IP Democracy: Solid Earnings from Verizon, But Hold On.....

Giant telco Verizon issued its Q2 07 earnings report this morning and the news is seemingly all good.

Revenues rose 6.4% year-over-year to $23.3 billion, while net income advanced 4.5% to $1.68 billion. Verizon Wireless was the big engine driving a lot of the profit growth. Wireless revenues jumped 17% from Q2 06 to Q2 07 to reach $10.8 billion, while operating income margin for Verizon’s wireless segment (which is jointly owened with Vodafone) rose to 27.8%, its highest level ever.

Juicing the wireless group’s performance was the spike in wireless data usage, which is almost pure gravy for Verizon Wireless. Wireless data soared 76% year-over-year to $1.8 billion even as the number of wireless data customers grew more slowly (but still pretty rapidly overall), climbing from 28.9 million in Q2 06 to 39.5 million in Q2 07, an increase of 37%. What this means is that customers are consuming more and more of Verizon Wireless’ data services.

That was the good news. The bad news: Verizon continues to lose local wireline access lines at a healthy, albeit slightly slower, rate. During the quarter, Verizon lost 870,000 local voice lines.

Of more concern is a very sharp slowdown in the growth of broadband customers. During the quarter, Verizon added only 288,000 net new broadband customers, a run-rate down by over one-third the net broadband adds posted during Q2 06 and down by over 30% compared to the net adds during Q1 07.

Verizon managed to post this sharply reduced growth rate even as it experienced strong gains in its FiOS high-speed Internet service, the fiber-based, higher-speed broadband option. During the quarter, Verizon added 203,000 net new FiOS high-speed subscribers, a run-rate 83% higher than the 111,000 net FiOS broadband additions experienced in Q2 06, an up nearly 15% over Q1 07 levels.

So, what happened? Verizon’s DSL subscriber base barely grew at all, adding only 85,000 net new customers during the quarter, a surprisingly anemic growth rate considering that Verizon added 329,000 net new DSL customers during Q2 06 and 239,000 net new DSL customers during Q1 07.

During the analysts call, COO Denny Strigl admitted that this major drop-off in DSL growth is a problem. “The 85,000 net adds are lower than what they should have been this quarter…I should add that DSL was not our focus this quarter,” he said.

CFO Doreen Toben tried to mitigate the impact of this troubling development. “Some reductions in DSL volumes should be expected” given the company’s focus on FiOS. Moreover, about 22% of the new FiOS broadband subscribers are customers who have upgraded from Verizon’s DSL service, she added.

Another troubling indicator, although it’s too soon to ring the alarm bells: Wireless net additions were soft even as the profitability of Verizon Wireless soared. During the quarter, Verizon Wireless added only 1.3 million net new wireless customers, a run-rate down 26% year-over-year and 20% sequentially.

Granted, Verizon Wireless lost about 300,000 wireless customers with the bankruptcy of retail client Amp’d, so net additions were artificially low. But, Verizon must have also felt some impact from the launch of AT&T’s iPhone product.

Strigl admitted as much during the analysts call, but said that the impact was only transitory. “We did see an impact in our porting rates for a short period of time but in the last week we returned to a net positive position in regards to all of our competitors. In the last week, it’s been two customers in for every customer we lose.”

The unqualified bright spot for Verizon was the growth in its FiOS TV product. During the quarter, Verizon added 167,000 net new FiOS TV customers, a run-rate almost 400% higher than the net gains during the corresponding quarter last year, reflective of the continued ramp-up in FiOS TV service availability.

Interestingly, Verizon also posted healthy gains in its DBS video customers, adding a net 125,000 DirecTV customers, a run-rate 79% higher year-over-year and 60% higher sequentially. By quarter’s end, Verizon counted a total multichannel video customer base of 1.3 million, more than double the video customer count the telco had at the end of Q2 06.

(Note: To get a better read of this table, click on the thumbnail and then click again on the resulting image.)

Posted by Cynthia Brumfield on July 30, 2007 11:26 AM to IP Democracy