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Verizon's profits soar on wireless

Despite economic uncertainty, company sees big gains in profits in the third quarter due to its wireless business.

Correction at 11:25 a.m. PDT: This story incorrectly stated that Verizon is currently selling the BlackBerry Storm. Verizon has announced it will sell the Storm, but it is not yet available for purchase.

Verizon Communications' wireless business helped boost profits for the third quarter as the company's management team reiterated confidence that the company will weather the brewing economic storm unscathed.

"We had what we thought was a good quarter, despite the economic uncertainty around the world," Verizon's CEO Ivan Seidenberg said Monday on the conference call with analysts and investors. "And it shows remarkable stability and strength in our business. The big question now is whether customers will continue to spend."

Seidenberg noted that he believes consumer and business spending will be light through the end of 2008, but he said he is hopeful that the company's diversified service portfolio will help it continue to grow in 2009.

For the third quarter, Verizon reported that profits increased 31 percent to $1.67 billion, or 59 cents a share, compared with a year-earlier profit of $1.27 billion, or 44 cents a share. Excluding one-time items associated with job cuts, the company earned 66 cents a share, which was on target with many analyst expectations.

The company's revenue was up 4.1 percent to $24.75 billion from $23.77 billion.

The biggest boost came from the company's wireless business, which added 1.5 million retail customers and about 630,000 customers from the acquisition of Rural Cellular. In total the company added 2.1 million customers. All told at the end of the quarter Verizon Wireless had 70.8 million wireless customers.

Sales in wireless grew about 12 percent to $12.7 billion largely driven by higher use of data services, such as e-mail, text messaging, and Internet browsing. Verizon's wireless users on average spent about $52.18 a month.

That said, Verizon Wireless's churn rate, or the rate at which customers ditch its service for someone else's, ticked up slightly, likely due to customers defecting from Verizon Wireless to AT&T for Apple's new iPhone 3G.

As a result, Verizon saw its total churn rate increase to 1.33 percent, compared to 1.12 percent the previous quarter and 1.27 percent during the same quarter a year ago. Still, even as its churn rate went up slightly, the company still has the lowest churn rate in the industry.

Denny Strigl, Verizon's chief operating officer, acknowledged during the call that Apple's iPhone, which is sold exclusively on AT&T's network in the U.S., may have caused some customers to defect.

"Yes, we saw some churn due to the iPhone during the quarter," he said. But he added that the company is not basing its strategy on one "iconic" device. Instead, it plans to launch several high-end handsets over the coming months to compete with the iPhone. Just this month, it announced it will sell the new touch-screen BlackBerry Storm from Research in Motion.

In general, Verizon Wireless kept pace with AT&T, which added 2 million customers during the third quarter.

But even though both carriers have managed to show strength in wireless sales, they are losing customers on the wireline side. Verizon reported it lost 12 percent of its primary phone lines that serve consumers. AT&T said it lost about 10.5 percent of these lines. While Seidenberg said that this trend has been expected, it's possible it is accelerating as more customers drop their landlines in favor of cheaper phone service from cable companies or to use their wireless phones exclusively.

Verizon now offers primary phone service to 21.63 million consumers at the end of the quarter, down from 24.57 million during the same quarter a year ago. Its revenue for wireline service also fell 1.7 percent to $12.2 billion.

Verizon's Fios, fiber-to-the-home service, helped take up the slack on some of these losses. The company said it saw strong growth in this service, which offers TV, broadband, and phone service to consumers. Verizon added 233,000 fiber-TV customers for a total of 1.6 million customers. It also added another 225,000 fiber Internet subscribers for a total of 2.2 million Fios Internet customers.

But the company reported it lost about 96,000 DSL high-speed customers. CEO Seidenberg said this was expected.

"Seeing the light at the end"
"We are not surprised by what we're seeing in wireline," he said. "We've been saying for a couple of years that DSL would become less potent and wireless would be a suitable substitution going forward for landline telephones. We feel there is momentum in all growth areas. And as we go through the tunnel, we are seeing the light at the end."

Verizon also talked up its acquisition of regional wireless operator Alltel, which is expected to be approved by the Federal Communications Commission this month. Seidenberg acknowledged the $28.1 billion acquisition won't have the same short-term benefits it had hoped when it announced the acquisition earlier this year.

The main reason is that the financing is not as attractive now due to the credit crunch. But the deal has also lost some of its initial luster due to regulatory concessions, the company will likely have to make. Verizon Wireless has already agreed to divest 85 markets, and it's likely to agree to divest another 15 to get the deal through the FCC. Then there is the issue of Universal Service Fund subsidies. The FCC could vote to limit funds given to rural wireless carriers as part of the Universal Service Fund (USF), which could hurt Verizon Wireless.

That said, Seidenberg said the long-term benefits far outweigh any concerns over these short-term issues.

"We agree that this acquisition didn't quite meet what we wanted," Seidenberg said. "But in the longer term, it will exceed what we expected...Alltel is still a compelling acquisition for us. The future operating synergies are off the charts. When it's all said and done this transaction will pay for itself probably many times over."