US wireless kingpin Verizon (VZ) reported operating results for fourth-quarter 2009 with adjusted (non-GAAP) earnings per share (EPS) of 54 cents, falling short of the Zacks Consensus Estimate by a penny while declining from 61 cents reported a year-ago. The company’s shares fell 78 cents or 2.5% to $29.90 in early trading Tuesday.

Adjusted EPS excludes one-time severance, pension and benefit charges associated with workforce reduction, merger integration and acquisition costs and expenses associated with the impending spin-off of specific wireline assets.

On a GAAP basis, Verizon reported a loss of 23 cents per share compared to an EPS of 43 cents registered a year-ago, primarily due to a one-time pre-tax charge of $3 billion related to workforce reduction.

The largest national wireless carrier reported a net loss (attributable to Verizon’s shareholders) of $653 million for the quarter compared to a profit of $1.24 billion registered in the year-ago quarter, largely due to rising costs and declining wireline business. Net income for full-year 2009 was $3.65 billion, down 43% from 2008.

Verizon reported revenue of $27.1 billion for the quarter, up 9.9% year over year, driven by the contribution from Alltel Corp acquired in early 2009. Revenue for full-year 2009 was $107.8 billion, up 10.7%.

Operating results for the quarter were highlighted by healthy gains across strategic growth areas such as wireless, broadband Internet and video. Following is a snapshot of results by operating segments:

Domestic Wireless

Total wireless revenue for the quarter increased 22.5% year over year to $15.7 billion (58% of total revenue), with service revenues reaching $13.5 billion, up 22.5%, driven by strong customer growth and continued demand for data services. Data revenue grew 45.9% year over year, driven by a healthy adoption of integrated devices.

Retail post-paid churn and total churn declined sequentially to 1.06% and 1.42%, respectively. Service ARPU (average revenue per user) decreased 2.2% year over year to $50.75. Data ARPU, however, increased 16.1% to $16.24, representing 32% of service ARPU.

Verizon exited the quarter with 91.2 million wireless customers, up 26.6% year over year. Net customer additions for the quarter were 2.2 million (excluding acquisitions). Net retail subscriber additions for the quarter were 1.2 million, bringing the total retail customer base to 87.5 million.

Wireline

On the wireline side, revenue for the quarter fell 3.9% year over year to $11.5 billion due to continued declines across global wholesale and enterprise businesses. Total switched access lines declined 10% year over year to 32.6 million. This was partly offset by respectable growth across the company’s FiOS footprint.

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.

Momentum for the fiber-to-the-premises network (delivering FiOS services) remains strong, having already covered 15.4 million premises, or 48% household penetration. Verizon also expanded its FiOS triple-play (voice, Internet and video) bundled service customer base by 47% to 2.4 million at the end of the quarter. The company is offering a discounted quadruple-play (wireless, wireline voice, Internet and video) bundled service to more effectively compete with cable TV offerings.

During the quarter, Verizon added a net of 153,000 new customers each for its FiOS TV and FiOS Internet services, representing sequential declines. At the end of 2009, the company had 2.9 million (up 49.2%) FiOS TV customers and 3.4 million (up 38.4%) FiOS Internet customers. The penetration rate of FiOS Internet and FiOS TV currently averages 28.1% and 24.5% across all markets, respectively. Total broadband connections reached 9.2 million, up 6.3% year over year, with 46,000 new connections registered in the fourth quarter.

Dividend & Cash Flow

Verizon remains committed to increase shareholder value leveraging a healthy free cash flow ($14.5 billion for full-year 2009). The company declared a fourth quarter dividend of 47.5 cents per share. A healthy dividend yield (of 6.3%) continues to support the stock.

Outlook

For 2010, Verizon targets capital expenditure in the range of $16.8 billion to $17.2 billion. The company anticipates that pension and retiree benefit costs will affect EPS by approximately 4 cents to 6 cents. Effective tax rate for the year is estimated in the range of 33% to 35%. The company projected a net debt-to-EBITDA ratio of 1.4 to 1.5 for 2010.

Verizon continues to extend its nationwide coverage of its high-speed 3G wireless network, covering more than 285 million people. The company is also testing the Long Term Evolution (“LTE”) standard based 4G network and plans to launch the first commercial service in 2010 in up to 30 markets.

In late 2009, Verizon launched Motorola’s (MOT) Droid smartphone based on Google’s (GOOG) Android platform to take on the iPhone. The company spent heavily on TV ads during the 2009 holiday season to aggressively position Droid against iPhone, which is exclusively marketed by archrival AT&T (T).

Verizon is also offering high subsidies to entice customers to its latest smartphone offerings. Moreover, AT&T may lose iPhone exclusivity in 2010, and there is rising speculation about Verizon selling the device. Verizon may also carry Apple’s (AAPL) much-awaited tablet computer.

In a major recent move, Verizon truncated tariffs for its unlimited voice services while mandating data plans for its customers. However, AT&T followed suit with similar rate cuts. While Verizon’s recent price cuts may drag near-term earnings to some extent, the move is expected to boost operating results in the long run driven by increased adoption of data plans.

Moving forward, we expect Verizon’s business prospects to be driven by synergies from acquisitions (especially Alltel) and increased market penetration of its 3G wireless and FiOS network footprints. However, we remain concerned about persistent access line losses and the company’s ongoing costly promotional war with AT&T, which may drag future earnings and margins.
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