Verizon 3Q profitability rises on subscribers, data growth

October 18, 2012 09:19 AM

Verizon Communications Inc., the second-largest U.S. phone company, reported an increase in profitability at its wireless unit that topped analyst estimates as sales of smartphones boosted customers’ bills.

The profit margin in the Verizon Wireless business, based on earnings before interest, taxes, depreciation and amortization, rose to 50 percent in the third quarter from 49 percent in the previous quarter, the New York-based company said today in a statement. The average estimate of eight analysts compiled by Bloomberg was for 48.4 percent.

Verizon Wireless, 45 percent owned by Vodafone Group Plc, added 1.54 million net contract customers in the quarter, beating the 901,000 estimate by analysts. Verizon and AT&T Inc., the largest U.S. phone company, are taking shares from competitor T-Mobile USA, said Kevin Roe, an analyst with Roe Equity Research in New York.

“The subscriber number beat the highest estimate on the street,” said Kevin Roe, an analyst with Roe Equity Research in New York. “Part of that was from tablets, and I also think the T-Mobile trend of losing significant customers continues.”

More smartphone users watching videos or streaming music meant bigger phone bills and a 6.5 percent rise in the price for the average monthly contract account to $145.42. The wireless gain helped offset slumping sales to business customers.

Verizon rose as much as 3.8 percent to $46.42 and was up 2.8 percent as of 12:43 p.m. in New York. The shares have climbed 11 percent through yesterday this year.

Data Allotment

Verizon Chief Financial Officer Fran Shammo said the company was seeing better than expected adoption of its Share Everything plan that gives users one data allotment to use with as many as 10 devices.

Verizon designed the plan to capitalize on heavier data users. The plan’s prices are higher than comparable plans at other carriers, said Tero Kuittinen, a New York-based analyst at Alekstra Oy, a mobile-diagnostics company.

“We are providing a network that delivers data wherever you are, and we think there might be a slight premium for that,” said Shammo in an interview today.

Verizon’s third-quarter per-share earnings excluding some items were 64 cents, compared with 56 cents a year earlier. Net income attributable to Verizon rose 16 percent to $1.59 billion. Third-quarter sales climbed 3.9 percent to $29 billion. Profit and sales were in line with analysts estimates.

iPhone Boost

Verizon sold 6.8 million smartphones in the third quarter boosting the proportion of retail contract phone connections to 53 percent from 39 percent a year earlier. The company sold 3.4 million phones running on Google Inc.’s Android software and 3.1 million iPhones. More specifically, Verizon sold 651,000 iPhone 5 models in the quarter, a total curbed by supply constraints, said Shammo.

“‘This is a stellar set of Verizon Wireless results,’’ said John Karidis, an Oriel Securities Ltd. analyst . ‘‘I would expect Vodafone to do better because of that.’’

Vodafone, the second-biggest mobile-phone company, closed up 1.2 percent in London trading.

‘‘They really jacked up their advertising in the past few months,’’ said Colby Synesael, an analyst at Cowen & Co. in New York. ‘‘Verizon has been very aggressive with marketing and it helped with sales.’’

Wireless Users

Verizon Wireless has also began to extract more money from renewing customers. Starting April 22, it imposed a $30 upgrade fee on all customers buying new smartphones. which has helped slow down the upgrade rate to 6.8 percent. Phil Cusick, an analyst with JPMorgan Chase & Co. expected an 8 percent upgrade rate. AT&T charges $36 for upgrades, and Sprint Nextel Corp. has an $18 fee plus an additional $10 monthly smartphone charge.

Total revenue for the land-line business in the third quarter was $9.9 billion, down 2.3 percent from a year ago.

Capital spending in the first nine months was $11.3 billion, compared with $12.5 billion in the year-earlier period.

‘‘Some expect us to go up substantially in capital spending, and I don’t see that happening,’’Shammo said in an interview. ‘‘2013 will be flat with 2012,’’ .

Verizon yesterday said it’s transferring about $7.5 billion in pension obligations, or one-fourth of the total, to Prudential Financial Inc. in a drive to remove risk from its balance sheet. Prudential, the second-largest U.S. life insurer, will take on responsibility for making future annuity payments to certain management retirees of the phone company.

Verizon follows General Motors Co. in paying Prudential to assume the risk that market returns are inadequate or that beneficiaries live longer than expected. Transferring obligations can reduce swings in earnings tied to securities and relieve companies of the need to manage large pools of money.

Bloomberg News

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