Verizon Earnings Don't Disappoint

Verizon Communications Inc. (NYSE: VZ) met Wall Street expectations in its first fiscal 2003 quarterly report today (see Verizon Reports Solid Q1). Overall, execs touted the strength of Verizon's business in the face of ongoing macroeconomic troubles.

Despite announcing a healthy profit, however, there was one glaring problem -- revenue is still declining. Revenues for the quarter were $16.3 billion, down from $17.2 billion sequentially (see Verizon Reports Revenue Growth). Quarterly earnings were $3.9 billion, $0.63 per share, in line with analysts' First Call consensus, before accounting for special items. Last quarter, Verizon reported profits of $2.2 billion, or $0.79 a share, before one-time items.

On a conference call with analysts this morning, Verizon execs boasted of keeping operating expenses down (they increased just 0.2 percent); of increasing the amount of cash from operations after dividends and capital spending to $2.29 billion (a 173 percent year-over-year increase); and of further reducing net debt. The carrier has shaved off another $2.7 billion from its debt, bringing net debt to $49.9 billion from last quarter's level of $52.6 billion.

Executives said they've continued to cut bottom-line expenses to improve profits, including dropping headcount. The RBOC has cut 10.2 percent of its workforce since the first quarter 2002, and now has 158,000 employees.

Wireless revenues of $4.66 billion were down 0.5 percent sequentially, but up 15 percent year over year. Telecom revenues of $9.94 billion were down from $10 billion last quarter.

Verizon execs say the revenue decline is due the the costs of UNE-P compliance and subscribers substituting wireless accounts for local access lines. But they point out that Verizon's consumer telecom revenues of $4.2 billion were up 2 percent year over year and 0.02 percent sequentially -- thanks to good sales of DSL, long distance, and bundles of these and local services.

On the business side, high-speed ATM, Frame Relay, Sonet, and DSL lines, which account for over 83 percent of Verizon's total service footprint, helped bring in $3.1 billion, up from $2.7 billion last quarter, but down 3.7 percent year over year. The reduction is owing to fewer sales of low-speed private lines and DS0s, execs said.

Viewed on the heals of Sprint's more downbeat quarter (see Sprint CEO: Can You Hear Me Now?), Verizon put in a decent showing. "Overall, they hit our expectations, which is a good thing in this environment," says Tavis McCourt of Morgan Keegan & Company Inc.

McCourt noted that some analysts have feared that the growth businesses -- DSL and wireless, for example -- have lower margins than the old-fashioned voice business, making it tougher to profit from them. But in his view, Verizon's done a "commendable job of lowering its cost structure" to keep earnings up.

In effect, that was the message Verizon execs were aiming to convey today. "We are very pleased with the quarter," said CEO Ivan Seidenberg during the quarterly conference call. He and other execs on the call said they felt margins were sustainable. They're standing by guidance for 2003 of 0 to 2 percent revenue growth ($2.79 to $2.80 per share for the year), capex of $12.5 billion to $13.5 billion, and net debt at year's end of $49 billion to $51 billion.

Seidenberg said in closing that even though Verizon's doing all it can to weather the downturn, three things would help the company improve: corporate spending increases; a "clarification" of UNE-P and broadband regulation from the Federal Communications Commission (FCC); and further industry consolidation.

— Mary Jander, Senior Editor, Light Reading

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