Verizon (VZ) has announced first-quarter 2010 results with adjusted earnings per share (EPS) of 56 cents, matching the Zacks Consensus Estimate while declining from 58 cents reported a year-ago.

Adjusted EPS excludes a $962 million one-time charge associated with the recent federal health-care overhaul which eliminated certain tax benefits related to retired employees. It also excludes merger integration and acquisition costs and expenses associated with the impending spin-off of specific wireline assets.

Net income (attributable to Verizon) plunged 75% year-over-year to $409 million (or 14 cents a share), largely due to the hefty charges related to healthcare reform.

The largest national wireless carrier posted revenues of $26.9 billion for the quarter, up 1.2% year-over-year, also in line with the Zacks Consensus Estimate. Revenue growth was driven by the contribution from Alltel Corp acquired in early 2009. Results were highlighted by healthy gains across strategic growth areas such as wireless and FiOS footprint (Internet and video).
 
Results by Segment

Domestic Wireless

Total wireless revenues for the quarter increased 4.4% year-over-year to $15.8 billion (59% of total revenues), with service revenues reaching $13.8 billion, up 5.9%, driven by strong customer growth and continued demand for data services. Data revenues grew 26.4% year-over-year, driven by the healthy adoption of integrated devices.

Retail post-paid churn and total churn declined year over year to 1.07% and 1.40%, respectively. Service ARPU (average revenue per user) remained flat year-over-year at $50.95. Data ARPU, however, increased 19.6% to $17.06, representing 33% of service ARPU.

Verizon exited the quarter with 92.8 million wireless customers, up 7.2% year over year. Net customer additions for the quarter were 1.55 million (excluding acquisitions), down 89% year over year. Total retail customer base increased 4.4% to 87.8 million. Net retail postpaid subscriber additions for the quarter were 423,000.

The carrier’s archrival AT&T (T) added 512,000 postpaid customers in the first quarter. The maturing domestic wireless market is affecting contract customer growth.

Verizon continues to extend nationwide coverage of its high-speed 3G wireless network, covering more than 285 million people. 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 AT&T, which lags with its 4G LTE network launch planned in 2011.

Wireline

On the wireline side, revenue for the quarter fell 2.9% year over year to $11.2 billion due to continued declines across global wholesale and enterprise businesses. Total switched-access lines declined 9.5% year over year to 31.8 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 15.6 million premises. During the quarter, Verizon added 168,000 and 185,000 new customers for its FiOS TV and FiOS Internet services, both representing a sequential increase. The carrier exited the quarter with 3 million (up 36.6%) FiOS TV customers and 3.6 million (up 30.2%) FiOS Internet customers.

The penetration rate of FiOS Internet and FiOS TV averaged 28.8% and 25.2% across all markets, respectively. Total broadband connections reached 9.3 million, up 4.3% year-over-year, with 90,000 new connections added in the quarter, driven by increased adoption of FiOS Internet.

Dividend & Cash Flow

Verizon generated $7.1 billion cash from operations in the quarter and spent $3.4 billion in capital expenditure, resulting in a free cash flow (cash from operations minus capital expenditures) of $3.7 billion, up 25.6%. Verizon remains committed to increase shareholder value by leveraging a healthy free cash flow. The company declared a first quarter dividend of 47.5 cents per share, up from 46 cents a year ago.

Outlook

Verizon has not released any financial forecast for the second quarter. For 2010, the carrier 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.

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, slowdown in postpaid subscriber growth as well as the company’s costly promotional war with AT&T, which may drag near-term earnings. This is reflected in our Neutral recommendation for the stock.
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