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Verizon Outperforms, Adds Users

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Before the opening bell, the largest U.S. mobile service provider Verizon Communications Inc. (VZ - Free Report) reported first quarter 2012 adjusted earnings of 59 cents per share. The quarter’s earnings were a penny ahead of the Zacks Consensus Estimate and 8 cents above the year-ago earnings.

The company made a good start to the year, producing double-digit earnings and cash flow growth. Lower sales of Apple Inc.’s (AAPL - Free Report) iPhone during the quarter boosted margins as subsidies fell. Both Verizon’s Wireless and Wireline businesses are likely to gain a strong momentum going forward this year.

Total revenue grew 4.6% year over year to $28.24 billion and surpassed the Zacks Consensus Estimate of $28.15 billion. Improved revenue performance was mainly driven by continued strong wireless services, FiOS fiber-optic services and strategic services.

EBITDA (earnings before interest, taxes, depreciation and amortization) rose 8.2% year over year to $9.2 billion while operating income increased 15.6% to $5.2 billion in the reported quarter.

Segment Results

Wireless revenue increased 8.2% year over year to $18.27 billion on the back of increased smartphone penetration and higher retail post-paid average revenue per user (ARPU). Service, Equipment and Other revenues grew 7.7%, 8.8% and 16.3%, respectively.

Data revenue spiked 21.1% from the year-ago quarter and represented 42.9% of service revenue. Retail service revenue rose 8.9% year over year representing the highest increase in three years.

Verizon added 734,000 retail subscribers during the first quarter, including 501,000 post-paid and 233,000 prepaid customers. At the end of the first quarter, the company had 92.99 million retail subscribers (including 89.96 million post-paid and 5.03 million prepaid customers), reflecting a 5.2% year-over-year increase.

Despite the slowing growth in the U.S. mobile market, rapid expansion of 4G Long-Term Evolution (LTE) services and strong adoption of Google Inc.’s Android smartphones led to the strong growth in retail wireless subscribers. At the end of the reported quarter, smartphones accounted for 47% of retail post-paid wireless, up from 43.5% in the prior quarter.

Further, the company is way ahead of its major rival AT&T Inc. (T - Free Report) and Sprint Nextel Corp. (S - Free Report) in deploying LTE services. As of April 19, the Verizon LTE deployment covered 230 markets with more than 200 million people.

Retail post-paid churn (customer switch) was low at 0.96% in the reported quarter compared with 1.01% in the year-ago quarter. Total retail churn also declined to 1.24% from 1.33% in the year-ago quarter. Retail service and post-paid ARPU grew 3.4% and 3.6% year over year, respectively.

Wireline revenue dipped 2% year over year to $9.9 billion due to continued declines across global wholesale and other businesses. Momentum for the FiOS fiber-optic network and sale of strategic service in the U.S. however remained strong.

During the reported quarter, Verizon added 180,000 and 193,000 new customers to its FiOS Video and FiOS Internet services, respectively. The company exited the first quarter with 4.4 million (up 18.8% year over year) FiOS Video customers and 5.0 million (up 16.8%) FiOS Internet customers. The penetration rate (subscribers as a percentage of potential subscribers) of both FiOS Internet and FiOS Video grew to approximately 36.4% and 32.3%, respectively, across all markets from the year-ago levels of 33.1% and 29.1%.

Strategic services showed a substantial increase of 11.6% from the year-ago quarter, representing 51% of enterprise revenue in the first quarter.

Total Broadband connection at the end of the fourth quarter was 8.8 million, up 3.3% year over year. Net additions of 104,000 connections mark the highest quarterly addition since the second quarter of 2009. The DSL-based HSI connections fell 10.4% year over year to 3.8 million. Total voice connections, representing FiOS Digital Voice connections in addition to traditional switched access lines, dropped 6.9% to 23.7 million.


The company exited the first quarter with cash and cash equivalents of $5.9 billion, which less than doubled from $14.0 billion at year-end 2011. Net debt rose to $45.7 billion from $41.8 billion at the end of fiscal 2011. Net debt-to-adjusted-EBITDA deteriorated to 1.3 times compared with 1.2 times since year-end 2011.

Verizon generated $6.0 billion of cash from operations in the reported quarter compared with $5.0 billion in the year-ago quarter. Capital expenditure decreased to $3.6 billion from $4.4 billion in the year-ago quarter.

Our Take

Verizon is poised to grow its revenue and earnings this year based on the introduction of smartphones, tablets and data devices in the Wireless segment as well as continued strong FiOS fiber-optic network and strategic services, including cloud-computing business, in the Wireline business.

However, we remain skeptical about returns from the 4G wireless and wireline FiOS networks, persistent access line losses, heavy iPhone subsidies and intense competition from cable companies and other alternative services providers.

We are currently maintaining our long-term Neutral rating on Verizon. For the short term (1-3 months), the stock retains a Zacks #3 (Hold) Rank.

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