(VZ) Verizon Communications Beats Expectations – Hires New CEO

The largest U.S. mobile service provider Verizon Communications (VZ) declared its second quarter earnings results before the opening bell today. Adjusted earnings of 57 cents per share were two cents ahead of the Zacks Consensus Estimate and above the year-ago earnings of 51 cents.

Continued strength in the wireless segment and improved revenue trends in wireline led to higher-than-expected earnings in the quarter.

Total revenue grew 6.3% year over year to $27.54 billion surpassing the Zacks Consensus Estimate of $27.45 billion. Including last year’s revenue from divested operations, total revenue increased 2.8% year over year. Verizon recorded the strongest revenue growth in the last ten quarters.

EBITDA (earnings before interest, taxes, depreciation and amortization) rose 5.2% year over year to $9 billion in the second quarter.

Segment Results

Wireless revenue climbed 10.2% year over year to $17.3 billion in the reported quarter. Service revenues grew 6.6% to $14.7 billion and equipment revenue shot up 71.2% to $1.7 billion. Other revenue fell 4.4% from the year-ago quarter to $833 million.

Data revenue increased 22.2% from the year-ago quarter and represented 39.5% of service revenue.

Verizon added 2.2 million subscribers during the reported quarter, including 1.3 million retail post-paid customers, 61,000 retail prepaid customers and 890,000 wholesale and other connections such as machine-to-machine and telematics.

Rapid expansion of fourth-generation (4G) technology coupled with the sale of Apple Inc.‘s (AAPL) iPhone led to the strong growth in wireless subscribers. Verizon activated 2.3 million iPhones compared with AT&T Inc.‘s (T) 3.6 million activations in the second quarter.

At quarter end, the company had a total of 106.3 million subscribers (including 89.7 million retail customers and 16.6 million wholesale and other connections), reflecting a 6.6% increase from the year-ago quarter.

Verizon recorded the industry’s lowest retail post-paid churn (customer switch) of 0.89% in the reported quarter. This also represents the lowest churn in three years. Total retail churn remained low at 1.22% and showed improvements from 1.33% in the prior quarter and 1.31% in the prior-year quarter. Retail post-paid ARPU (average revenue per user) grew 1.9% year over year to $54.12.

Verizon rolled out 4G Long-Term Evolution (LTE) mobile broadband networks in 102 markets, covering 160 million people as of July 21. By the end of 2011, the company expects its LTE networks to expand in more than 175 markets, reaching out to 185 million people.

Wireline revenue dipped 0.3% year over year to $10.2 billion due to continued declines across global wholesale and other businesses. However, the trend of decline has improved from the 2.2% year-over-year drop recorded in the prior quarter. This is due to the acquisition of cloud and managed IT infrastructure leader Terremark Worldwide Inc. in April, which contributed $98 million to wireline revenues.

Momentum for the FiOS fiber-optic network in the U.S remained strong. During the quarter, Verizon added 184,000 and 189,000 new customers to its FiOS TV and FiOS Internet services, respectively. The company exited the quarter with 3.8 million (up 24.7% year over year) FiOS TV customers and 4.5 million (up 22.4%) FiOS Internet customers.

The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS TV surged to approximately 34% and 30%, respectively, across all markets from the year-ago levels of 30% and 26%.

Total Broadband connection at the end of the second quarter was 8.6 million, up 3.3% year over year. Total voice connections, representing FiOS Digital Voice connections in addition to traditional switched access lines, dropped 7.9% to 25 million. This is the smallest year-over-year decline in the last four years.


The company exited the quarter with cash and cash equivalents of $6.2 billion, which was up from $4.7 billion in the year-ago quarter. Net debt increased to $47.7 billion from $46.1 billion at the end of fiscal 2010. Net debt-to-adjusted EBITDA was 1.4 times compared with 1.3 times at year-end 2010.

Verizon generated $12.8 billion cash from operations in the first half of 2011 compared with 16.8 billion in the year-ago period. Capital expenditure increased to $8.9 billion from $7.6 billion during the same timeframe.


Concurrent with its second quarter earnings release, Verizon appointed Lowell McAdam as the new CEO. McAdam will replace the retiring CEO, Ivan Seidenberg effective August 1.

Our Analysis

We believe strong demand for wireless and FiOS services, cloud computing business, market share gain in the retail post-paid market along with increasing smartphone penetration and other data devices makes the stock attractive for the long term. Further, the speedy growth of LTE networks and iPhone sales will boost the company’s growth prospects.

However, persistent erosion in access lines, uncertain returns from investments, iPhone subsidies and intense competition from cable companies and other alternative services providers may result in downside risk for the stock.

We are currently maintaining our long-term Neutral rating on Verizon with the Zacks #3 (Hold) Rank.

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