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Verizon earnings get boost from Alltel

Verizon Communications was helped in the first quarter by its acquisition of Alltel, but the company faces stiff competition from AT&T.

Updated 7:20 a.m. PDT with information from the conference call.

Verizon Communications saw earnings grow 5.3 percent in the first quarter, helped by its acquisition of Alltel. But wireless competition is heating up with AT&T, which saw strong growth due to the iPhone.

For the three months ended March 31, Verizon reported net income of $3.2 billion, or 58 cents a share, barely beating last year's earnings of $3.0 billion, or 58 cents a year. Revenue was up about 12 percent, to $26.6 billion, largely due to the acquisition of regional wireless provider Alltel. If Alltel had been a part of Verizon's business a year ago, the increase would have been about 3.3 percent.

Verizon Wireless added 1.3 million net customers during the quarter, bringing the total number of subscribers to 86.6 million. Verizon's total customer base also includes 13.2 million customers from Alltel. Verizon's acquisition of Alltel last year has made the operator the largest wireless operator in the United States.

Overall, the company performed well in a difficult economic environment.

"As expected, we had some headwinds going into this quarter," Chief Operating Officer Denny Strigl said on the conference call with analysts and investors. "But the results reflect solid execution and strength of our consolidated business model and our focus on investing in our crowned jewels, our Fios, and wireless networks."

Wireless has been a strong growth engine for Verizon for several quarters. And Verizon Wireless, which is jointly owned by Vodafone, increased sales in wireless by 29.6 percent to $15.1 billion.

But there appear to be some chinks in mighty Verizon Wireless' armor. Verizon also reported that its churn rate--or the rate at which people switch wireless services--rose to 1.47 percent from 1.19 percent. Verizon typically has the lowest churn rate of the four major U.S. wireless companies.

Strigl said these customer losses were primarily due to the economic downturn. Specifically, he said corporate customers were canceling data card plans, and consumers were canceling fourth and fifth phone lines. But some of the loss may also be due to increased competition with AT&T, which is the exclusive carrier in the United States for Apple's iPhone.

Last week, AT&T reported strong sales and a gain of 1.2 million wireless customers during the first quarter. Much of AT&T's subscriber growth came from new iPhone users. During its conference call last week, AT&T executives indicated that a large percentage of these new iPhone subscribers were also new customers.

Even though Verizon has worked hard to bring new devices, such as the BlackBerry Storm, to its network, it has not found a device to match the popularity or "coolness" of the iPhone. There are rumors that the company is in talks with Apple to offer the device next year, but CEO Ivan Seidenberg hinted recently in an interview with The Wall Street Journal that any deal with Apple would be for a device to work on its 4G network, which will launch next year.

During the call with analysts, Strigl said there was nothing new to report regarding the iPhone.

"We have said in the past that we are always open to discussions with any suppliers," he said. "But we have no announcements with Apple today."

Strigl added that the company is seeing strong demand in smartphones. Specifically, he said smartphone and PDA sales made up 41 percent of the company's direct device sales during the quarter, and that does not include devices sold by Alltel.

As for the Alltel merger, which closed at the end of 2008, Strigl said the company would start to integrate billing systems later this year and that it would be transitioning Alltel "signage" and related marketing to the Verizon Wireless brand in time for the holiday buying season.

Verizon also reported strong growth in its fiber to the home business called Fios. The company added 299,000 net TV customers and 298,000 net Internet subscribers during the quarter. Verizon has a total Fios TV subscribership of 2.2 million and a total Fios Internet subscribership of 2.8 million.