(VZ) Verizon Communications Earnings Falls Short by a Penny

Before the opening bell, the largest U.S. mobile service provider Verizon Communications (VZ) reported fourth quarter 2011 adjusted earnings of 52 cents per share. The quarter’s earnings were a penny below the Zacks Consensus Estimate but 2 cents ahead of the year-ago earnings.

Adjusted earnings per share excluded $1.20 related to non-cash pension items and 3 cents for the early extinguishment of debt during the reported quarter. Including these special items, Verizon generated a loss of 71 cents compared to earnings of 93 cents in the year-ago quarter.

In fiscal 2011, adjusted earnings per share grew 3.4% year over year to $2.15.

Total revenue increased 7.7% year over year to $28.44 billion in the fourth quarter and surpassed the Zacks Consensus Estimate of $28.43 billion. This represents the highest year-over-year quarterly revenue growth in 11 years mainly driven by continued strong wireless services, FiOS fiber-optic services and strategic services.

Revenue for fiscal 2011 rose 4% to $110.875 billion from the last year. On an adjusted basis, revenue upped 6.2% year over year. EBITDA (earnings before interest, taxes, depreciation and amortization) rose 3.4% year over year to $29.4 billion in fiscal 2011.

Segment Results

Wireless revenue climbed 13% year over year to $18.254 billion in the reported quarter on the back of increased smartphone penetration and increased retail postpaid average revenue per user (ARPU). Service, Equipment and Other revenues grew 6.4%, 96.7% and 12.5%, respectively. Data revenue spiked 19.2% from the year-ago quarter and represented 41.6% of service revenue.

Verizon added 1 million subscribers during the fourth quarter. Retail additions were 1.46 million, including 1.21 million post-paid customers and 0.25 million prepaid customers, representing the highest additions in three years. On the flip side, the company lost 490,000 wholesale and other connections such as machine-to-machine and telematics.

At the end of fiscal 2011, the company had 108.7 million subscribers (including 92.2 million retail customers and 16.5 million wholesale and other connections), reflecting a 6.3% year-over-year increase.

Rapid expansion of 4G Long-Term Evolution (LTE) services, strong adoption of Google Inc.’s (GOOG) Android smartphones and Apple Inc.‘s (AAPL) iPhone led to the strong growth in retail wireless subscribers. At the end of the fourth quarter, smartphones accounted for 44% of retail postpaid wireless, up from 39% in the prior quarter. Verizon sold 4.2 million iPhones in the fourth quarter, more than doubled sequentially.

Further, the company is way ahead of its major rival AT&T Inc. (T) in deploying LTE services. As of January 23, the Verizon LTE deployment covered 195 markets with more than 200 million people.

Retail post-paid churn (customer switch) was low at 0.94% in the fourth quarter compared with 1.01% in the year-ago quarter. Total retail churn also declined to 1.23% from 1.37% in the year-ago quarter. Retail post-paid ARPU grew 2.5% year over year to $54.80.

Wireline revenue dipped 1.5% year over year to $10.1 billion in the fourth quarter due to continued declines across global wholesale and other businesses. Momentum for the FiOS fiber-optic network and sales of strategic service in the U.S. however remained strong.

During the reported quarter, Verizon added 194,000 and 201,000 new customers to its FiOS Video and FiOS Internet services, respectively. The company exited fiscal 2011 with 4.2 million (up 20.2% year over year) FiOS Video customers and 4.8 million (up 18%) FiOS Internet customers. The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS Video grew to approximately 35.5% and 31.5%, respectively, across all markets from year-ago levels of 31.9% and 28%.

Strategic services showed a substantial increase of 14.7% from the year-ago quarter, representing 50.6% of enterprise revenue in the fourth quarter.

Total Broadband connection at the end of the fourth quarter was 8.7 million, up 3.3% year over year. The DSL-based HSI connections fell 10.6% year over year to 3.8 million. Total voice connections, representing FiOS Digital Voice connections in addition to traditional switched access lines, dropped 7.2% to 24.1 million. This is the least year-over-year decline since the first quarter of 2006.

Liquidity

The company exited fiscal 2011 with cash and cash equivalents of $13.4 billion, which doubled from $6.7 billion in 2010. Net debt reduced to $41.8 billion from $46.1 billion at the end of fiscal 2010. Net debt-to-adjusted EBITDA improved to 1.2 times compared with 1.3 times since year-end 2010.

Verizon generated $29.8 billion of cash from operations in 2011 compared with $33.4 billion in the year-ago period. Capital expenditure slightly decreased to $16.2 billion from $16.5 billion during the same timeframe.

Our Take

We believe fiscal 2012 will be a great year for Verizon considering the promise in both Wireless and Wireline businesses. On the wireline front, continued strong FiOS fiber-optic networks and strategic services, including cloud-computing business, would boost profitability going forward and would enhance shareholder value.

Though the purchase of new wireless spectrum licenses would be accretive to Verizon in the long term given the leading position in the 4G LTE deployments, we believe it might put pressure on the balance sheet in the short term by reducing cash balances and increasing capital expenditures. In addition, persistent erosion in access lines, uncertain returns from investments, iPhone subsidies and intense competition from cable companies and other alternative services providers are threats to the stock.

We are currently maintaining our long-term Neutral rating on Verizon. The stock retains the Zacks #4 Rank (Sell) for the short term.

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