Verizon suffers $2B loss on pensions, iPhone costs

Despite strong sales in wireless and its Fios broadband products, Verizon Communications posted a quarterly loss, which it attributed to noncash pension charges and high costs associated with selling the Apple iPhone.

The company today reported a fourth-quarter loss of $2.02 billion, or 71 cents per share, compared with a profit of $2.64 billion, or 93 cents a share, during the same quarter last year. Excluding a noncash pension-related charge, it earned 52 cents per share. Analysts had expected the company to earn 53 cents per share.

Still, revenue was strong: Verizon brought in $28.4 billion in sales. This compares to $26.4 billion during the fourth quarter a year ago. Analysts had expected the company to generate $28.39 billion, according to Reuters.

Verizon saw strong sales and customer additions in wireless. It said it added a total of 1.2 million new contract customers during the quarter. And it ended the year with a total of 108.7 million wireless connections, which is a 6.3 percent increase compared to a year ago. Verizon said that smartphones now account for 44 percent of all Verizon Wireless contract customers. This is up from 39 percent in the third quarter of 2011.

Wireless revenue for the fourth quarter increased to $18.3 billion, a 13 percent jump compared to the previous year. Data revenue was $6.3 billion, up more than $1.0 billion or 19.2 percent year over year, and represented 41.6 percent of all service revenue. Service revenue was $15.1 billion, up 6.4 percent year over year.

Verizon had warned of the pension costs. And executives had said in early January that the company activated 4.2 million iPhones in the three months that ended December 31. Because Verizon subsidizes the cost of the devices for customers who sign new two-year contracts, it takes a hit when signing up new customers. And the subsidies lower profit margins.

Verizon Chief Financial Officer Fran Shammo told analysts on the company's conference call that sales of the iPhone and other high-end LTE smartphones put pressure on profit margins, due to the subsidies. But he added that eventually the cost of the subsidies will pay off, since these customers will subscribe to more expensive data plans. And for LTE customers, the fact that the company is able to move these subscribers to a more efficient network will also eventually help Verizon increase profitability.

But some analysts are skeptical. They believe that Verizon and other major wireless service providers selling the iPhone and other high-end devices may never recover from the cost of these subsidies.

The reason is that most subscribers are on an endless upgrade cycle for newer devices, which means carriers are never able to make back the cost of their phone subsidies.

Craig Moffett, an analyst with Sanford Bernstein, wrote in a research note today that three years ago AT&T found itself with depressed profit margins due to the iPhone. But even though the company has promised that those margins would rebound over time due to higher service revenue from iPhone customers, the reality is that those margins have still not come back.

"Now, it's Verizon's turn, and the same question looms," he said. "Is the iPhone margin effect transitory, or is it a 'new normal'?"

Moffett said that an endless string of Apple upgrade cycles could keep margins from rebounding for far longer than anticipated. In this scenario, he said that the "earnings pop will always be a year away."

Moffett also pointed out that that equipment sales were what boosted Verizon Wireless revenue during the quarter and not service contracts.

"Reported revenue growth was hugely boosted by the sale of wireless equipment - all those iPhones. Excluding these equipment sales (that is, measured as a service provider), proportionate organic revenue growth is still sub 2.0%...and EBITDA growth on the same basis is negative on both a proportionately consolidated basis and in the all-important Wireless segment."

On the wireline side of the business, Verizon continued to lose money on its traditional voice business. But it is growing its data services. It added 201,000 net new Fios Internet broadband connections and 194,000 net Fios TV customers in the fourth quarter. The company ended the year with 4.8 million Fios broadband customers and 4.2 million Fios TV customers.

Updated 7:35 a.m. PT: Details from the company's conference call and comments from an analyst were added to this story.