Verizon escapes economic hard times, thanks again to wireless

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Verizon reported another strong quarter, with little thanks to the few remaining landline customers. Verizon Communications, the 51% parent to Verizon Wireless, says its second quarter earnings were up 12%, reaching $1.88 billion, or 66 cents per share, up from $1.68 billion, or 58 cents per share a year ago, even as more landline customers disconnected service. The company reported an 11.4% percent decline in residential landline customers, up from the 10.9% slide in the first quarter.

Which means most of that growth was again coming from its wireless arm: Verizon Wireless reported adding 1.5 million new customers during the second quarter, with the lowest record churn rate (or number of customers leaving for another carrier) of 1.12%. Verizon Wireless said its total revenues were up 11.8% from the same quarter last year, and that its average monthly reveneue per customer increased for the 9th consecutive quarter, coming in at $51.53, monthly data revenue was up 31.3%.

Verizon also said it successfully sold more FiOS services including 176,000 new FiOS TV customers, and 187,000 net new FiOS Internet customers.

Verizon Reports Double-Digit Earnings Growth, Strong Operating Cash Flows, Sales Gains in All Key Areas in 2Q

NEW YORK — Verizon Communications Inc. (NYSE:VZ) today reported continued strong results in the second quarter 2008. Verizon Wireless again led the industry in key metrics, while Verizon Wireline expanded penetration of FiOS services and continued to increase sales of strategic business services.

Verizon reported 66 cents in diluted earnings per share (EPS) in the second quarter 2008, compared with 58 cents per share in the second quarter 2007.

On an adjusted basis (non-GAAP), second-quarter 2008 earnings were 67 cents per share, a 15.5 percent increase compared with 58 cents per share in the second quarter 2007.

Adjusted earnings in the second quarter 2008 excluded $22 million after-tax, or 1 cent per share, for merger integration costs. Adjusted earnings in the second quarter 2007 also excluded 1 cent per share for merger integration costs.

Investments Delivering New Growth

“Verizon continued to grow in all key strategic areas in the second quarter, despite the economic headwinds,” said Verizon Chairman and CEO Ivan Seidenberg. “Recent investments in wireless spectrum and in our FiOS network will help drive future growth opportunities. We expect additional opportunities for FiOS growth as we add major cities, such as New York .

“Our second quarter results were on track with our business plan, and top- and bottom-line growth remained solid,” he said. “We remain focused on steady improvements in revenue growth and productivity that will increase profitability and cash flows and create future opportunities to enhance shareholder returns.”

Revenue Growth, Margin Expansion and Strong Operating Cash Flows

Verizon’s total operating revenues grew to $24.1 billion in the second quarter 2008. This is a 3.7 percent increase compared with the second quarter 2007, or an increase of 4.9 percent when adjusted for the spinoff of the Wireline segment’s non-strategic local exchange and related business assets in Maine , New Hampshire and Vermont (non-GAAP). Total operating expenses increased 2.4 percent to $19.6 billion, comparing second quarter 2008 with second quarter 2007.

Verizon’s operating income grew 9.6 percent to $4.5 billion, compared with the second quarter 2007. Adjusted operating income (non-GAAP) grew 10.9 percent. Operating income margin rose to 18.8 percent, compared with 17.8 percent in the second quarter 2007. On an adjusted basis, Verizon’s operating income margin rose to 19.0 percent, compared with 18.0 percent in the second quarter 2007.

Cash flows from continuing operations were $12.1 billion through the first six months of 2008, up 4.2 percent compared with the same period last year. Capital expenditures were $8.4 billion through the first six months of 2008, down more than $100 million over the same period last year.

Total debt was $43.1 billion, compared with $35.8 billion at the end of the first quarter 2008. In the second quarter, the company made final payments of approximately $8.5 billion for licenses won in the Federal Communications Commission’s 700 MHz spectrum auction and purchased $4.8 billion of Alltel Corp. debt in connection with the pending acquisition of Alltel.

