Verizon's Split Personality


By Steve Rosenbush Given the lukewarm financial results that Verizon Communications (VZ) is expected to post for 2004's third quarter, you would never know that a gale-force wind is ripping through telecom.

The largest U.S. telco will meet with investors at Lincoln Center in New York on the morning of Oct. 28 to discuss the results. It's expected to report a modest revenue increase of 5%, to $18 billion, according to analyst Richard Klugman of Jefferies & Co. He believes Verizon will post 63 cents earnings per share, a slight decline from 67 cents in the third quarter of 2003. The consensus estimate on Wall Street is for 64 cents a share. Klugman assumes for the sake of the forecast that Verizon owns all of its Verizon Wireless business. In reality, Vodafone (VOD) has a 45% stake.

Judging from the forecast, Verizon looks like another Fortune 500 company experiencing modest revenue growth and a hiccup in earnings. But dig a little below the numbers, and there's evidence of every trend that's turning telecom upside down, from a declining core wireline business to runaway growth in wireless and broadband.

TWO OF A KIND. Verizon is really two businesses, each with its own financial profile. The wireless business is an industry leader, and Klugman expects it to generate $7.2 billion, up about 20% from the third quarter of last year. That's impressive, considering its size. Verizon Wireless is one of the world's largest growth companies. But the wireline business is expected to shrink 3%, to $9.5 billion. This decline would be much greater if it wasn't partially offset by the surge in broadband, which is growing its subscriber base at a rate of 50% a year.

The differences between the two businesses are becoming ever more noticeable. Verizon Wireless is poised to dominate the wireless business well into the future, notwithstanding rival Cingular's $41 billion acquisition of AT&T Wireless (AWE). Cingular, which is owned by BellSouth (BLS) and SBC Communications (SBC), has 46 million subscribers, making it the largest wireless company in the U.S. Until that deal closed Oct. 26, Verizon Wireless was the largest, with 40 million subscribers.

Many analysts expect Verizon Wireless to recapture the lead. It's growing subscribers at a rate of 16% a year -- faster than Cingular. Klugman expects the number of Cingular subscribers to decline now that the deal has closed, possibly because of churn, the rate at which customers leave. "If you combine the companies, you are going to have twice as much churn in a given month. But you're doing away with one brand name, so you won't have twice as many customer additions," he says.

RIVALS STEP UP. Cingular is doing what it can to stay competitive against Verizon (See BW Online, 10/26/04, "Cingular: Cool Phones Ring In a Merger"). But analysts are divided about how successful Cingular's tactics will be.

On the wireline front, Verizon may continue to lose steam. It's already losing customers to wireless outfits. And the competition from rivals that offer Internet-based phone service is just getting started. Merrill Lynch telecom analyst James Moynihan said in a report Oct. 7 that he believes the company wants to reduce its exposure to the business by selling as many as 10 million of its lines. Over the long term, it could return wireline business to growth mode by upgrading its lines with fiber-optic cables, which can carry TV and superfast broadband access. But that transition will take years.

These contradictory forces have battled themselves to a draw. That's why analysts have the most humdrum of ratings on the company. Moynihan says he's "neutral" and Klugman gives it a "hold." Clearly, there's a lot going on under the hood at Verizon. Rosenbush is a writer for BusinessWeek Online in New York


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