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Verizon profits dip, subscriber growth slows

The telecommunications company sees its profits slump, in part because of a one-time health care charge. Also, wireless customers aren't signing up the way they used to.

Verizon Communications saw its first-quarter 2010 earnings fall 29 percent as the company was hit with one-time charges and saw slower subscriber growth.

Profits plunged to $2.28 billion, or 14 cents per share, from $3.21 billion, or 58 cents per share, during the same quarter a year ago, the company reported Thursday. Results for the three-month period included a $970 million charge related to U.S. health care reform.

Verizon previously received a tax-free benefit from the government to subsidize health care costs for retirees, who would otherwise be on a Medicare Part D plan. Under the new legislation, Verizon is no longer be able to deduct that subsidy.

Revenue was up about 1.2 percent to $26.92 billion.

Subscriber growth has slowed in wireless. Verizon reported that it added a total of 1.6 million wireless subscribers in the quarter. Rival AT&T said Wednesday that it added 1.9 million wireless customers.

Like AT&T, Verizon added fewer post-paid customers. During the quarter it added only 423,000 of these highly valued contract customers. Analysts had expected to company to add 582,000 post-paid customers.

AT&T reported Wednesday that it added 512,000 contract customers, most of whom were iPhone subscribers.

Verizon is not giving up on its post-paid business, which still generates about 85 percent of revenue for the wireless business, said Verizon's Chief Financial Officer John Killian, during a conference call discussing the earnings. But he acknowledged that new subscriber growth has slowed. Going forward, Verizon will be focusing on wringing out as much revenue from its existing customers as it can. Already about 30 percent of its customers are using a smartphone or multimedia phone that requires a data plan, Killian said.

Killian also acknowledged that first quarter is typically slower in terms of getting new customers. But he said that the results were magnified as more Americans now have cell phones. With over 90 percent market penetration, Verizon and the other wireless carriers are now forced to poach customers from competitors. Killian said Verizon's lineup for new smartphones and its reliable network will help it pick off some customers.

"We are not ready to throw the towel in to say that postpaid growth is going to be substantially lower," he said. "We are still very bullish about growth opportunities in the retail postpaid market."

Killian said the company is counting on its Android devices, such as the Motorola Droid and the upcoming HTC Incredible, to lure in new customers. AT&T has also relied on the popular Apple iPhone to bring in business. In fact, without the iPhone in the first quarter of 2010, AT&T's net postpaid subscriber additions would have been negative.

In addition to new devices, Verizon is also counting on its larger 3G network and reliable service to win over customers. And as the company upgrades to 4G using LTE technology, it also see potential for growth.

"We still think there is postpaid growth for us," Killian said. "We have a huge upgrade opportunity with LTE coming later this year."

But even though Verizon is not signing up as many new customers as it once had, it is making more money on its existing customers. It's wireless revenue increased 4.4 percent compared to the first quarter of 2009. And the churn rate or the rate at which customers leave for another provider, still remains low at 1.07 percent for postpaid subscribers. Much of this revenue increase came from data services, which were up 26.4 percent for the quarter.

On the wireline side of the business, Verizon said it added 185,000 Fios Internet subscribers and 168.000 Fios TV subscriber during the quarter, pushing the total customer base for Fios Internet to 3.6 million subscribers and 3.0 Fios TV subscribers.

Still, subscriber growth for Fios is slowing compared to 2009. In the first quarter of 2009, Verizon added 298,000 Fios Internet subscribers and 299,000 Fios TV subscribers. But Verizon executives said that the company is making more money from its current subscribers. The average revenue per subscriber was up 12.3 percent compared to the first quarter of 2009. And in total broadband and video revenues were up 22 percent compared to the same quarter a year ago.

Verizon continues to lose access lines in its traditional phone business. The company now has 17.9 million residential phone lines, a decline of 11.9 percent compared to last year.

Updated at 8:55 a.m. PDT: Quotes and information from the conference call have been added.