US wireless kingpin Verizon (VZ) is slated to report first-quarter 2010 results on Thursday, April 22, 2010, ahead of the opening bell. The carrier has not released any financial forecast for the quarter. The current Zacks Consensus Estimate for the first-quarter is 56 cents, representing an 11.41% annualized decline.

In its fourth-quarter conference call, Verizon stated that it envisions pension and retiree benefit costs to affect earnings by approximately 4 cents to 6 cents in 2010. Moreover, the company has projected full-year capital expenditure in the range of $16.8 billion to $17.2 billion, which is mostly in line with $17 billion spent in 2009.

Fourth Quarter Flashback

Verizon reported fourth-quarter 2009 adjusted earnings per share of 54 cents, missing the Zacks Consensus Estimate by a penny while declining from 61 cents reported a year ago, impacted by rising costs and a declining wireline business. However, the carrier reported 10% annualized growth in revenues, driven by the contributions from Alltel Corp acquired in early 2009.

The quarterly results were highlighted by gains across strategic growth areas such as wireless, broadband Internet and video. Wireless revenue growth was driven by strong subscriber accretion and sustained demand for data services. The carrier registered healthy growth in data ARPU (average revenue per user) and decline in churn in the fourth quarter. Growth in data was fueled by healthy smartphone adoption.

On the wireline side, revenues remained under pressure due to continued erosion in switched access lines as well as declines across global wholesale and enterprise businesses. However, this was partly offset by respectable growth across the carrier’s FiOS footprint.

Estimate Revisions Trend

Agreement

The overall trend in estimate revisions for Verizon has been sporadic and manifests a lack of a clear directional agreement. Out of a total of 27 analysts covering the stock, in the last 7 days 1 analyst has lifted his or her earnings estimate while 2 analysts have moved in the opposite direction. Moreover, 2 analysts have raised their estimates over the past month while 3 have made negative revisions.

Estimates for 2010 have been inclined more towards the negative side, with 5 out of the total of 31 analysts lowering their forecasts over the past week, with 1 making a positive revision. Likewise, 10 analysts have cut their forecasts over the past month, with 2 raising their estimates. The current Zacks Consensus Estimate for 2010 is $2.33, reflecting a roughly 3% year-over-year decline.

The negative revisions, to some extent, have been fueled by the dilutive impact of pension and benefit charges associated with workforce reduction, the recent slash of voice tariff rates by the carrier, heavy handset subsidies as well as the expenses associated with the impending spin-off of specific wireline assets.

Magnitude

The magnitude of revisions for the forthcoming quarter has plateaued over the last 7, 30 and 60 days. However, there has been a decrease of 2 cent over the past three months. Estimates for 2010 have gone down by a penny over the past 60 days while remaining static over the last week and month.

With respect to earnings surprises, Verizon has a mixed track record in the preceding four quarters. The carrier had one positive and one negative earnings surprise each in two quarters while matching the estimates on two other occasions. The operator produced an average positive earnings surprise of 2.48% over the last four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

Our Take

We are encouraged by Verizon’s ongoing efforts to extend the nationwide coverage of its 3G network. Moreover, the company is planning to launch commercial 4G services based on the Long-Term Evolution (“LTE”) standard in fourth-quarter 2010 across 25−30 markets. This will offer the carrier a head start over its archrival AT&T (T), which lags with 4G LTE network launch planned in 2011.

In an effort to boost its wireline business, Verizon is replacing its copper line-based networks with expensive fiber-optic deployments in key markets. The company is selling its local wireline assets in 13 states to Frontier Communications (FTR) to focus on more densely populated markets.

In late 2009, Verizon launched Motorola’s (MOT) Droid smartphone based on Google’s (GOOG) Android platform to take on the iPhone. The carrier has expanded its Android smartphone range with its recently introduced “Droid Incredible” by HTC.

Verizon is also offering high subsidies to entice customers to its latest smartphone offerings. Moreover, AT&T may lose its iPhone marketing exclusivity in 2010, and there is rising speculation about Verizon selling the device in the future.

In a major move, Verizon has truncated tariffs for its unlimited voice services while mandating data plans for its customers. While voice price cuts may drag near-term earnings to some extent, the move is expected to boost operating results in the long run, driven by an increased adoption of data plans.

Moving forward, we expect Verizon’s business prospects to be driven by the synergies from the Alltel acquisition and increased market penetration of its 3G and FiOS network footprints. However, we remain concerned about persistent access line losses and the company’s costly promotional war with AT&T, which may drag near-term earnings and margins. This is reflected in our Neutral recommendation for the stock.
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