Verizon misses Q3 mark as it shrugs off rivals' promotions

Verizon was able to keep its customer growth engine humming even as it narrowly missed earnings expectations for the third quarter.

The nation's largest wireless carrier by subscriber base posted earnings of 89 cents a share and revenue of $31.59 billion, compared with Wall Street's average forecast of 90 cents a share and $31.58 billion.

Shares of the New York-based company oscillated between positive and negative territory in early trading Tuesday, and was last up 0.3 percent to $48.60.

Verizon continues to grow despite increased competitive activity in the wireless industry, most notably aggressive offers by smaller rivals Sprint and T-Mobile. The carriers are engaged in a quasi-price war, preferring to provide more data than actually cut prices -- although discounts have also played a part. The result has been better deals for consumers, and more scrambling by the carriers to keep up with each other.

Verizon, however, largely held pat in the third quarter despite the flurry of competitive activity kicked off by T-Mobile with a discounted family plan, which undercut an AT&T family plan. Sprint then upped the ante with new family and single-line plans, as well as a special $50 plan specifically for the iPhone.

"While the rest of the sector has slogged through a series of price cuts, Verizon has resolutely stuck to its premium priced strategy," said MoffettNathanson analyst Craig Moffett.

Verizon hasn't been completely immune, and is starting to make adjustments in this fourth quarter. Earlier this month, it announced a program to double the amount of data available to higher-end shared family plans in reaction to similar plans offered by Sprint and AT&T just days earlier. On Thursday, it rolled out new discounts to its monthly installment program, called Edge.

The discounts puts Edge more in line with the competition, according to Verizon Chief Financial Officer Fran Shammo. He acknowledged consumers were less keen to adopt its monthly-installment program, which has proven popular with competitors. Shammo said 12 percent of customers signed up for its Edge program, down from 18 percent in the second quarter, but said the new pricing could spur a rebound in interest in the fourth quarter. He hinted at more activity to come.

"There will be more promotions from everyone," he said on a conference call with investors. "We have our own plans."

At a time when subscriber growth has slowed, Verizon added a net new 1.5 million customers in the third quarter. The company again relied on tablets -- 1.1 million additions in the period -- to drive growth. The company added 1.2 million 4G LTE smartphones, but reported only a total gain of 457,000 phones, suggesting a loss of 743,000 3G smartphone and feature phone customers. On the call, Shammo acknowledged a decline in that category.

Although it was only briefly mentioned, the launch of the iPhone 6 and iPhone 6 Plus on Sept. 19, right at the tail end of the period, likely helped results. The full impact of the new iPhones will show up in the following quarter. Shammo said that Verizon is seeing the largest backlog of potential iPhone buyers since it began carrying Apple's smartphone in early 2011.

In total, Verizon activated 8.9 million smartphones, which made up 77 percent of its base in the third quarter.

Verizon did report a slight uptick in its customer turnover rate, suggesting some pressure from competitors.

On the wireline side, the company added 162,000 net new FiOS Internet connections and 114,000 net new FiOS video connections. In total, it has 6.5 million FiOS Internet customers and 5.5 million Fios video customers.

Verizon said it continues to expect total revenue growth of around 4 percent for the full year.

While Verizon's per-share earnings missed Wall Street expectations, it did rise 14.1 percent from a year ago. The earnings miss is attributed to higher-than-expected subscriber growth, as carriers typically takes a hit to its margins during high-growth quarters because of the subsidies required to cover the upfront cost of a smartphone. That's why wireless companies are so keen on moving to a monthly installment plan for smartphones; they can reduce the amount they pay out in subsidies and avoid taking an early financial hit.

Still, Verizon's business continues to run largely on the traditional contract and subsidy model, and quarter after quarter remains less affected by the industry shifts affecting its rivals.

"One needs to give credit where credit is due," Moffett said.

Updated at 6:50 a.m. PT: To include analyst and executive comments throughout.