30 percent rise in profit was overshadowed by revenue growth miss

Under the shadow of the U.S. National Security Agency (NSA) spying scandal and reports that it is exploring a buyout of its joint venture with Vodafone Group Plc (LON:VOD), Verizon Communications Inc. (VZ) has posted [PDF] an impressive quarter of earnings.  But in lieu of heady investor expectations even these strong results were viewed as "a miss".

I. LTE, Post-Paid Adds Continue Strong Growth

Outside of the wireless carrier business, which it owns a 51 percent stake in (with Vodafone holding the remaining 49 percent), Verizon grew its wireline revenue by 9.4 percent.  Over 140,000 fiber-optic (FiOS) video customers and 161,000 FiOS internet customers were added for the quarter.

On the wireless side of the fence, Verizon is continuing to fire on all cylinders thanks to its popular shared-data pricing plans and U.S.-leading 4G LTE network.  For the quarter Verizon spent $1.5B USD on capital expenses, which include network expansion and maintenance, just slightly less than the $1.6B USD it spent a year before.  

Verizon's LTE network now blankets virtually the whole country, serving 500 markets and roughly 301 million Americans.  That means that in a number of markets unserved by AT&T, Inc.'s (T) 4G LTE network, Verizon is the only true 4G solution at present.  Even Alaska is now being served by Verizon's LTE network, which covers 99 percent of its 3G footprint.  

Verizon executives
Verizon Wireless continues to lead the nation in LTE coverage and subscribers.
[Image Source: Julie Jacobson/AP]

Overall, 31.1 million LTE devices were purchased during the quarter, up from 10.9 million a year before.  Roughly 64.4 percent of Verizon's post-paid customers -- or 60.7m users -- are now using smartphones, up from 49.7 percent a year ago.

Verizon broke the 100 million mark in total subscribers, adding 941,000 post-paid customers (contract customers, generally the most lucrative) and roughly 100,000 pre-paid customers.  Verizon currently has 100.1m total subscribers of which 94.3m post-paid (contract) customers.

Perhaps most pleasing on the balance sheet was the rise in operating margin (a measure of profitability) from 19.8 percent a year ago to 22 percent. Overall profit (net revenue) was 73 cents excluding items such as one-time pension gains (78 cents per share before exclusion) -- in line with the 72 cents per share analysts had hoped.

II. Investors are Not Impressed

But where the analysts knocked Verizon was in revenue growth -- the average expectations in a Thomson Reuters I/B/E/S survey was $29.83B USD versus the posted revenue of $28.55B USD.  Comments Moffett Research analyst Craig Moffett to Reuters, "The results were very good but at these valuations even very good might not be good enough."

Other line items also disappointed the investor flock.

Subscriber churn -- an estimate of the percent of post-paid subscribers leaving the service -- was 0.93 percent, versus an analyst expectation of 0.9 percent (and 0.84 percent a year ago).  Mr. Moffett believes T-Mobile USA -- the budget-savvy subsidiary of Deutsche Telekom AG (ETR:DTE) was the primary recipient of these defectors, while Verizon offset the losses from Sprint Nextel Corp. (S) and AT&T leavers.

not impressed
Investors were not impressed. [Image Source: Reuters]

Another disappointment was wireless profit margin, which stood at 49.8 percent.  A year ago that figure stood at 49 percent; the analyst expectations ranged from 50.0 percent to 50.9 percent.

But perhaps the biggest investor knock on Verizon was the silence by executives in the earnings call regarding the potential buyout of Vodafone's stake.  With profit expected to continue to rise, investors had hoped Verizon would move swiftly to bring Verizon Wireless fully under its control, while it had the financial means to do so.

If another quarter slips by with no word on a buyout the investor reaction may be even harsher, as the pro-acquisitions shorters jump off.

AT&T will report its earnings on July 23, followed by Sprint on July 30.

Sources: Verizon [PDF], Reuters

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