By Thomas Gryta
Verizon Communications Inc. (VZ) on Thursday reported the most profitable quarter ever for its wireless business, just as the carrier is implementing new data plans that are expected to raise prices for most customers.
Through the years, Verizon Wireless, a joint venture with Vodafone Group Plc (VOD VOD.LN), has spent billions to build out its network with faster, cost-saving technology. Now, the carrier is benefiting from that investment and the rapid rise of mobile devices--such as smartphones and tablets--that lead to greater data consumption and, for the company, higher profits.
"The wireless business is firing on all cylinders," Chief Financial Officer Fran Shammo said in an interview after the company reported second-quarter financial results. He said customer adoption of the new data plans is tracking above the company's expectations, and he is confident of "double-digit earnings growth" in 2012.
Verizon shares, up 17% over the past three months, fell 2.9% Thursday to $44.54 as the company's in-line results and lagging wireline business disappointed investors.
The carrier has invested well over $10 billion over the past three years in rolling out a next-generation network using LTE, or Long Term Evolution, technology that is more profitable than previous networks. Being an early adopter of the standard has paid off, as the network now covers 337 markets in the U.S., while AT&T is the next in line covering 47 markets.
As a result, the carrier is now in line to benefit from the growth in smartphones. Nearly 110 million Americans now own a smartphone, up from barely 9 million just five years ago, and that growth is expected to continue, according to research firm comScore.
Verizon reported Thursday that 50% of its 89 million postpaid wireless customers are using a smartphone, up from 47% just three months ago. That contributed to a 19% increase in data usage revenue, which totaled $6.9 billion in the second quarter and represented 37% of overall wireless revenue compared to 34% a year ago.
That number is expected to increase as a result of the new data-pricing plans introduced by the carrier last month. The options let customers share data allotments among as many as 10 devices under a single account, while giving unlimited voice and messaging services. AT&T unveiled similar plans Wednesday, but Verizon is being more aggressive in getting customers on the new structure.
The new model more aligns pricing with how people are using their smartphones, but eliminates the cheapest options. It locks in revenue from voice and messaging because customers can't downgrade or drop the services in order to use popular phone-based applications that perform the same functions.
The plan changes come as Verizon Wireless's subscriber rolls swell. It added 888,000 new postpaid customers in the period, while total churn, or customers who cancel services, was 0.84%--the lowest in four years, according to the company.
Macquarie Securities analyst Kevin Smithen said the subscriber growth was impressive amid handset makers citing slower demand in the quarter. Because he expects the second quarter to be flat for customer additions across the entire U.S. wireless industry, Mr. Smithen believes Verizon is likely capturing market share from competitors. The other carriers haven't reported their second-quarter results yet.
Verizon Wireless also is trying to get regulatory clearance for its $3.9 billion deal to buy a chunk of airwave licenses from a group of cable companies, a move that would provide more capacity for its data network and provide a spectrum advantage over other carriers. Despite reports of regulatory concerns, Mr. Shammo expects that deal to close later in the summer.
Overall, Verizon reported a profit of $1.83 billion, or 64 cents a share, up from $1.61 billion, or 57 cents a share, a year earlier. Revenue jumped 3.7% to $28.55 billion. Analysts polled by Thomson Reuters had forecast earnings of 64 cents a share on revenue of $28.55 billion.
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