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Verizon Communications Inc. (VZ - Analyst Report) reported first-quarter 2014 adjusted earnings of 84 cents per share, missing the Zacks Consensus Estimate by 87 cents. However, the bottom line improved from 68 cents earned a year ago.

The growth was buoyed by strong revenue contribution from wireless services, improvement in wireless operating margins and increased demand for FiOS services. In addition, the company’s growing investments in building advanced network services and infrastructure supported its business growth.

First quarter earnings excluded the impact of after-tax gain of 55 cents per share related to the sale of Verizon's minority interest in Vodafone Omnitel, charges of 17 cents related to debt redemption and interest and financing costs of 8 cents per share related to Verizon Wireless transaction.

Total revenue increased 4.8% year over year to $30.8 billion, and surpassed the Zacks Consensus Estimate of $30.7 billion. The growth was driven by increasing demand for Verizon Wireless, FiOS and strategic enterprise services.

Segment Results

Wireless revenues increased 6.9% year over year to $20.9 billion in the first quarter on higher retail service revenues supported by substantial growth in retail post-paid customers. Service revenues improved 7.5%, while equipment revenues were up 3.1% year over year. Other revenues rose 4.1% year over year.

During the quarter, Verizon added over 549,000 retail subscribers, including 539,000 million post-paid customers. At the end of the quarter, the company had 103.3 million retail subscribers (including 97.3 million post-paid and 6 million prepaid customers), reflecting a 4.4% year-over-year increase. The growth was aided by expansion of LTE service, strong sale of Apple Inc.’s (AAPL - Analyst Report) iPhone and increased adoption of Android smartphones also aided growth at Verizon Wireless.

At the end of the year, smartphones accounted for 72.0% of retail post-paid wireless.

Retail post-paid churn (customer switch) increased 6 basis points (bps) year over year to 1.07%. Total retail churn also went up by 7 bps to 1.37%. Retail post-paid ARPA (average revenue per account) grew 6.3% year over year.

Wireline revenues dipped 0.4% year over year to $9.8 billion due to continued decline in global business. The negative effect was partially offset by strong consumer revenues backed by FiOS sales and better sale of strategic services in the U.S.

FiOS revenues were $3 billion, up 15.5% year over year. During the reported quarter, Verizon added 57,000 and 98,000 new customers to its FiOS Video and FiOS Internet services, respectively.

The company exited the quarter with 5.3 million (up 8.7% year over year) FiOS Video customers and 6.2 million (up 9.9%) FiOS Internet subscribers. The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS Video increased to approximately 39.7% and 35.0%, respectively, across all markets from the year-ago levels of 38.2% and 34.1%.

Strategic services revenues, including Verizon Terremark cloud and data center services, security and IT solutions, advanced communications, and strategic networking, increased 1.8% from the year-ago quarter, representing 58.5% of total enterprise revenue.

Total broadband connection as of Mar 31 was over 9 million, up 1.5% year over year.

Liquidity

As of Mar 31, Verizon had cash and cash equivalents of $2,907 million. The company had total long-term debt of $107.6 billion. Net debt-to-adjusted EBITDA was 2.5x versus 1.0x at the end of 2013.

In the first quarter of 2014, Verizon generated $7.1 billion of cash from operations, while capital expenditure amounted to $4.15 billion. The company had free cash flow of $3 billion at quarter end.

Looking Ahead

The company targets 4% revenue growth and margin expansion in 2014.

Our Take

We believe that Verizon will continue to experience solid momentum in its wireless business based on solid subscriber addition. Going forward, Verizon will achieve growth and profitability with its focus on gaining share in the retail post-paid market, launching new devices and expanding network to new markets. The company’s robust cash flow growth and capital efficiency are expected to support its performance level.

Despite these positives, we prefer to stay on the sidelines owing to risk factors such as persistent erosion in access lines, uncertain returns from investments, iPhone subsidies, hindrances in spectrum deals and intense competition.

Verizon currently holds a Zacks Rank #3 (Hold).

Other Stocks

Better ranked stocks in this sector include Level 3 Communications, Inc. (LVLT - Snapshot Report) and Shenandoah Telecommunications Co. (SHEN - Snapshot Report), both with Zacks Rank #1 (Strong Buy).

Read the Full Research Report on VZ
Read the Full Research Report on LVLT
Read the Full Research Report on AAPL
Read the Full Research Report on SHEN


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