Verizon Communications Inc. (VZ:US), the largest U.S. wireless carrier, exceeded profit estimates on stronger customer gains even as rivals including T-Mobile US Inc. brought more price competition to the industry.
Second-quarter earnings, excluding some items, of 91 cents a share beat the 90 cents that analysts projected on average. While subscriber growth drove the profit gains, wireless margins and the size of customers’ phone bills were smaller than analysts expected.
Chief Executive Officer Lowell McAdam announced July 10 that Verizon added 1.4 million contract customers in the quarter, an improvement from 941,000 a year earlier. More than 82 percent of those new customers were tablet buyers, Verizon said today. With the company selling more tablets than phones and offering discounts on data plans, customers’ monthly phone bills will likely shrink, putting more pressure on wireless margins, said Kevin Smithen, an analyst with Macquarie Securities USA.
So far, Verizon hasn’t felt much of the effects of the shift to Edge, its phone financing plan where customers pay monthly installments on their devices, said Chief Financial Officer Fran Shammo. Verizon didn’t heavily promote Edge, which gives customers quicker device upgrades and discounts on data plans. As a result, more customers than expected opted for the traditional two-year contract offers that come with a discounted phone, Shammo said.
“Our sales strategy in the second quarter dramatically improved customer growth, which created strong momentum for us as we entered the second half of the year,” Shammo said on an earnings conference call today.
Second-quarter sales climbed 5.7 percent to $31.5 billion, the New York-based company said today in a statement. Analysts had estimated (VZ:US) $31.1 billion in sales, according to data compiled by Bloomberg.
The average size of customers’ monthly bills grew 4.7 percent to $159.73. Verizon’s wireless service margins expanded to 50.3 percent. Analysts predicted 51.3 percent, based on nine estimates compiled by Bloomberg.
“Investors need to continue to see that Verizon is not suffering from rising wireless competition,” said Kevin Roe with Roe Equity Research in Dorset, Vermont, before the results were announced.
Verizon’s Edge plan spreads the phone charges over 20 months and lowers service plan charges by $10 or $25 a month depending on the data allotment. While the shift threatens to erode wireless service revenue and margins, the move may help keep customers from switching to T-Mobile, which was the first carrier to offer phone financing early last year.
Verizon’s net income rose to $4.21 billion, or $1.01 a share, up from $2.25 billion, or 78 cents, a year ago, before the company bought full control of its U.S. wireless business.
Verizon acquired Vodafone Group Plc’s 45 percent stake in the mobile-phone unit on Feb. 21 for $130 billion, the third-largest deal in history, on a bet that rising demand for data connections for multiple devices, from tablets to cars, would extend the growth of the wireless industry.
Gaining sole ownership of the wireless business puts Verizon in a strong position, and the mobile unit has great momentum going into the second half of the year, Shammo said on the earnings call.
While rivals like AT&T Inc. (T:US) pursue expansion into new markets with the pending purchase of DirecTV and Twenty-First Century Fox Inc. made a bid for Time Warner Inc., Shammo said Verizon isn’t feeling pressure to pursue another deal.
“We’ll sit on the sidelines to see how that plays out,” Shammo said in a phone interview. “From a strategy standpoint, we can get the rights to the content that will make us successful, without needing to buy the content.”
Landline revenue rose 0.3 percent to $9.8 billion, a sign that seven years of sales declines may be ending. Landline revenue represents about a third of the company’s total sales.
Shares of Verizon gained less than 1 percent to $50.98 at the close in New York. The stock has risen 3.7 percent this year.
“Verizon is the strongest carrier out there. AT&T is nearly as good,” said Gerard Hallaren, an analyst with Janco Partners Inc. “The only ones switching to T-Mobile or Sprint are prepaid customers.”
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