Verizon's profit falls, customer base grows


Published: Tuesday, January 30, 2007 at 6:01 a.m.
Last Modified: Monday, January 29, 2007 at 10:56 p.m.

NEW YORK — Verizon Wireless added 2.3 million customers, most of them prized monthly subscribers, to put a shine on a fourth quarter when Verizon Communications Inc.'s profit was cut by restructuring costs.

In reporting the 38 percent drop in quarterly profit Monday, Verizon also emphasized that growth in its DSL and new FioS Internet businesses has outpaced the loss of traditional telephone customers.

In the final three months of 2006, Verizon earned $1.03 billion, or 35 cents per share, down from $1.66 billion, or 59 cents per share, in the fourth quarter 2005.

The latest figures reflect a charge of $541 million, or 19 cents per share, for taxes triggered by the sale of Verizon's operations in the Dominican Republic. It also included 3 cents of costs related to the spinoff of the company's phone book and online directories business, as well 5 cents in charges for severance, pension, merger, and headquarters relocation expenses. Excluding those charges, Verizon earned 62 cents per share, edging past the average forecast of 61 cents among industry analysts surveyed by Thomson Financial.

The directories' spinoff and the Dominican divestiture were geared toward bolstering Verizon's financial posture as it invests billions in upgrading its copper phone network and readies for the day when cellular partner Vodafone Group PLC might decide to sell its share of Verizon Wireless.

Fourth-quarter revenue totaled $22.60 billion, a 26.1 percent increase from $17.93 billion in the same period in 2005. though a big chunk of that gain came from the acquisition of the MCI long-distance business in early 2006. About $10.10 billion of the revenue came from the cellular business, up 16.3 percent from $8.69 billion a year earlier.

Despite the near-record customer growth, it was a rare quarter where Verizon didn't sign up enough to close the gap further behind AT&T Inc.'s cell business for bragging rights as the nation's largest wireless provider: Verizon's gain of 2.3 million customers gave it 59.1 million at the end of 2006. AT&T, formerly named Cingular Wireless, grew by 2.4 million customers during the holiday quarter to finish at nearly 61 million.

That said, the vast majority of Verizon's new customers were monthly subscribers, whereas a third of AT&T's fourth-quarter gain consisted of "pay-as-you-go" users who tend to generate less revenue and switch providers more frequently. Overall, Verizon Wireless now has 56.8 million monthly subscribers, equaling 96 percent of its base. Verizon's "churn" rate of subscribers switching to rivals also came in lower than many forecasts, averaging 1.14 percent of the customer base per month.

"We take in two (cellular) customers for every one we hand over to our competitors," Denny Strigl, the company's new president and chief operating officer, said in a conference call after the report. "We have no intention of slowing down our growth. Our intention is to take share quarter after quarter."

On the non-wireless side, fourth-quarter revenue totaled $12.73 billion, down 3.5 percent from a year-ago tally that was adjusted to include the not-yet acquired MCI business.

The total number of phone lines in service across Verizon's local network declined by nearly 900,000 during the quarter to 45.1 million. For all of 2006, access lines fell by 3.7 million, a drop of 7.6 percent, amid growing competition from Internet-based phone services being introduced by cable TV companies.

Verizon said the business services operation created by the acquisition of MCI generated $5.3 billion in fourth-quarter revenue, 2.3 percent higher than in the third quarter and up 2.7 percent from a year earlier. Savings from the merger in 2006 came to $600 million, about $50 million more than projected. The company now expects $900 million in merger synergies for 2007, up from a prior forecast of $825 million.

Another positive sign, Verizon said, was that the consumer operation's loss of 366,000 residential phone lines was more than offset by a gain of 409,000 broadband Internet lines for a year-end total of roughly 7 million.

The broadband growth included 165,000 new customers for FiOS Internet — the high-capacity fiber-optic lines that Verizon is installing across half its local phone network in place of copper phone wires at a cost of $23 billion. At year-end, FiOS Internet was available to 4.8 million homes with 687,000 customers, a penetration rate of 14 percent.

Subscribers to FiOS TV, a pivotal weapon in the battle against cable, grew by 89,000 for a year-end total of 217,000 — a penetration rate of 9 percent among the 2.4 million homes that had access to FiOS TV.

"We woudn't hesitate to tell you it is a significant investment, but it's one that in the future will provide us a good growth rate with a very good return," Strigl said in an interview. Strigl also said "we have made significant progress" in cutting installation costs, which the company recently disclosed were exceeding projections.

Full-year earnings in 2006 came to $6.20 billion, or $2.12 per share, on revenue of $88.14 billion. In 2005, profits totaled $7.40 billion, or $2.67 per share, on revenue of $69.52 billion.

Verizon shares rose 20 cents to close at $38.03 on the New York Stock Exchange.

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