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The largest U.S. mobile service provider Verizon Communications Inc. (VZ - Analyst Report) reported fourth quarter 2012 adjusted earnings of 45 cents per share. The quarter’s earnings were below the Zacks Consensus Estimate of 54 cents and also lagged the year-ago figure of 52 cents.

The company’s earnings were negatively impacted by steeper operating costs as well as a drop in wireless EBITDA (earnings before interest, taxes, depreciation and amortization) margin.

Total revenue increased 5.6% year over year to $30.04 billion, almost in line with the Zacks Consensus Estimate of $29.71 billion. The year-over-year revenue growth was driven by continued strong wireless services, FiOS fiber-optic services and strategic services.

For the full year, the company posted earnings of $2.31 per share (missing our projection by 3.8% but up 5.0% year over year), on revenue of $115.8 million (up 4.5% from the prior year).

Segment Results    

Wireless revenue increased 9.5% year over year to $20.00 billion in the fourth quarter on the back of increased smartphone penetration and high retail post-paid subscriber growth. Service, Equipment and Other revenues grew 8.5%, 15.5% and 11.7%, respectively.

During the quarter, Verizon added 2.2 million retail subscribers, including 2.1 million post-paid. At the end of 2012, the company had 98.2 million retail subscribers (including 92.5 million post-paid and 5.7 million prepaid customers), reflecting a 6.6% year-over-year increase.

Despite the sluggish growth in the U.S. mobile market, rapid expansion of 4G Long-Term Evolution (LTE) services, strong sales of Apple Inc.’s (AAPL - Analyst Report) iPhone (including the new iPhone 5), and increased adoption of Google Inc.’s Android smartphones led to the strong growth in retail wireless subscribers.

At the end of 2012, smartphones accounted for 58% of retail post-paid wireless. As of January 22, the Verizon LTE deployment covered 476 markets with more than 273 million people.

Retail post-paid churn (customer switch) increased 1 basis point (bp) year over year to 0.95% in the reported quarter. Total retail churn also went up by 1 bp to 1.24%. Retail post-paid ARPA (average revenue per account) grew 6.6% year over year.

Wireline revenue dipped 1.5% year over year to $10.0 billion due to continued decline in global business. The negative effect was partially offset by strong FiOS fiber-optic network and better sale of strategic service in the U.S.

FiOS revenue increased 15.7% year over year. During the reported quarter, Verizon added 144,000 and 134,000 new customers to its FiOS Video and FiOS Internet services, respectively.

The company exited the fourth quarter with 4.7 million (up 13.3% year over year) FiOS Video customers and 5.4 million (up 12.6%) FiOS Internet customers. The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS Video increased to approximately 37.3% and 33.3%, respectively, across all markets from the year-ago levels of 35.5% and 31.5%.

Strategic services revenue, including Verizon Terremark cloud and data center services, security and IT solutions, advanced communications, and strategic networking, increased 5.3% from the year-ago quarter, representing 54% of global enterprise revenue in the fourth quarter.

Total Broadband connection at the end of 2012 was 8.8 million, up 1.4% year over year.

Liquidity

Verizon exited 2012 with cash and cash equivalents of $3.1 billion. The company had long-term debt (including current portion) of $52.0 billion, representing debt-to-capitalization ratio of 37.8%. Net debt-to-adjusted EBITDA improved to 1.3 times from 1.2 times at the end of 2011.

Verizon generated $31.5 billion of cash from operations in 2012, while capital expenditure for the year amounted to $16.2 billion.

Other Stock Set For Earnings Release

Another telecom giant AT&T Inc. (T - Analyst Report) will release its full fourth-quarter 2012 financial results on January 24, 2013 after the close of trading. The Zacks Consensus Estimates for the fourth quarter and 2012 earnings currently stand at 47 cents per share and $2.37 per share, respectively. The estimates reflect a respective year-over-year growth of 11.7% and 7.8% for the fourth quarter and 2012.

Our Take

Verizon currently holds a Zacks Rank #3, implying a short-term Hold rating. We believe Verizon is poised to grow its revenue and earnings in 2013 based on the introduction of new smartphones, tablets and data devices in the wireless segment, and continued expansion of robust FiOS fiber-optic network and strategic services, including cloud-computing business, in the wireline business.

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