Verizon Beats Consensus

Verizon (VZ), the largest US wireless carrier by subscribers, reported results for the second quarter of 2009 on Jul 27, 2009. Results were highlighted by healthy gains across strategic growth areas such as wireless, broadband Internet and video.

Reported revenue came in line with consensus and our expectations increasing 11.3% year over year to $26.9 billion, driven by contribution from Alltel Corp acquired in early 2009. However, reported earnings per share (EPS) attributable to the company fell short of our estimates, declining 21.2% to $0.52 from $0.66 reported in the year ago quarter, largely due to rising costs and declining wireline businesses. On an adjusted basis, EPS fell to $0.63 from $0.67 registered in the prior-year quarter, beating the consensus.

Total wireless revenue increased 27.7% year over year to $15.5 billion (58% of the total revenue), increasing 29.6% year-over-year with service revenues reaching $13.3 billion, up 27.2%, driven by strong customer growth and demand for data services. Data revenue grew 52.6% year-over-year to $3.9 billion, driven by strong adoption of integrated devices.

At the end of the second quarter, the company served 87.7 million wireless customers, up 27.7% year over year. Net retail additions were 1.1 million excluding acquisitions for the quarter bringing the total retail customer base to 85.2 million, posting 27.8% annualized growth. This compares to 1.4 million net additions registered by its major rival AT&T (T). Retail post-paid churn declined sequentially to 1.01% while service ARPU (average revenue per user) increased 0.8% year over year to $51.10.

On the wireline side, revenue fell 5.2% year over year to $11.5 billion due to declines across global wholsale and enterprise businesses. Total switched access lines declined 9.9% year over year to 34.3 million. Verizon added a net of 300,000 new FiOS TV customers and 303,000 (a record) net new FiOS Internet customers.

At the end of the quarter, the company had 2.5 million FiOS TV customers and 3.1 million FiOS Internet customers. Total broadband connections reached 9.1 million, up 9.4% year over year.

Verizon continues to extend its nationwide coverage of its high-speed 3G wireless network, covering roughly 284 million people as of Jun 30, 2009. The company is also conducting trial runs of a 4G network based on Long Term Evolution (LTE) technology, and plans to launch the first commercial service in 2010. This will make Verizon the first wireless operator to offer commercial LTE services in the US.

Momentum is also building up for the fiber-to-the-premises network (delivering FiOS Internet and FiOS TV services) which already covered 13.8 million premises, representing 43% household penetration. Verizon also expanded its FiOS triple-play (voice, Internet and video) bundled service coverage to 10.3 million premises at the end of the second quarter.

Moving forward, we expect the company’s business prospects to be driven by synergies from acquisitions (especially Alltel) and increased market penetration of its 3G wireless and FiOS network footprints. Moreover, the stock remains attractive for income-oriented investors based on the healthy dividend yield, supported by stable cash flow.

However, we remain concerned over the persistent access line losses to competition, which may constrict future earnings performances. Consequently, we maintain our Hold rating for Verizon.

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