-owns Verizon Wireless, its mobile-phone carrier unit, with the U.K. phone giant Vodafone Group Plc.

Vodafone’s investors have been waiting for Verizon Wireless to issue them a dividend -- something that’s expected by the end of the year.

Verizon Chief Financial Officer Fran Shammo said today that the dividend issue is not on the agenda for Verizon Wireless’s board meeting next week, though a decision isn’t required until year-end.

Land-Line Unit

Verizon added 120,000 FiOS TV customers, a 35 percent decline from the 184,000 added a year earlier. New FiOS Internet customers totaled 134,000, down 29 percent from the 189,000 added a year earlier.

Total revenue for the land-line business was $9.93 billion, down 3.1 percent from $10.25 billion a year ago, because of flat business spending in the U.S. and declining demand for network services in Europe, Shammo said in an phone interview.

“The weak spot for Verizon is in enterprise,” said Nomura’s McCormack. “Verizon has European exposure, and domestically they aren’t really seeing a pickup among companies below the top tier. This affects revenue growth,” he said.

Capital spending was $2.05 billion, compared with $3.57 billion in the first quarter and $2.67 billion a year ago. Shammo told investors on an earnings call that total capital spending would be flat to down from the $16.2 billion level in 2011.

Separately, Verizon’s two largest unions -- the Communications Workers of America and the International Brotherhood of Electrical Workers -- said they have requested a federal mediator to resolve contract talks. Rich Young, a company spokesman, declined to comment.

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