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January 30, 2007

Verizon Should Keep Working Higher

Verizon (VZ) reported solid 4Q06 results, closely matching analyst estimates is most key areas. VZ is a huge company with lots of closely followed metrics so there are always some pluses and minuses but in general I see little change to the story as a result of the earnings report and management commentary about 2007.

EPS came in at 62 cents, a penny ahead of estimates. Revenues of $22.6 billion were a little short of consensus of $23 billion but no one on the call seemed concerned.

Wireless was strong again with excellent gross adds, very low churn, and lots of postpaid adds. Revenues rose 16%. Margins took a hit on higher than expected adds but overall it was a very good quarter for wireless. VZ and AT&T (T) both performed well in wireless this quarter but VZ is building a better quality subscriber base as evidenced by its churn and focus on postpaid adds.

Wireline reported mixed results as usual. Access line losses in the consumer business were higher than expected and DSL adds a little low although FiOS based data and TV adds were a little better than expected. Management notes that customers additions net of access line losses are stable and beginning to increase slightly. This provides some hope that this business can return to growth later this year and in 2008.

Wireline results in business, formerly MCI, look a little better than expected with another quarter of low to mid single digit revenue growth. Merger synergies were bumped up to $900 million from $825 million.

Lots of questions concerned FiOS dilution. My interpretation is that management is sticking by their prior statements that quarterly dilution will peak in the first half of 2007. 1Q07 dilution is 11 cents with the whole year around 30 cents. Management speaks very positively about all FiOS metrics including coverage, penetration, and cost controls. Nevertheless, based on the questioning on the conference call, analysts remain concerned. It is not a hostile concern, however.....

There were very few questions about buying Vodafone (VOD). One analyst did note that Verizon Wireless would be out of debt later this year and asked management if this meant dividends were going to upstreamed. Management noted he was about a year off but that 2009 would see a switch.

Overall, I think the quarterly results and conference call will satisfy investors despite the big move in the stock that raised the bar. Estimates will be tweaked and overall EPS may come down slightly but I don’t think investors will be concerned. The basic story is intact: wireless is driving modest growth while the company works to stabilize consumer wireline and buildout FiOS. The current FiOS footprint remains too small to drive corporate results but I still believe that is the correct strategy despite the heavy dilution. VZ will come out the other side of the buildout in a stronger and sustainable competitive position. I think investors should be willing to pay for this now even if valuation is slightly elevated. I don’t see big upside in VZ but the stock should work higher as the year progresses assuming we get more quarters like 4Q06 that are without surprises.

Posted by Steve Birenberg at January 30, 2007 03:35 PM in Telephone