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Verizon tops Q2 expectations as tablet demand drives growth

The company adds 1.15 million new tablets in the period, offsetting a slowdown in smartphone growth.

Verizon CEO Lowell McAdam. CNET

Verizon's customer growth bounced back in the second quarter, thanks to a pickup in tablet and smartphone demand in the period.

The company posted a second-quarter profit of $4.32 billion compared with a year-ago gain of $5.2 billion. But Verizon's share of the profit, after excluding the cut that Vodafone that previously received, was actually $4.2 billion, or $1.01 a share, up significantly from a year-ago gain of $2.2 billion, or 78 cents a share. Excluding a one-time gain from the sale of spectrum, its adjusted earnings per share was 91 cents a share.

Revenue, meanwhile, rose 5.7 percent to $31.48 billion.

The New York telecommunications giant was expected to post 90 cents in earnings per share and $31.12 billion in revenue, according to a survey of analysts by Thomson Reuters.

Like the industry as a whole, Verizon faces pressure both from slowing growth in its core smartphone business as well as increased pressure from T-Mobile, which has turned up the heat on rivals with a slate of aggressive offerings. While most of the national carriers have seen slowing growth, customers continue to flock to T-Mobile, albeit at a cost to its bottom line.

"While Verizon's results were solid, we are still wary of the carriers in general because of rising competition," said Jonathan Chaplin, an analyst at New Street Research.

Verizon said it added 1.4 million net new customers, in line with the figure that its CEO, Lowell McAdam, teased earlier this month. As with previous quarters, growth was largely driven by demand in tablets, with the company adding 1.15 million in the period. The strength in the tablet business once again offset a slowdown in smartphone growth, although it did see 304,000 net new phone additions.

"On our last earnings call, I indicated that we exited the first quarter with better momentum and expected that to carry forward," said Chief Financial Officer Fran Shammo. "As you can see from our second quarter results, we delivered on what we said."

Verizon rebounded from a first quarter in which it actually saw a significant loss of basic phone and 3G smartphone customers. Verizon had made several tweaks to its plans late in the period including adding price breaks, additional data capacity, and global text messages under a program called " More Everything." More recently, it began touting its XLTE service, a fancy marketing term to describe additional spectrum capacity for its wireless coverage.

While Shammo touted the improvements, Verizon continued to lose basic phone and 3G smartphone customers, what he called the lower end phone category.

The increasing popularity of its shared data plans, which allow customers to link multiple devices under one shared data account, is likely fueling the sale of connected tablets. Customers can add a tablet to their family data plan for an additional $10 a month. The popularity of tablets in the current quarter is a far cry from even a year ago, when consumers opted to buy less-expensive Wi-Fi-only tablets.

"We see tablets as a highly profitable growth opportunity, with significant headroom in terms of further penetration," Shammo said.

Verizon benefits from the sale of tablets because those customers tend to use more data, stay with the carrier longer, and chip in additional revenue from the access fees. In May, it launched a promotion giving away the LG G Pad 8.3 or $200 toward any tablet to any new FiOS TV customers.

Verizon, meanwhile, activated 8.3 million smartphones and 9.5 million 4G LTE devices in total in the period, with smartphones making up three-quarters of the entire customer base.

The company's retail turnover rate rose 1 basis point from a year ago to 0.94 percent.

While the company has made the move to discounted off-contract plans through its Edge program, Shammo said only 18 percent of its customers opted for that route, below his previous projection of 30 percent. He noted that the promotions during Father's Day and Mother's Day helped lock people into traditional contracts.

Shammo declined to discuss his expectations for customer growth in the third quarter, only teasing continued strength due to "several dynamic" products, likely a reference to Apple's iPhone 6 and Samsung's Galaxy Note 4.

On the wireline side, Verizon's revenue ticked up only 0.3 percent to $9.8 billion from a year ago. The company added 139,000 net new Fios Internet customers and 100,000 net new Fios video customers.

For the year, Verizon maintained its 2014 target of $16.5 billion to $17 billion in capital investments, as well as revenue growth of 4 percent alongside earnings before interest, taxes, depreciation, and amortization margin expansion.

Updated at 5:35 a.m. PT: To include additional comments from the executive and analysts.