Wireless Continues to Gain Share, Posts Record Low Churn

Verizon Wireless continued to lead the industry with strong, quality customer growth, record-low churn and the highest profitability. In the second quarter:

* Of the 1.5 million total net customer additions, essentially all were retail post-paid.
* Retail gross customer additions were strong, up 3.2 percent over the prior year.
* Total churn was industry-leading and down year over year at 1.12 percent, a record low for the company. Among the company’s retail post-paid customers, churn was even lower at 0.83 percent, also a record low.
* Wireless continued its double-digit revenue growth, with total revenues of $12.1 billion, up 11.8 percent year over year. Service revenues were $10.5 billion, up 11.6 percent year over year, driven by customer growth and demand for data services. ARPU levels (average monthly revenue per customer) increased year over year for the ninth consecutive quarter. Total service ARPU of $51.53 was up 0.9 percent year over year driven by total data ARPU, which was up 31.3 percent.
* Wireless operating income margin was 28.6 percent, the highest ever.
* EBITDA margin on service revenues (non-GAAP) was 45.6 percent. (EBITDA is earnings before interest, taxes, depreciation and amortization.)

Significant Business Development Initiatives

Verizon Wireless, which expects the closing of the Rural Cellular acquisition soon, also launched or completed several significant business development initiatives in the second quarter:

* The company paid for the 700 MHz spectrum it gained in the FCC’s auction. The purchase includes a nationwide footprint the company will use to build its 4G LTE (fourth generation, Long Term Evolution) network in the 2010 timeframe.
* The company announced an agreement to purchase Alltel, with completion of the merger targeted for the end of the year, subject to regulatory approvals.
* The company announced a five-year agreement with Qwest Communications International for Qwest to market and sell Verizon Wireless service beginning this summer.

Continued Growth in FiOS, Strategic Services

Verizon Wireline expanded penetration of FiOS services and continued to increase sales of enterprise strategic services. In the second quarter (with prior-period comparisons adjusted to reflect the impact of the previously mentioned spinoff):

* Sales penetration rates (percentage of potential customers who buy the service) increased for both FiOS Internet (available for sale to nearly 8.4 million premises) and FiOS TV (available for sale to 7.0 million premises). FiOS Internet penetration averaged 23.5 percent across all markets, up from 18.7 percent in last year’s second quarter. FiOS TV penetration averaged 19.7 percent across all markets, up from 13.3 percent.
* Verizon added 176,000 net new FiOS TV customers, for a total of nearly 1.4 million FiOS TV customers as of the end of the quarter.
* Verizon added 187,000 net new FiOS Internet customers. The company had nearly 2 million FiOS Internet customers at the end of the quarter, nearly doubling the number of FiOS Internet customers since the end of second quarter 2007. Verizon added its 2 millionth FiOS Internet customer earlier this month.
* Broadband and video revenues from consumer customers totaled more than $1.0 billion in the second quarter, representing year-over-year growth of 52.9 percent.
* Growing revenue from broadband and video services drove consumer ARPU in legacy Verizon wireline markets (which excludes consumer markets served by the former MCI) to $63.76, a 10.4 percent increase compared with last year’s second quarter. The ARPU among FiOS customers was more than $130 per month.
* Verizon Business had total revenues of $5.3 billion, or growth of 0.9 percent compared with last year’s second quarter. This was Verizon Business’ seventh consecutive quarter of year-over-year pro-forma revenue growth (non-GAAP, calculated as if Verizon and MCI had merged on Jan. 1, 2005). Global enterprise revenue, representing retail sales, increased 1.7 percent to $4.0 billion, compared with last year’s second quarter.
* Sales of strategic services — such as IP (Internet protocol), managed services, Ethernet and optical ring services — continued to drive growth at Verizon Business. These services generated $1.5 billion in revenue, up 18.7 percent from second quarter 2007.

