Verizon earnings reveal the pressure from AT&T-Apple's iPhone

When Verizon Communications (VZ) announced its third-quarter results on Monday, they were largely in line with analyst estimates. But they fell short in an area that could be cause for concern: Verizon added fewer postpaid wireless customers than Wall Street had anticipated.

The telecom giant said that Verizon Wireless, a joint venture with Britain's Vodafone (VOD), added 900,000 postpaid customers versus consensus estimates of between 1 million and 1.1 million. Even though Verizon Wireless is the largest wireless carrier in the U.S., the latest report stood in contrast to that of rival AT&T (T), which said it activated a record number of iPhone customers over the quarter. Indeed, Apple's (AAPL) iPhone 3GS may have taken the wind out of Verizon's sails.

"We knew this was going to be a weak wireless quarter, given the launch of the iPhone 3GS and the price cuts on the other iPhone models," JP Morgan analyst Jonathan Chaplin wrote in a research note following the earnings announcement. Chaplin wrote that he's expecting a sluggish fourth quarter as well because of a likely strong holiday season for the iPhone.

Verizon also said the continuing high unemployment rate softened results at its business unit. And unlike tech giant Texas Instruments (TXN), Verizon said it doesn't yet see a meaningful turnaround in business conditions. After dropping 4.5 percent year over year, customer use of long-distance minutes remained flat compared to the previous quarter. While remaining "cautiously optimistic," the telecom giant was "not comfortable calling a bottom," Verizon CFO John Killian said in a conference call with investors.

Verizon said it earned 1.18 billion, or 41 cents per share, in the current quarter compared to 59 cents per share a year ago. Excluding some items, earnings came in at 60 cents a share, a penny ahead of estimates from analysts polled by Thomson Reuters. Revenue rose to $27.3 billion from $24.75 billion a year ago, thanks in part to the acquisition of smaller rival Alltel. Shares of Verizon dipped about 0.50 percent to around $28.70 in midday trading Monday.

On the conference call, Verizon's management reminded investors that its wireless data segment remains strong: At $4 billion for the current quarter, wireless data revenue clocked in at what it accounted for in the entirety of 2006, Killian said. Executives also outlined the company's strategy for a counterattack in wireless.

Verizon plans to go after this large and fast-growing market by launching a slew of high-end handsets in the coming months. Phones running Google's (GOOG) Android operating system, Research in Motion's (RIMM) Blackberry Storm 2, and the Palm (PALM) Pre are expected to debut by early next year.

Verizon CEO Ivan Seidenberg also left the door open to adding the iPhone to the lineup if Apple were up for it. "This is a decision that is exclusively in Apple's court," Seidenberg said. As Verizon adds to its smart-phone roster, "hopefully along the way Apple and others will decide to jump on the bandwagon," he said.

Along with continuing to invest in its current 3G network -- widely considered to be the best in the country -- Verizon also said it would start building out a more powerful 4G network next year. Seidenberg talked up the potential of a new network capable of "sophisticated data applications" ranging from machine-to-machine communications to video.

In another red flag, growth at Verizon's FiOS fiber-optic TV, broadband and landline phone service slowed over the quarter. Verizon added 191,000 new FiOS TV customers compared with 233,000 from the same period a year ago. As customers ditch traditional phone service in favor of cell phones, Verizon is spending $23 billion to roll out its new state-of-the-art service.

But some analysts have predicted that FiOS will be a money-loser for Verizon, and the current quarter's slowdown could be ominous. Part of the drop in new subscribers was due to lower promotional spending, the company said. Verizon had initially given customers items like HD TVs and digital video recorders for free. The slowdown raises questions about its ability to maintain momentum without the handouts.

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