(VZ) Verizon Communications Sells 4.2 Million iPhones in 2011 Fourth Quarter

Verizon Wireless, a joint venture between Verizon Communications (VZ) and Vodafone Plc (VOD), sold 4.2 million Apple Inc. (AAPL) iPhones in the fourth quarter of fiscal 2011. This brings the total iPhone sales closer to Verizon’s targeted 11 million for fiscal 2011.

The fourth quarter iPhone sales more than doubled from the prior quarter. Verizon added 2 million iPhones in the last quarter, trailing AT&T’s 2.7 million activations.

Even then, Verizon outpaced AT&T in total subscriber gains, on the demand for handsets that run on Google Inc.’s (GOOG) Android operating system. The company sold 2.2 million smartphones apart from iPhones in the recently concluded quarter using its highest-speed wireless network.

We believe the record fourth quarter iPhone sales is strengthening Verizon’s competitive position against the other telecom bigs AT&T (T) and Sprint Nextel Corp. (S). The top three industry players are putting in effort to make the most of the iPhone popularity.

The surge in demand for smartphones, tablets and other devices signals a new wave in the industry and opportunities for Verizon to expand. Going forward, smartphone sales are expected to be healthy driven by iPhones and new LTE devices.

The new iPhone 4S is also gaining traction in the U.S. market, driving subscriber count and average revenue per user. We expect increased penetration of smartphones and other integrated devices to boost data revenue.

On the other side, the largest U.S. mobile service provider expects strong iPhone sales to hit wireless gross margin by 500–600 basis points (bps) in the fourth quarter. The wireless margin is expected to fall in the range of 42% to 43% from 47.8% reported in the third quarter.

Verizon is spending hugely to subsidize the device, which is dragging its profits down. Additionally, the iPhone does not support its new high-speed 4G network that uses the long-term evolution technology with an average download speed of more than five-times faster than the 3G network. Further, Verizon’s iPhone deploys lower data speeds as against AT&T’s upgraded 3G network.

We are maintaining our long-term Neutral recommendation on Verizon. The stock retains the Zacks #3 Rank (Hold) for the short term (1–3 months).
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