Verizon's Strong Q1 Results Don't Tell the Whole Story

Verizon posted double-digit earnings and profits, thanks to its Vodafone deal, but it lost basic phone users and postpaid growth fell dramatically.

Verizon Communications posted the results of a complicated fiscal first quarter April 24.

The company enjoyed its fifth consecutive quarter of double-digit operating income and earnings growth, and total profits, which were up 23 percent—largely thanks to the strong growth of Verizon's FiOS business and the completion of its $130 billion buyout of Vodafone's 45 percent share of Verizon Wireless, which added a one-time after-tax gain of $1.9 billion to the balance sheet.

Those items helped offset slowing wireless growth rates and increasing churn. Verizon's postpaid retail customer growth rate fell by 20.4 percent year over year, as it added 539,000 postpaid customers during the quarter, down from 1.6 million the quarter before and 677,000 during the first quarter of 2013.

Verizon CFO Fran Shammo said the loss was mostly to Verizon's "basic phone" base.

Verizon's retail postpaid churn was 1.07 percent during the quarter, compared with 1.01 percent during the first quarter of 2013 and 0.96 percent during the first quarter of 2012. Overall retail churn was 1.37 percent, up from 1.30 and 1.24 in the respective first quarters of the two previous years.

"We've said that from an overall product set, smartphones are … going to be a slower portion of the growth for the entire industry, so we're looking to the other facets [such as tablets and machine-to-machine connections] that could potentially drive more profits," said Shammo.

And indeed, Verizon had what Shammo called "one of the best tablet quarters ever."

The company activated 814,000 postpaid tablets, nearly all of which were 4G, said Shammo, putting the number of supported tablets on the network at 4.3 million.

In February, Verizon began responding to customer losses with the introduction of More Everything plans, which added Verizon Edge—Verizon's monthly installment plan for device purchases—to improved tiered pricing offers. Shammo said Verizon began offering Edge to out-of-contract customers, to positive long-term effects—while it puts pressure on Verizon up front, he explained, it eventually drives more usage and so increased revenues.

"It's a good move for us," he added. "It treats customers the way they want to be treated."

Verizon's FiOS—its bundling of Internet access, telephone and television services—saw a consumer revenue increase of 14.6 percent and a total FiOS revenue increase of 15.5 percent, helping to push Verizon's total operating revenues during the quarter to $30.8 billion, up 4.8 percent over the same quarter a year ago.

Profit for the quarter was $5.99 billion, up 23 percent, but again this included the $1.9 billion from the Vodafone deal, as well as charges of $575 million, related to debt redemption, and $260 million in interest and financing costs related to the transaction.

Shammo said that having full ownership of Verizon Wireless had already resulted in available free cash flow that "was more than $1 billion higher than a year ago" and that overall "more cash flow will be available at the corporate level."

Shammo added, in conclusion, that Verizon has had a "great start to the year."

"We listen to our customers, we monitor the competitive environment and we respond as necessary," he said. "We're very excited about the future of this industry."

Verizon rival AT&T, which announced the results of its first quarter April 22, saw revenue of $32.5 billion and net income of $3.65 billion. It added 311,000 postpaid smartphones, 255,000 prepaid smartphones and 313,000 tablets.

Sprint will announce its first-quarter results April 29, and T-Mobile will do the same May 1.

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