Verizon Blames Everyone

Verizon Communications Inc. (NYSE: VZ) reported a catalogue of problems Tuesday that it expects will cause a shortfall in its profits this year and next, and, analysts say, is likely to be echoed by other carriers throughout the industry (see Verizon Lowers Guidance).

For the full year, Verizon now said it expects profit of $2.56 to $2.60 a share, adjusted for onetime items. In January, the carrier predicted it would earn $2.70 to $2.80 a share.

Chief among its concerns appears to be the impact of the Federal Communications Commission (FCC)'s recent Triennial Review ruling concerning which Verizon has a complaint filed with the Commission (see RBOCs Appeal Directly to FCC).

The carrier has asked the FCC to stay the specific portions of the Review that impose unbundling requirements for elements of traditional narrowband telephone networks. The appeal centers around EELs (enhanced extended links), which allow competitive carriers to share Verizon’s facilities at reduced rates. Verizon and the other RBOCs say that enabling this function costs them more money than they are allowed to charge for it, which they say is unfair (see ILECs, CLECs Face Off Over UNE-P).

"On EELs, lawyers have been sent out into the wilderness until they fix this damn issue,” said a disheartened Ivan Seidenberg, CEO of Verizon, on a conference call with press and analysts. “You can rest assured we will continue to fight this and nail it down from a litigation standpoint."

Another setback to the company this year has been the wet weather, which has driven up repair expenses, it says. “This summer was the wettest in 25 years even before Hurricane Isabel rolled through our footprint last week… And the blackout affected our territories as well,” said CFO Doreen Toben.

Its recent battle with the unions will also add financial pressure to Verizon’s bottom line, as the general state of the economy continues to take its toll, Toben said (see Verizon Inks Deal With Unions).

The inevitable result is a cut in capex. Verizon expects 2003 capital expenditures of $12 billion to $12.5 billion, a decline of $1 billion from the high end of its previous guidance of $12.5 billion to $13.5 billion.

Seidenberg says the company will move forward on its RFP for a fiber buildout next year, but with caution. “We will reallocate where we have to… We are waiting to see what the suppliers tell us… about issues of electronics and support systems that go with it." (See Fiber Surprise in FCC Rules? and Vendors Await FTTP Shortlist.)

Near term, Seidenberg says, Verizon will focus on the things it can control, such as expanding long-distance, small to medium business and enterprise services, and issues of employee retention. Longer term, he says Verizon plans to migrate to more broadband services, but this shift will take time.

“In the past, growth was measured in access lines, but now they are decreasing in revenue per account… Our strategy is to retain customers and increase revenue per account by migrating up the bandwidth chain to a broadband world,” Seidenberg said.

He adds that the frustration for carriers today is the FCC’s “backward, immature view of the market… They are not creating a bigger pie, just reallocating the one they have in front of them."

Regarding events out of his control, Seidenberg expects consolidation and an eventual return to spending to boost Verizon’s profits. “There’s no question in our mind that some economic recovery will help us… And it’s inevitable consolidation will occur in an industry that isn’t growing and continues to get mismanaged by the government. We just have to make sure we ride the crest of this.”

The news prompted a flurry of negative comments from Wall Street analysts. "The fact that we're going through an economic recovery right now, the mere hint that a company can't meet expectations, cannot be good for the sector," said one broker who declined to be named.

On the bright side, Verizon said it will maintain investment in its wireless business, which continues to outgrow its expectations. Verizon Wireless will add more than 4.5 million new customers for 2003, up from its previous forecast of about 4 million.

Shares in Verizon were down 5 percent to $32.97 in midday trading.

— Jo Maitland, Senior Editor, Boardwatch

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