Verizon's Fourth Quarter Connects

The communications company is optimistic about the future of its FiOS and other services. But a sagging stock indicates investors may not be so confident

by Spencer E. Ante

In bad economic times, the strong sometimes get stronger. On Jan. 28, Verizon Communications (VZ) joined a select crowd of technology companies reporting solid earnings and maintaining an optimistic forecast for 2008—providing more proof some dominant names may have enough firepower to buck the slowing economy.

On a conference call after the fourth-quarter report, Verizon's chief financial officer said the company has not been hit by growing economic weakness aside from a small impact in one or two Midwestern states. "We have not seen a change in sales expectations through January," said Doreen Toben. "I am not seeing anything in the urban areas. We expect 2008 to be a solid year."

President Denny Strigl echoed that optimism, which contrasted with the more cautious tone struck by AT&T (T) in its fourth-quarter update. "We remain very confident about 2008 despite all the noise we are hearing about the economy," he said. The company reaffirmed its commitment to delivering double-digit growth in wireless revenue and boosting profitability in its mature wireline business.

Corporate Business Stumbles

Verizon's fourth-quarter revenue totaled $23.8 billion, up 5.5% from the same period a year earlier, and a shade below the consensus estimate of $23.96 billion among Wall Street analysts. Yet the company did meet expectations for profits excluding non-operating adjustments, earning 62¢ per share for the quarter. Still, its stock price dipped after the report, falling 28¢ to $37.48, suggesting investors remain on edge about the future. Verizon's shares have lost nearly a fifth of their value since the market peaked in October.

In terms of specific business units, the company's cell-phone business posted another robust quarter and its new cable TV service showed strong growth. However, Verizon's corporate business stumbled and residential DSL service appears to be slipping as a growth driver.

Verizon Wireless, owned jointly with Britain's Vodafone (VOD), boosted its customer base by 2 million phone lines during the final three months of 2007—fewer than AT&T's mobile business, but strong nevertheless. Wireless revenue grew 13.3% overall, with the portion coming from non-voice data services such as text messaging and mobile Web access soaring 53% compared with the year-earlier period. Overall, data services accounted for half of Verizon Wireless' revenue growth in 2007. "Our expectation is that we'll continue to see strong data growth going forward," Strigl said. The pace of customer losses, known as churn, remained at an industry-leading low of 1.2% of the customer base per month. Strigl also said he expects Verizon Wireless to continue to boost market share.

Residential Resilience

But perhaps more significant than the wireless showing was the surprising resilience displayed by Verizon's residential business, which benefited from cost-cutting, outsourcing, and the company's huge investment in its new fiber-optic FiOS network. FiOS TV, key to Verizon's effort to hit back at cable companies that now sell phone service, signed up 226,000 more homes in the fourth quarter and proceeded to cross the 1 million subscriber mark during January. Verizon also signed up 246,000 customers for FiOS broadband Internet service, ending 2007 with 1.5 million customers. However, the company only added 19,000 new DSL subscribers.

Verizon Business, the unit that sells services to corporations, saw revenues grow only 0.5%, to $5.4 billion. In the quarter, several customers, including a cable TV operator, switched to other communications providers. "What occurred in the (quarter) was frankly quite annoying to me," said Strigl. "The lower growth number should not be interpreted as a shift in the business. We expect revenue growth to be back on trend in the first half of the year."

As expected, executives said spending on FiOS, the wireless network, and other initiatives will be "slightly lower" this year compared with 2007. Even if the slowing economy does begin to affect the company, Strigl said, steps can be taken to avoid "material disruptions." Those steps would include more layoffs and cutting expenses such as the use of outside contractors. But for now, Verizon remains confident in the future. "We have a proven business model," said Toben. "Our strategy of investment and innovation is clearly driving consumer growth."

Ante is the computers department editor for BusinessWeek.