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April 30, 2007

Verizon 1Q07 Earnings Offer Upside

Verizon 1Q07 earnings were right on target with EPS of 54 cents and revenues of $22.6 billion right in line with the consensus estimates. Key subscriber metrics also closely matched analyst estimates. With the numbers all very close to expectations, I don’t expect a big reaction in the shares. Additionally, analyst estimates for the balance of 2007 should be quite stable.

As always with VZ, it is a story of wireless vs. wireline. Wireless grew very strongly with service revenues up 18% as the company added 1.7 million new subscribers. Industry leading churn was even lower than expected at 1.08%. The mix of new subscribers was virtually all postpaid which is usually greeted favorably by investors. If there was one surprise in VZ's results it was better than expected wireless ARPU of $50.73. I think most analysts were looking to slightly less than $50. Growing data revenues appear to be the source of the upside with data ARPU at almost $9 per month, up sharply vs. a year ago....

On the wireline side, revenues fell slightly as growth areas like DSL and business data could not overcome FiOS dilution, significant residential line loss, and roll off of the former MCI's mass market consumer revenue. Investors will be happy that FiOS dilution of 11 cents matched estimates. Further, management noted that the dilution would fall in the second quarter and would still be at previous guidance of mid-30 cents. FiOS does seem to be gaining traction as VZ added 141,000 TV customers in the quarter and penetration of high speed was 16% of homes passed. Access line losses continue to be much higher than AT&T (T). 1Q07 access line loss was 7.9% with residential lines declining by over 10%.

I remain favorably disposed toward VZ because I believe the company is making the right choice to build out a fiber optic network. VZ will be able to offer the best quad play product across the bulk of its network by mid-2008 leaving it in a strong competitive position. A premium product will also probably keep ARPU at healthy levels which will ultimately ease investor worries about the clash with cable – the fact that cable has been able to sustain high speed data ARPU by offering premium speeds could be a sign of the future at VZ. FiOS also will provide VZ with substantial cost savings in terms of maintaining its network and servicing customers. Assuming that wireless growth is sustained, as FiOS dilution winds down in 2H07 and 2008, I think the shares can work higher.

Posted by Steve Birenberg at April 30, 2007 10:01 AM in Telephone