Additional Highlights

Wireless

* The company has the most retail customers in the industry. At the end of the second quarter, 97 percent of the company’s base was retail (post-pay and pre-pay).
* Verizon Wireless continued to lead the industry in cost efficiency. Cash expense per customer (non-GAAP) was $28.02 in the second quarter 2008, an increase of 1.2 percent over the second quarter 2007 and a decrease of 0.1 percent from the first quarter 2008.
* Data revenues grew 45.3 percent over the prior year, contributing nearly $2.6 billion. The company had 49.6 million retail data customers in June (approximately three-quarters of its retail customer base), a 25.6 percent increase over the prior year.
* Building on the success of its first Open Development Initiative (ODI) conference held in March, Verizon Wireless during the second quarter certified the first device for use on its network under ODI. Provided by SupplyNet Communications, the device is a machine-to-machine wireless inventory telemetry system to monitor inventories at customer locations and send alerts when set levels are reached.
* The company continued to extend the reach of its nationwide wireless broadband network. This is the nation’s largest and most reliable 3G (third generation) network, and it was available to more than 256 million Americans by the end of the second quarter. More than 60 percent of the company’s retail customers — 40.5 million — had 3G broadband-capable devices at the end of the quarter.
* To continue to meet demand for broadband devices, Verizon Wireless launched the BlackBerry Curve 8330, the Moto Q 9c and the Palm Centro for business connectivity and productivity. The company also announced the availability of three new multimedia handsets by LG: the Dare, featuring an all-touch screen operation; the Decoy, the world’s first phone with a built-in detachable Bluetooth headset; and the Chocolate 3, the latest version of the iconic music phone. In addition, in the second quarter, the company launched the Glyde by Samsung, the Motorola w755 and the Nokia 6205 (The Dark Knight Edition).
* During the quarter, Verizon Wireless launched V CAST Music with Rhapsody, a monthly subscription service combining the company’s world-class mobile music service with Rhapsody’s leading desktop music solution, which delivers unlimited access to music on select wireless phones and players, and online on PCs, for $14.99 a month.
* During the quarter, Verizon Wireless customers sent or received nearly 70 billion text messages and 1.4 billion picture/video messages. Customers also completed 36.5 million music and video downloads.

Wireline
* Wireline total operating revenues were $12.1 billion, a 1.8 percent decrease compared with the second quarter 2007. Wireline total operating expenses decreased 1.7 percent over the same period.
* Verizon gained final approval for the New York City video franchise in July, and the company today is announcing the sales launch of FiOS TV service in the city — as well as the availability of 100 high-definition FiOS TV channels in the New York metropolitan area. The New York City franchise covers 3 million premises, and Verizon already passes about 25 percent of these with fiber. About 2 million premises are in multiple dwelling units.
* Verizon’s broadband fiber-to-the-premises network, which delivers FiOS Internet and FiOS TV services, passed 11.0 million and 9.6 million premises, respectively, throughout the company’s entire service territory by the end of the quarter.
* Total broadband connections were 8.3 million, a net increase of 54,000 over the first quarter 2008. This includes a decrease of 133,000 DSL-based Verizon High Speed Internet connections, which was more than offset by the increase in FiOS Internet customers. The
* 8.3 million is an 11.5 percent year-over year increase, excluding broadband connections in 2007 in the three New England states that have since been spun off.
* Wireline data revenues — which now represent 41.8 percent of total wireline revenues — were $5.1 billion, an increase of 16.1 percent compared with the second quarter 2007. This includes revenues from consumer broadband services, wholesale data transport and Verizon Business data services.
* Verizon Business, which delivers integrated global solutions to large-business and government customers and operates the world’s most connected public IP network, again announced significant capability enhancements. These included expanded unified communications services for multinational companies; expanded global professional consulting services; enhanced optical capabilities for Ethernet networks; expanded enterprise mobility offerings in Asia-Pac and Canada ; and several additional managed security services.
* Verizon Business continued to expand its reach into high-growth, global markets, announcing that it had joined the Europe India Gateway submarine cable consortium, which will build a 9,000-mile high-speed submarine cable network from the United Kingdom to India. The company also unveiled plans to open an office in Dubai to further strengthen its Middle East operations, and it received approval to directly deliver advanced communications services in Mexico .
* Additional global network enhancements included turning up 1,940 route-miles of Ultra Long Haul network in Europe connecting London, Amsterdam, Frankfurt, Paris and Brussels, as well as 804 additional U.S. route-miles; deploying new multiplexer technology in nine additional U.S. markets, enabling remote configuration and provisioning of bandwidth; and installing additional MPLS-based (multi protocol label switching) switches in 22 additional global business centers.
* New commercial customer agreements included Liz Claiborne Inc., Milliman Inc., Parsons Brinckerhoff, Standard Register and Western Union . In addition, Bühler became the first customer of the Swisscom/Verizon Business strategic alliance announced during the second quarter. Verizon Business also signed new contracts with several U.S. government agencies, including a 10-year, $678.5 million agreement under the Networx Universal program to deploy and manage a global IP network for the U.S. Department of Homeland Security.

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