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Verizon subscriber growth sags in Q3

Carrier slightly beats analyst expectations on earnings and revenue, but growth in its wireless subscriber base wasn't as high as analysts expected.

Verizon Communications' revenue and profits edged slightly ahead of analyst expectations for the third quarter, but the company's growth in wireless subscribers missed expectations during the period.

Today, Verizon reported that its profits increased to $3.54 billion, or 49 cents a share, compared with $2.7 billion, or 23 cents a share, during the same quarter a year ago. Adjusted profits for Verizon were 56 cents a share. Analysts had expected 55 cents a share.

Revenue increased to $27.91 billion from $26.5 billion during the same quarter a year ago. And analysts had expected the company to generate around $27.88 billion.

While Verizon's financials hit the mark, the company's subscriber growth on wireless--the growth engine for the company--fell short of expectations. Verizon Wireless netted only 882,000 new contract subscribers during the quarter. Analysts were expecting the company to add 950,000 to just over 1 million new contract customers.

A year ago, Verizon Wireless signed up only 584,000 contract customers. But compared to the 1.3 million new contract wireless customers the company added in the second quarter of 2011, the company's growth in those subscribers slowed significantly.

Still, to keep all of this in perspective, Verizon managed to win more new wireless customers on contracts than its rival AT&T. On Thursday, AT&T reported it added only 319,000 net post-paid subscribers. This was down from 745,000 new contract customers a year ago.

Verizon's CFO Fran Shammo acknowledged the company hit a speed bump in terms of signing up new contract customers due in part to customers waiting to upgrade to the new iPhone. AT&T also blamed its lull in contract subscriber growth in the third quarter due to the fourth quarter introduction of the iPhone 4S. Apple and its retail and carrier partners began selling the new iPhone 4S October 14, well after the end of the third quarter.

During the third quarter, Verizon sold about 2 million iPhones, bringing its year to date count for iPhone sales to about 6.5 million. This figure trails AT&T, which has also been selling the older iPhone 3GS at a big discount. AT&T said yesterday that it had activated 2.7 million iPhones during the third quarter of 2011. This was about half the number of iPhones it had activated during the same period last year after the iPhone 4 was launched.

Shammo said that Verizon has already seen strong sales of the iPhone 4S. He wouldn't go into specifics. But he mentioned that Verizon ran out of the iPhone 4S in stores on the first day it was launched. And the company continues to be on "allocation" from Apple.

In terms of the mix of customers upgrading from their existing Verizon handset to an iPhone 4S compared to those who are new customers coming to Verizon specifically for the iPhone 4S, Shammo said the ratio has not changed from what it was before the launch of the device. About 20 percent of customers are new to Verizon and about 80 percent are existing customers that are upgrading to Verizon.

Shammo said he expects the iPhone 4S to give Verizon a sales boost as people who may have waited during the previous quarter to upgrade start buying the new device. And he said he isn't too worried about competitors, such as AT&T which is now offering a free iPhone 3GS with a two year contract or Sprint Nextel, which is for the first time offering the iPhone 4S.

"When we compete head-to-head with any provider, we generally win," he said.

While the iPhone 4S is clearly an important product for the company, Shammo said that the Google Android line-up of smartphones is also strong. And about half the smartphones sold by Verizon Wireless are Android. An increasing number of these devices also support Verizon's faster 4G LTE network, which Shammo noted is a major competitive advantage. Verizon sold about 1.4 million 4G LTE smartphones during the quarter.

In total, Verizon has 15 LTE devices on the market, including smartphones, Mi-Fi devices, and notebooks. The move to LTE not only offers consumers a faster network than what's offered currently by competitors, but it also helps Verizon save on operational costs. Shammo noted that as the company moves its wireless data customers using laptop data sticks and Mi-Fi devices from its 3G network to 4G, the company can operate its networks more efficiently, thus saving costs.

In terms of the actual sales figures for wireless, Verizon managed to boost revenue particularly from data services. Data revenues were $6.1 billion for the quarter, up more than $1.0 billion or 20.5 percent compared to last year. Data revenue in wireless accounts for about 40.6 percent of all service revenues, the company said. Revenue for wireless was up 9.1 percent compared to last year to $17.7 billion.

Verizon also managed to boost the average revenue per user (ARPU) by 2.4 percent compared to a year ago. In the third quarter this year, the ARPU was $54.89.

As for Verizon's traditional wireline business, which includes home telephone service and its Fios fiber broadband and TV services, the company saw revenue dip 1.3 percent to $10.15 billion. The company is currently negotiating with labor unions to cut some of the expenses from benefits out of the cost of its business. Workers went on strike in August, which slowed deployments of the Fios service. The company has still not reached a final contract agreement with its unions.

Shammo also said the company had additional expenses related to the severe weather in the third quarter, including a hurricane and tropical storm, which affected almost all of Verizon's landline footprint. The storms and union workers strike cost the company about $250 million.

7:30 a.m. PT: This story has been updated with more details from the company's conference call.