Verizon (VZ) reported operating results for third-quarter 2009 with adjusted earnings per share (EPS) of 60 cents, coming in line with the Zacks Consensus Estimate while declining from 66 cents reported a year-ago.

Adjusted EPS excludes one-time severance, pension and benefit charges, merger integration and acquisition costs and expenses associated with the impending spin-off of specific wireline assets. The largest US wireless carrier reported net income of $2.89 billion (41 cents per share), representing a 9.8% decline from $3.2 billion (59 cents per share) registered in the year-ago quarter, largely due to rising costs and declining wireline business.

Operating results for the quarter were highlighted by healthy gains across strategic growth areas such as wireless, broadband Internet and video. Verizon reported revenue of $27.3 billion for the quarter, up 10.2% year over year, driven by contribution from Alltel Corp acquired in early 2009.

The following is a snapshot of results by operating segments:

Domestic Wireless

Total wireless revenue increased 24.4% year over year to $15.8 billion (58% of the total revenue), with service revenues reaching $13.5 billion, up 23.7%, driven by strong customer growth and continued demand for data services. Data revenue grew 48.1% year over year to $4.1 billion, driven by a healthy adoption of integrated devices.

Retail post-paid churn increased sequentially to 1.13% while total churn of 1.49% represents an increase from 1.33% reported a year ago. Service ARPU (average revenue per user) decreased 2.2% year over year to $51.04. Data ARPU, however, increased 17.2% to $15.59, representing 31% of service ARPU.

Verizon exited the quarter with 89 million wireless customers, up 25.7% year over year. Net customer additions for the quarter were 1.2 million (excluding acquisitions) which compares to 2 million net additions registered by its major rival AT&T (T). Net retail subscriber additions for the quarter were 1 million, bringing the total retail customer base to 86.3 million.

Wireline

On the wireline side, revenue fell 4.8% year over year to $11.6 billion due to continued declines across global wholesale and enterprise businesses. Total switched access lines declined 10% year over year to 33.4 million. This was partly offset by respectable growth across the company’s FiOS footprint and broadband business.

During the quarter, Verizon added a net of 191,000 new FiOS TV customers and 198,000 net new FiOS Internet customers, both representing sequential declines. At the end of the quarter, the company had 2.7 million FiOS TV customers and 3.3 million FiOS Internet customers. The penetration rate of FiOS Internet and FiOS TV currently averages 28.5% and 24.9% across all markets, respectively. Total broadband connections reached 9.2 million, up 8.5% year over year, with 63,000 new connections registered in the quarter.

Verizon remains committed to offer incremental returns to its shareholders leveraging a healthy free cash flow ($10.7 billion for the first nine months of 2009). The company has increased its quarterly dividend by 3.3% to 47.5 cents per share. Annualized, this increases the company’s dividend to $1.90 per share (from $1.84 per share).

Verizon continues to extend its nationwide coverage of its high-speed 3G wireless network, covering roughly 284 million people. The company is also testing Long Term Evaluation (“LTE”) technology based 4G network and plans to launch the first commercial service in 2010 in up to 30 markets. Verizon is also gearing up to launch smartphones based on Google’s (GOOG) Android platform which are expected to strongly compete with Apple’s (AAPL) iPhones.

Momentum is also building up for the fiber-to-the-premises network (delivering FiOS services) which already covered 14.5 million premises, representing 45% household penetration. Verizon also expanded its FiOS triple-play (voice, Internet and video) bundled service coverage to 10.9 million premises at the end of the quarter. Moreover, the company has recently launched a discounted quadruple-play (wireless, wireline voice, Internet and video) bundled service to more effectively compete with cable TV offerings.

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 the persistent access line losses to competition, which may affect future earnings performances.
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