Verizon Profits Up But Internet Additions Disappoint

by Ritsuko Ando

Verizon Communications Inc. on Monday posted a higher quarterly profit on strong wireless growth, but shares fell as Internet subscriber additions disappointed some analysts, and higher expenses underscored concerns about its costly high-speed network project.

Analysts said Verizon Wireless' subscriber growth had exceeded their high expectations, but growth in high-speed Internet customers was weaker than expected amid fierce competition from cable operators.

"One of the specific disappointments is the lack of strong growth in broadband Internet subscription, although overall the results were good," said Albert Lin, an analyst at American Technology Research.

Verizon's third-quarter income excluding some special items rose to $2.0 billion, or 68 cents per share, from $1.8 billion, or 66 cents per share, in the year-ago quarter.

Wall Street on average expected earnings before items of 66 cents a share, according to Reuters Estimates.

Including special items such as pension settlement charges and costs related to the merger and integration of MCI, it reported quarterly earnings of 66 cents per share, compared with 67 cents per share in the same quarter a year earlier.

Verizon Communications' third-quarter operating revenue rose to $23.3 billion, up 25.8 percent year-on-year.

Verizon said it added 448,000 net high-speed Internet connections, which include digital subscriber lines (DSL) and the more advanced fiber-optic lines, known as FiOS. Some analysts said they had expected around 500,000 net additions.

Some analysts also said the 7.5 percent fall in domestic wireline subscriptions was higher than expected.

Shares in Verizon, the second-biggest U.S. telephone company, fell 3 percent to close at $37.65. They had risen 30 percent since the start of the year on expectations of growth in FiOS Internet and television services.


Analysts were also concerned about spending on FiOS, the fiber-optic network for Internet and television services, although most agreed the investment was needed for long-term growth amid declining traditional phone subscribers.

FiOS TV, together with Verizon's Internet and phone services, is also aimed at competing against cable operators' all-in-one packages of video, Internet and phone services.

Verizon said it had 118,000 FiOS TV customers by the end of the third quarter, exceeding its target of 100,000. It said last month it expects to attract 175,000 TV customers by year-end.

It expects FiOS to cut earnings by between 31 cents and 32 cents a share for full-year 2006, compared with its previous forecast of 28 cents to 30 cents.

Chief Financial Officer Doreen Toben said FiOS will hurt earnings by the same amount in 2007.

The company, like its bigger rival AT&T, has benefited from strong growth in mobile phone subscriptions in the past few years, as traditional phone line users decline.

Verizon Wireless, of which Verizon owns 55 percent, added 1.9 million net customers in the third quarter, bringing the total to 56.7 million customers. The market had expected 1.7 million in net additions, according to a Reuters survey of nine analysts.

Verizon Wireless revenues grew 18.2 percent to $9.9 billion, the company said. Vodafone Group Plc (VOD.L) holds the remaining 45 percent stake in the wireless venture.

"It was a very strong quarter for wireless. I wouldn't want to minimize that importance. It's just that wireless strength was somewhat expected," said A.G. Edwards analyst Kent Custer.

Some analysts cited worries about slowing U.S. economic growth as an overhang on the stock after data on Friday showed third-quarter GDP grew at its slowest pace in over three years, although Toben said she had not seen an impact.

"I know what the GDP numbers say but companies have strong earnings. At the moment, we're bullish," she told Reuters.

Copyright 2006 Reuters Limited.

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Ritsuko Ando
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