Carrier Scorecard: Verizon Makes the Grade

We're kicking off the latest edition of the North American Carrier Scorecard by handing out our highest grade yet.

Each quarter, Light Reading publishes scorecards on the world's most influential publicly held carriers, giving them a grade of A through F based on their financial and business performance. Our previous North American carrier scorecard is right here: Carrier Scorecard: Ma Bell's Metamorphosis.

Receiving a grade of A is tough. You need to show strong growth across the board and obvious momentum for the future. But, as you see, it can be done:

We had been lenient with Verizon Communications Inc. (NYSE: VZ) in previous quarters because we understood that its profits and margins were down due to the enormous cost of FiOS, and it's hard to discredit a company for making a huge investment in its future.

Now, with net income on the rise again and the continued steady growth in revenue, it seems only appropriate to give Verizon the first-ever grade in the A range. Its FiOS service roared past the 1 million mark in Internet subscribers and just inched past half a million TV subscribers. The company's stock is now trading near its 52-week high and outperformed the S&P 500 in the second quarter by more than 4 percent.

There is, however, some risk to consider in future quarters. Much of Verizon's strength came from wireless, and with AT&T launching the iPhone we'll see if it can hold onto its customers while Apple and AT&T ramp up the marketing.

Table 1: Verizon's Q2 2007 Scorecard

	2Q07	2Q06	Q/Q Change
Revenue (Millions)	$23,273	$21,886	+6.3%
Earnings (Millions)	$1,683	$1,611	+4.5%
GAAP EPS	$0.58	$0.55	+5.5%
Access Lines	43,288,000	46,950,000	-7.8%
Broadband Subscribers	7,686,000	6,125,000	+25.5%
Video Subscribers**	1,300,000	n/a	n/a
**515,000 FiOS TV subscribers and 785,000 DirecTV subscribers

We're still waiting 'til 2008 before we can really make sense of AT&T Inc. (NYSE: T)'s quarterly performance. By then, its growth numbers won't be inflated by the fact that it's including a whole other company's worth of revenues and earnings this year that it wasn't counting last year.

U-verse is expanding its subscriber base; it now has 51,000, compared to 3,000 at the end of last year, and if the company hits its target of doing 10,000 installations per week by the end of this year, then it'll quiet some of its skeptics.

And then there's wireless. AT&T has the iPhone in its arsenal, which is selling well and bringing in a lot of new subscribers -- but at what cost? The fees that AT&T must pay Apple Inc. (Nasdaq: AAPL) for being its exclusive carrier seem to keep mounting every week. (See iPhone Revenues Flow in Three Streams.)

While Apple's stock surged in anticipation of the iPhone, AT&T performed the worst out of the four carriers we're grading. It grew 5.16 percent -- just a bit behind the performance of the S&P 500.

Table 2: AT&T's Q2 2007 Scorecard

	2Q07	2Q06	Q/Q Change
Revenue (Millions)	$29,478	$15,770	+86.9%
Earnings (Millions)	$2,904	$1,808	+60.6%
GAAP EPS	$0.47	$0.46	+2.2%
Access Lines	32,159,000	22,310,000	+44.1%
Broadband Subscribers	11,260,000	6,571,000	+71.4%
Video Subscribers*	1,897,000	590,000	+221.5%
* In 2007, 51,000 are U-Verse subscribers and 1,846,000 are DISH Network subscribers sold through AT&T. In 2006 all video subsribers are Dish Network

We're done making excuses for Qwest Communications International Inc. (NYSE: Q). It was the same old story this quarter as the company more than doubled earnings on flat revenues, thanks to its cost cutting.

Broadband subscribers were up more than 30 percent, and enterprise revenues are going up, on the heels of Qwest's inclusion in the U.S. government's Networx contract. But where AT&T and Verizon use wireless to bring in big revenues, Qwest uses it to prevent the loss of revenues. Everyone else is on the attack against cable while Qwest plays defense.

That strategy doesn't look as if it'll change anytime soon, as outgoing CEO Dick Notebaert was very adamant that the company will continue to revolve its video and wireless strategies around partnerships with DirecTV Group Inc. (NYSE: DTV) and Sprint Nextel Corp. (NYSE: S). (See Qwest CEO: No Need for New U-verse.) Those aren't bad partnerships, because it's revenue returned on nearly zero invested capital.

But how much longer can it keep its customers interested with no new services? That'll be up to the new CEO to figure out.

Table 3: Qwest's Q2 2007 Scorecard

	2Q07	2Q06	Q/Q Change
Revenue (Millions)	$3,463	$3,472	-0.26%
Earnings (Millions)	$240	$117	+105.13%
GAAP EPS	$0.13	$0.06	+116.67%
Access Lines	13,272	14,283	-7.08%
Broadband Subscribers	2,405,000	1,798,000	+33.76%

It was an extremely flat quarter for BCE Inc. (Bell Canada) (NYSE/Toronto: BCE). Revenue and income hardly went anywhere, and broadband growth was below 10 percent.

Normally, such mediocre results would get a mediocre grade. But then there's that whole deal to take Bell Canada private. (See Bell Canada Goes Private.) The price the Ontario Teacher's Pension Plan is paying for the company is a 40 percent premium over the company's share price before it was public knowledge it was pursuing strategic alternatives.

When you give your shareholders a 40 percent return on their investment, that's a good thing, right? Let's see if they can close the deal. (See Telus Still a Factor in Bell Canada Buyout.)

Table 4: Bell Canada's Q2 2007 Scorecard

	2Q07	2Q06	Q/Q Change
Revenue (Millions - CAD)	$4,438	$4,374	+1.46%
Earnings (Millions - CAD)	$898	$894	+0.45%
GAAP EPS	$0.56	$0.54	+3.70%
Access Lines	8,524,000	8,638,000	-1.32%
Broadband Subscribers	1,959,000	1,785,000	+9.75%

— Raymond McConville, Reporter, Light Reading