The largest U.S. mobile service provider Verizon Communications Inc. (VZ) declared its first quarter 2011 earnings results before the opening bell. Adjusted earnings came in at 51 cents per share, a penny ahead the Zacks Consensus Estimate and above the year-ago earnings of 48 cents.
Continued strength in wireless, FiOS and strategic business services led to higher-than-expected earnings in the quarter. Further, Verizon started selling Apple Inc.‘s (AAPL) iPhone from February 10, ending the exclusivity that its largest competitor AT&T Inc. (T) enjoyed since 2007.
Verizon’siPhone is gaining traction and is being well adopted by customers. The company sold 2.2 million iPhones in two months.
Total revenue grew 5.3% year over year to $26.99 billion in the reported quarter, inching past the Zacks Consensus Estimate of $26.89 billion. Including last year’s revenue from divested operations, total revenue nudged up 0.3% year over year.
Segment Results
Wireless revenue climbed 10.2% year over year to $16.9 billion in the reported quarter. Service revenues grew 6.3% to $14.3 billion, while data revenues increased 22.3%, driven by healthy adoption of integrated devices.
Verizon added 1.78 million subscribers during the reported quarter, including 906,000 retail post-paid customers and 897,000 wholesale and other connections such as machine-to-machine and telematics. On the other hand, Verizon lost 27,000 retail prepaid customers.
At the end of the first quarter, the company had a total of 104 million subscribers (including 88.4 million retail customers and 15.6 million wholesale and other connections), reflecting a 6.1% increase from the year-ago quarter.
Both retail post-paid and total churn (customer switch) remained low at 1.01% and 1.33%, respectively, but showed improvements from 1.05% and 1.42% in the year-ago quarter. Retail post-paid ARPU (average revenue per user) grew 2.2% year over year to $53.52.
Wireline revenue dipped 2.2% year over year to $10.1 billiondue to continued declines across global wholesale and other businesses.
Momentum for the FiOS fiber-optic network in the U.S remained strong. During the quarter, Verizon added 192,000 and 207,000 new customers to its FiOS TV and FiOS Internet services, respectively. The company exited the first quarter with 3.6 million (up 25.7% year over year) FiOS TV customers and 4.3 million (up 23.7%) FiOS Internet customers.
The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS TV surged to approximately 33.1% and 29.1%, respectively, across all markets from the year-ago levels of 29% and 25.4%.
Total Broadband connection at the end of the first quarter was 8.5 million, up 3% year over year. Total voice connections, representing FiOS Digital Voice connections in addition to traditional switched access lines, dropped 8.2% to 25.5 million. This is the smallest year-over-year decline since first quarter 2008.
Liquidity
The company ended the quarter with cash and cash equivalents of $14 billion, which was up from $3 billion in the year-ago quarter. Net debt increased to $47.2 billion from $46.1 billion at the end of fiscal 2010.
Verizon generated $5 billion cash from operations in the first quarter compared with 7.1 billion in the year-ago quarter. Capital expenditure declined 29.4% year over year to $4.4 billion.
Guidance
For fiscal 2011, Verizon guided revenue growth in the range of 4–8% and earnings per share in the range of 5–8% on an annual basis. Capital expenditure is likely to remain flat with 2010.
Our Analysis
We believe Verizon’s continued investments in its broadband network,strong wireless and FiOS services, cloud computing business, share gain in the retail post-paid market along with increasing smartphone penetration and other data devices will make the stock attractive for the long term. Further, the fourth-generation Long-Term Evolution network and iPhone sales will boost the company’s growth prospects.
Although Verizon continues to expand its 3G wireless and wireline FiOS network footprints, returns from investments in these businesses are uncertain. Verizon may also spend to promote the iPhone in the year, which might hurt short-term margins.We remain concerned about persistent access line losses, high promotional and restructuring expenses, and intense competition from cable companies and other alternative services providers, which could drag near-term earnings.
We are currently maintaining our long-term Neutral rating on Verizon with the Zacks #3 (Hold) Rank.
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