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January 29, 2008

Verizon OK But Growth Slowing Slightly

Verizon (VZ) reported a pretty solid quarter and made constructive -- if not detailed -- comments about 2008. The market is focusing on some slight misses in key metrics, but I think that has more to do with the suddenly negative sentiment toward the telcos than with the quarter.

EPS, adjusted for one-time items, of 62 cents exactly matched estimates. Revenue of $23.8 billion were just short of estimates. Wireless results were good, with something for bulls and bears. Revenue growth of 13.6% was a little shy of estimates, but net adds, churn and data revenue look good. The small revenue shortfall appears to emanate from lower-than-expected average revenue per unit, with the best explanation being a competitive environment in the important holiday season.

The conference call had several questions about the sustainability of wireless growth, especially if the economy weakens. Verizon appears to be gaining share at the expense of Sprint Nextel (S) . AT&T (T) can make the same claim. Management said that the company is monitoring the economy and its impact on all of Verizon's businesses very closely, and so far, there is nothing evident that would make it change its sales expectations for any business, including wireless.

On the wireline side, revenue was as expected, with slightly better margins. Looking out several years, management said that margins in wireline can move meaningfully higher. Access line losses were 8.1%, a bad number, but not an acceleration from last quarter.

FiOS numbers look pretty solid, with TV adds of 225,000 very close to estimates and broadband adds of 246,000 at the low end of estimates. I think some of the weakness in the shares this morning is due to a few estimates that had broadband adds closer to 300,000.

For 2008, management said it expected a "solid year," with EPS growth and rising margins. The company also stated that it has contingency plans to cut expenses quickly should the economy begin to negatively impact revenue. Capital spending is projected to be lower than 2007.

Overall, I think investors are finally realizing that the fears about competition and economic weakness that have surrounded cable shares are also relevant for telco shares, including wireless. The 80%-plus penetration in wireless in the U.S. is definitely a concern given economic fears.

Will wireless growth slow? Will new subscribers be lower quality?

Less optimism about wireless and slightly more cautious estimates of FiOS broadband adds will probably linger, but I think the sharp pullback in Verizon shares (and AT&T) is incorporating a scenario that is worse than what currently exists. Thus, barring a sudden slowdown in operating metrics, the shares should stabilize relative to the market. And relative to the market, I think they represent decent value, although not as good value as AT&T.

Posted by Steve Birenberg at January 29, 2008 10:32 AM in Telephone